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Home Real Estate

Passive Real Estate Investing: The Pros and Cons

by msz991
February 1, 2022
in Real Estate
5 min read
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Real Estate Business
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Favored by many, real estate has proven to be one of the most reliable investment forms. Participators make use of several strategies to generate substantial income.

The good thing about real estate is you don’t have to be actively involved, granting you an opportunity to pursue other goals. Such investments are called passive real estate investments.

Passive investment is suitable, especially if you have a 9-5 job that takes up most of your time and attention. While having in-depth knowledge about real estate and financial planning isn’t a requirement, a basic understanding of how the investment works will help if you desire to become a successful passive investor.

Table of Contents

  • What Is Passive Real Estate Investing?
  • Active Vs. Passive Investing
  • Passive Income Investments You Can Venture Into
    • Rental Properties
    • Real Estate Investment Trusts (REITS)
    • Real Estate Crowdfunding
    • Benefits of Real Estate Investing
  • Cons of Passive Real Estate Investing
    • Real Estate Market is Unpredictable
    • Lack of Liquidity
    • Loss of Control
    • You Earn the Lower Percentage From Profit
  • Conclusion

What Is Passive Real Estate Investing?

Passive real estate investing involves generating income from an investment without participating actively. Real estate passive income investments don’t require an investor’s active involvement, and hence it’s a preferred option for individuals looking to invest in real estate. 

Here, you provide the needed capital but remain uninvolved, and if the investment yields fruit, you get returns. Management and maintenance of the property is the job of the active investor who also benefits from the investment but handles the more significant share of responsibilities.

Active Vs. Passive Investing

An investment is active when you acquire a property and are actively in maintenance and management. On the other hand, a passive investment doesn’t involve your participation, and someone else handles the management and maintenance of the real estate property you’ve acquired.

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When you’re an active real estate investor, you’re in charge of all management activities, including rental policies, maintenance, renovations, tenant selection, etcetera. Participants in passive real estate investments are free of these duties and let the active investors handle these tasks.

As a passive investor, it’s essential to seek a management company’s services or an experienced real estate agent to run the day-to-day activities. 

Passive Income Investments You Can Venture Into

Once you’ve decided you want to begin a passive investment, it’s essential you know the opportunities. This step is vital, and you might want to visit a passive real estate investments website for a broader understanding of your opportunities.

Some of the best passive income investments include:

  • Rental Properties

This passive investment is pretty popular. It involves leasing out a purchased or already owned property to generate income. When turning a rental property into a passive income source, you hire a management company to help you handle the day-to-day routines of taking care of your property.

You won’t need to worry about property maintenance or handling tenants with a management team. Your team does all these for you while you sit back and benefit from rent.

  • Real Estate Investment Trusts (REITS)

REITs are companies whose major investments include single-family homes, apartments, warehouses, shopping malls, etcetera. These companies purchase real estate properties, intending to add them to their long-term portfolio, thus earning rental income and property appreciation.

This investment presents an opportunity for you as an investor to earn dividend passive income because REITs must pay at least 90 percent of their taxable income to shareholders in the form of a dividend.

  • Real Estate Crowdfunding

Under crowdfunding, an investment management company consolidates capital from a group of individual investors. More significant investments are purchased with the resulting consolidated funds, some of which are unaffordable for an individual investor. These investment properties include farmlands, hotels, storage facilities, etcetera.

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The company organizing the crowdfunding deal receives management fees from the investors, and within each investment is enlisted a stated strategy, investing timeline, and target return.

Often, these are long-term investments. So, investors can’t get their money back until the managing company ends the investment.

Benefits of Real Estate Investing

We’ve already highlighted some passive real estate investments you’ll find beneficial if you’re looking to earn passive income.

Passive income investing allows you to earn with your investment capital and little or no involvement, granting you enough time for other pursuits, including other passive or even active investments. Or, if you have a day job, you’re given enough time to face your job while earning passive income.

When you’re an active investor, you’re engaged in finding the right deal, arranging finance, and putting up with day-to-day property management activities. Passive investors have someone else handle the various activities in their place while reaping the fruits of the investment with little effort.

Also,  with the best passive income investments, you’ll need to pay for the services of a professional real estate agent who handles the management and maintenance of your property. This position is advantageous because your real estate asset is under the care of reliable and experienced personnel. 

So, you can expect the proper management of your property. Also, an experienced agent knows the best way to make use of your property, and with the right opportunities, it’ll yield significant profit for you.

Furthermore, passive investing requires a lower starting capital than most investments. So, you can profit financially from an investment you started with minimal capital.

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Cons of Passive Real Estate Investing

While passive real estate investments are advantageous, there are several downsides which include:

  • Real Estate Market is Unpredictable

Property value tends to rise and drop depending on the state of the real estate market. Experts can only predict how much your house will be worth shortly. So, there’s no guarantee that a promising asset you own will significantly increase in worth, as time passes.

Houses tend to appreciate with time, but sometimes, their value can drop, leading to losses.

  • Lack of Liquidity

With passive investing, your asset is tied up for a given time frame. Hence, you can’t decide to sell your property and make money in a short while.

  • Loss of Control

Activities like renovations, marketing, tenant selection, etcetera, are no longer under your control. These activities are carried out and controlled by your management team, and you must accept that they know what they’re doing.

  • You Earn the Lower Percentage From Profit

You’re leaving the heavy lifting for the active investors. Hence, they take the higher percentage of the profit from the real estate property as payment for management.

As the passive investor, you’re entitled to smaller percentages, which may be substantial, depending on how much profit the property generates.

Conclusion

The sole aim of an investment is to generate income. Financial benefits from an investment with little or no effort from the investor are called passive income.

Passive real estate investments can be beneficial and disadvantageous in various ways. For this reason, you need to consider these benefits and disadvantages to help choose the best cash flow investments that’ll generate passive income for you.

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