Many assume that passive real estate investing is as simple as it’s portrayed by social media influencers on platforms like TikTok, involving purchasing a property, finding a tenant, and simply cashing the rent checks each month.
The truth, however, is that directly purchasing and renting out properties is far from passive investment, even if you hire a management company.
There are options for truly passive real estate investment, however. In this guide, we’ll share the 4 most common options available to investors. Options such as real estate investment trusts (REITs), syndication deals through a private equity firm such as FNRP, real estate investment groups, and crowdfunding platforms allow investors to tap into different sectors of the real estate market without the time commitment needed to manage properties directly.
If you’re ready to put your money sitting in the bank to better use, First National Realty Partners (FNRP) will partner with you to earn income through passive real estate opportunities.
Founded in 2015, FNRP has quickly established itself by offering best-in-class investment opportunities with a commitment to white-glove service. Even new investors can step into the world of real estate with the assurance of working with the experienced team at FNRP, who have over $2 billion in managed assets across more than 60 properties.
Watch our webinars at FNRP today and learn how our approach to passive real estate can be a lucrative investment.
What Is Passive Real Estate Investing?
Passive real estate investing offers people a way to make money from real estate who lack the time or desire to manage properties themselves. Investors in this model can put their money in REITs, crowdfunding platforms, or private equity opportunities to earn income without handling the daily operations.
This approach is ideal for those looking to invest in real estate without taking on a second job as a property manager.
To learn more about the different types of passive real estate investing, check out our guide comparing REITs and crowdfunding approaches.
Passive Investing vs. Active Investing in Real Estate
Passive real estate investing allows you to generate income and build wealth without the day-to-day involvement required in active investing. Unlike active investors, who buy properties to flip or take on responsibilities to manage them directly, passive investors contribute financially to real estate projects while professionals handle the operations and management.
Understand the differences between active and passive commercial real estate investing by reading our blog.
Passive Real Estate Investing Options
An investor interested in passive real estate investing has a number of options available. Whether through pooling funds with other investors, investing in specialized companies that find and manage the properties, or participating in online crowdfunding platforms, passive investments provide access to real estate with potentially lower risks and steady returns.
Syndications and Direct Investments
Syndications in private equity are when multiple investors collectively fund significant real estate ventures such as office towers, residential complexes, or, in the case of FNRP, grocery-anchored commercial real estate. Pooling resources spreads the financial risk across participants and allows investors to engage in larger projects than they might individually.
Direct investments involve an investor purchasing a share of a property. Unlike private equity, direct investments offer more control over the investment.
Real Estate Investment Trusts (REITs)
Real estate investment trusts own, operate, or finance various types of income-generating real estate properties, including commercial and residential properties. They offer investors an efficient way to access dividends generated from real estate without buying the properties outright. REITs are popular for their liquidity, as shares are traded on major exchanges like stocks, making them an accessible option for investors who value ease of entry and exit from their investments.
Additionally, REITs must distribute at least 90% of their taxable income to shareholders annually as dividends to ensure a regular income stream.
Real Estate Investment Groups (REIGs)
Real estate investment groups function similarly to small mutual funds for rental properties. If you prefer to own physical real estate without the responsibilities of being a landlord, this might be the right option. REIGs handle property acquisition, maintenance, and management, distributing a portion of the rental income to the investors.
This structure benefits those who wish to invest in real estate but lack the time or expertise to manage properties directly.
Crowdfunding Solutions
Crowdfunding is a newer method in real estate investing that allows individuals to invest in real estate ventures through small contributions, often via online platforms. These platforms collect funds from numerous investors to purchase properties that professionals manage.
Crowdfunding lowers the barrier to entry for passive real estate investing, providing a platform for novice investors to start with minimal upfront capital.
Advantages of Passive Real Estate Investing
Passive real estate investing through one of these options allows individuals to participate in the real estate market without actively managing properties. By investing passively, you can benefit from the lucrative returns of real estate while minimizing your day-to-day involvement, thus freeing up your time for other pursuits or investments.
Generate Passive Income
One of the primary benefits of passive real estate investing is the potential to generate a steady stream of passive income through rent or dividends. This type of income can continue to accrue with minimal ongoing effort from the investor.
Portfolio Diversification
By including real estate in your portfolio, you can reduce the overall risk of your portfolio and create a more stable financial future. Real estate investments tend to be less volatile than stocks and bonds, safeguarding against inflation and economic fluctuations. Additionally, real estate often moves independently of other major asset classes, further enhancing its value as a diversification tool.
Tax Benefits
Passive real estate investments offer numerous tax advantages, including deductions for depreciation, mortgage interest, and other property-related expenses. Certain real estate investments, like those in Qualified Opportunity Zones, can provide additional tax incentives such as deferrals and potential exclusions of capital gains.
Potential For Appreciation
Real estate investments can appreciate over time, providing a lucrative return on investment upon future sales.
Factors such as improvements, development, and changes in the market drive the potential for property value increases.
Less Financial Commitment
Unlike active investing, passive real estate does not require a large initial financial or time commitment. This makes it more accessible for individuals with extensive personal or professional commitments. Many passive investment opportunities, such as REITs or crowdfunding platforms, allow investors to start with smaller amounts of capital.
The accessibility of passive real estate investing opens the door to a broader audience, allowing participation in the market without the need to manage the complexities of property ownership directly.
Potential Risks in Passive Real Estate Investing
While often lucrative, real estate investing carries inherent risks that should be carefully considered. Understanding these risks can help investors prepare for and possibly mitigate them. Despite their hands-off nature, passive real estate investments are subject to market dynamics, management dependency, and liquidity issues that can impact the overall return on investment.
Market Volatility
While generally less volatile than the stock market, real estate markets can still experience periods of instability. Factors such as economic downturns, changes in interest rates, or oversupply can decrease property values.
Investors should be aware that real estate is not immune to downturns; for instance, commercial property values and rental incomes may decline during economic recessions due to broader economic challenges.
Liquidity Concerns
Real estate investments are not as liquid as stocks or bonds. Converting your investment into cash quickly can be challenging if the market conditions are unfavorable. This lack of liquidity means that in times of need, an investor cannot rely on selling real estate quickly without potentially incurring losses.
Property Management Issues
Depending on the investment structure, you may still face risks associated with property management, including poor management practices that could affect your returns. Ineffective property management can lead to high vacancy rates, excessive maintenance costs, and tenant dissatisfaction, all of which diminish the profitability of the investment.
Top Considerations for Passive Real Estate Investors
When venturing into passive real estate investing, investors should carefully evaluate property types, locations, and market conditions to make informed decisions aligning with their investment strategies.
Property Type
The type of property you invest in — residential, commercial, or industrial — will influence your returns and investment dynamics. Residential properties, for example, may offer more stability in income streams through consistent rental demand. While commercial properties can provide higher yields, they may be more sensitive to economic conditions.
Location
Location significantly affects real estate values. Properties in high-demand or up-and-coming areas are more likely to appreciate and bring higher rents. Investors must also consider the potential for saturation and local economic factors that could impact the property’s long-term value.
Strategic location choice can differ between a highly successful investment and one that fails to meet financial goals.
Market Conditions
Understanding current market conditions, such as supply and demand dynamics, interest rates, and economic indicators, is essential for making informed investment decisions. Factors such as demographic shifts, urban development policies, and changes in employment patterns can all influence the real estate market.
Steps For Success: How To Get Started In Passive Real Estate Investing
Starting passive real estate investing requires careful planning and strategic decision-making. Each step toward success can help investors make informed decisions and set a solid foundation for achieving their financial objectives.
Step 1: Educate Yourself About Your Investment Opportunities
Begin your investment journey by researching different types of passive real estate investments, such as REITs, crowdfunding platforms, and real estate syndications. It’s important to understand each type’s specific risks and benefits.
For instance, REITs offer liquidity and regular dividends. While crowdfunding can provide access to higher-value projects with lower upfront capital but may carry higher risks and less liquidity.
Step 2: Set Goals For Your Investments
Clearly define what you hope to achieve through your investments. Consider whether your primary interest is generating a steady income stream through rental yields, attaining long-term capital appreciation, or a mix of both.
Setting specific, measurable, achievable, relevant, and time-bound (SMART) goals will help guide your investment decisions and strategies.
Step 3: Choose The Right Investment Vehicle
Select the investment option that best aligns with your financial goals and risk tolerance. Consider various factors such as the liquidity of the investment, the level of management required, and the potential returns.
For example, a publicly traded REIT might be suitable if you prefer a hands-off approach with regular income. In contrast, a private equity real estate fund might be more appropriate if you are interested in higher potential returns and are comfortable with a long-term investment.
Step 4: Assess Risks and Returns
Carefully evaluate the potential risks and expected returns of each investment. Understanding these factors is crucial before committing your funds. Consider market conditions, the stability of income streams, the credibility and track record of management, and the potential for long-term property value appreciation.
Tools such as risk-return profiles and performance projections can be invaluable in this assessment.
Step 5: Diversify Your Portfolio
Diversification is key to managing risk in any investment portfolio, including real estate. Consider diversifying across different types of real estate properties (such as residential, commercial, and industrial), geographical locations, and investment vehicles.
Diversifying your portfolio can mitigate risk if one area of the market underperforms and provides exposure to various opportunities for growth and income.
FAQs About Passive Real Estate Investments
Is passive real estate investing risky?
Like all investments, passive real estate investing carries inherent risks, but these can be managed and often mitigated with careful planning and strategic decision-making. The level of risk depends on various factors, including the type of investment (e.g., REITs, crowdfunding, syndications), market conditions, and the quality of management.
While passive investments are generally less volatile than the stock market and provide diversification benefits that can help stabilize your portfolio, investors should be aware of potential liquidity concerns and the impact of economic downturns on property values.
How does passive real estate work?
Passive real estate investing involves putting money into real estate ventures without requiring daily involvement in property management. Investors can choose from various vehicles such as REITs, crowdfunding platforms, REIGs, and syndications.
These investments are managed by professionals who handle all operational responsibilities, from property acquisition and maintenance to tenant management and financial reporting. You can benefit from income generated through rent, dividends, and potential property appreciation, receiving returns on your investment without the day-to-day hassles of property management.
Is real estate investing a good source of passive income?
Yes, real estate investing can be an excellent source of passive income. It offers the potential for steady cash flow through rental income, dividends from REITs, or distributions from other investment structures. Additionally, group or private real estate investments can provide tax advantages, such as depreciation and mortgage interest deductions, to enhance the overall return.
Is real estate always passive?
Not all real estate investments are passive, as active real estate investments are just as common. Active real estate investing involves direct and ongoing involvement, such as property flipping or the daily management of rental properties.
Start Building Your Portfolio with FNRP’s Passive Real Estate Investment Opportunities
FNRP offers high-quality real estate opportunities to new and seasoned investors looking to diversify their portfolios. By investing with FNRP, you don’t have to worry about daily responsibilities and can put your money toward our premium commercial real estate assets managed by a team of seasoned professionals.
Grow your wealth today and start building your portfolio with FNRP’s passive real estate investment opportunities.
