Investing in real estate can be a dynamic part of building wealth. But not all forms of real estate investment work the same or are the right fit for every investor.
Active forms of real estate investment, such as buying and flipping homes and owning a rental property, can be particularly intimidating to a first-time real estate investor. Although active investments can give a great return on your investment, they also require more risk, effort, and knowledge to succeed.
That’s where passive real estate investment comes into play. Ideal for new investors, passively investing in real estate allows you to build a portfolio without shouldering the responsibility solo.
Here’s a look at what it means to passively invest in real estate, your options, and the pros and cons associated with each.
What passively investing in real estate is — and isn’t
As a passive investor, you buy shares of a property or portfolio while the day-to-day operations are managed by someone else. You — and your investment — benefit when the property does well.
Although you will not take an active role in managing the property, it is still important to research your investment before you put any money down. You should also follow your investment and keep up with how it performs over time.
Passively investing in real estate allows you to learn about the industry without having to take on the risk and responsibility of buying, flipping, or renting a property to earn a profit. And you don’t have to worry about selling a property on your own.
Building your wealth passively tends to take more time than actively investing in real estate.
Crowdfunding platforms
Real estate crowdfunding is a way to buy a share of an investment opportunity without having to take on the risk alone.
When you buy into a crowdfunding platform, you join other investors in pooling together capital that is used to purchase a commercial or residential property that has been identified by an experienced real estate developer or investor.
There are a couple of ways to earn profit as a crowdfunding investor. The first is by receiving a proportionate share of rent collected. The second is from the profit of selling the property at the end of the venture.
Although there is great potential for earning income from crowdfunding, there are also no guarantees. Like with any investment, you have to be prepared for the possibility of losing some or all of the money you invest.
Also, while other investment opportunities are more liquid, once you put money into crowdfunding, you are typically committed to the project for its duration. You don’t have the option to sell whenever you want.
Real estate investment trusts (REITs)
Real estate investment trusts, or REITs, are publicly traded investment opportunities that allow you to buy a share of a company’s property portfolio. REIT portfolios typically include a variety of income-producing properties, such as shopping centers, restaurants, and hotels.
As a REIT investor, you will receive dividends annually. REITs are required to return 90% of their taxable income to shareholders every year. Unlike crowdfunding platforms, REITs are more liquid, which means you have the freedom to sell your shares when you choose.
REITs are more risk-free, but they do come with a couple of downsides. REITs typically grow in value more slowly over time, and you can expect to pay operational fees over time.
Real estate investment groups (REIGs)
Similar to REITs, real estate investment groups (REIGs) buy or build residential properties, such as apartments and condos, as well as commercial properties. As an investor, you buy a share of a partnership or corporation.
REIGs typically hold diversified portfolios, which gives investors, like you, a greater potential for earning a profit without taking on too much risk.
As with any real estate investment, there is some risk, and you have no guarantee of earning a profit. Group fees may cut into your profits. Also, depending on the group’s agreement, you may have less access to funds.
Is passively investing right for you?
Before diving headfirst into any investment, it’s important to know your goals and expected outcomes.
If you are looking to cut your teeth in real estate and build an investment portfolio over time, then buying a share of a crowdfunding platform or REIG might be the best path for you. Likewise, if you are looking to make a profit fast and want to be more active in your investment, it might be time to consult a local real estate professional (don’t forget to negotiate their fees!) to learn about home flipping or rental opportunities
For more understanding how to make money with real estate.
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