Six strategies for passive real estate investing

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Throughout the years real estate has proven to be a top investing strategy. While offering an opportunity to make money in both the short and the long term, real estate properties are also very low-risk investments compared to stocks and other alternatives. Nonetheless, many people stay away from this profitable opportunity due to the widespread notion that investing in real estate requires a lot of time and efforts. Indeed, real estate can be a passive investment strategy. Following are 6 ways to make passive income from real estate:

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Passive Real Estate Investing Strategies

1. REITs

Real Estate Investment Trusts, or REITs for short, are one of the most traditional forms of passive real estate investing. In the US market, REITs were established by Congress in 1960 with the aim of giving all investors, no matter how big or small their budget is, access to income-producing properties. REITs are entities which own, operate, and finance income-producing real estate assets. Individual investors buy shares in order to receive dividends as well as capital gains. Trusts are obliged by law to distribute as much as 90% of their taxable income to their shareholders regularly. In this sense, investing in a REIT is very similar to investing in stocks.

All you have to do as an investor is to conduct research to choose the most profitable opportunity in the market. This makes this strategy not only a source of income but also an excellent opportunity for beginners with no knowledge of and experience in real estate. Naturally, some investors see this as a disadvantage as it takes away from the excitement of making hands-on real estate investing decisions. Another consideration which beginners should keep in mind is that most REITs have strict minimum capital requirements.

2. Real Estate Crowdfunding

Real estate crowdfunding is a modern twist to the more traditional concept of Real Estate Investment Trusts which has been made possible by the spread of social media and online technologies. Crowdfunding platforms gather hundreds or even thousands of investors from around the globe to pull their financial resources together in order to make joint real estate investments. Similar to investing in REITs, all that investors have to do is to conduct diligent research and analysis to select a top-performing crowdfunding platform. Once they have done that, they start receiving dividends, making investing in real estate crowdfunding a passive investment strategy. An important advantage of crowdfunding over REITs as a source of passive income is that you can invest in the former as little as $500. This makes crowdfunding accessible to all levels of investors, even those who are just starting their career and are looking for supplemental income.

3. Buy and Hold

Investing in real estate passively does not necessarily mean lack of individual ownership of properties. To the contrary, the buy and hold real estate strategy allows investors to buy a property and hold on to it in their investment portfolio with the ultimate goal of selling it in the future after it has appreciated significantly in value. The key to success with this strategy is to purchase investment properties in markets which are expected to heat up and undergo major real estate appreciation in the coming years and decades. Compared to REITs and crowdfunding, buy and hold exhibits a major drawback. Namely, investors do not make money in the short term but only in the long run, once they have sold their property.

4. Rental Properties

To make buy and hold real estate a positive cash flow strategy throughout, investors can choose to rent out their investment properties. In this way they will make money every month in the form of rental income. Importantly, investors can choose whether to rent out their property on a long term basis (as a traditional rental) or a short term basis (as an Airbnb-style rental). Their decision should depend on the state of the housing market, rental demand, and local regulations and should be based on careful analysis. Investing in rental properties might sound counterintuitive to those in pursuit of a passive real estate investing strategy.

Becoming a landlord or even more so an Airbnb host is as far away from passive as possible. However, owning a rental property does not have to equal being a landlord. As long as an investor hires a professional property manager to take care of all aspects of owning and managing a rental, he/she can enjoy his/her passive rental income. Moreover, with this strategy investors get to make money in the long run when they decide to sell their property.

5. Turnkey Real Estate Investing

Turnkey properties are a specific type of investment rental properties which allow passive real estate investing.  Additionally,Turnkey real estate comprises of properties which are completely ready to be rented out to tenants at the moment of purchase. In most cases, the company which has constructed or renovated them remains responsible for the property management process. Frequently turnkey investment properties even come with the tenants in place. This means that investors in turnkey real estate have absolutely nothing to worry about, which makes this strategy yet another way to invest in real estate passively. In order to succeed with this approach, investors have to do diligent research and choose a top-performing company with a proven record of performance.

6. Real Estate Syndication

Yet another way to invest in real estate passively while owning a rental property is through participating in a real estate syndication. Legally speaking, real estate syndications can be registered as corporations, limited partnerships, or limited liability companies (LLC). In this real estate partnership, the syndicator – also called the sponsor – is responsible for finding profitable investment properties, securing the financing by pulling together the funds of various investors, buying the property, and managing it.

This means that the syndicator does all the active work that requires time and efforts. The investors simply provide their money to the sponsor in order to finance the purchase of the investment properties, after which they co-own the rentals with the rest of the investors. Investors in a syndication make passive income month after month from their rentals.

The key to success with this strategy, similar to any other real estate partnership, is to select a reliable, trustworthy syndicator with solid knowledge of the local housing market and proven experience in property investments. Moreover, it is crucially important to sign a written agreement which specifies the rights and responsibilities of all parties to the syndication and includes an exit plan.

One of the most important benefits of investing in real estate is the wide myriad of options that one can choose from, including passive real estate investing strategies. Selecting the most appropriate way to invest in real estate passively depends on one’s budget, real estate knowledge, previous experience, and personal preference.



About the Author

Daniela Andreevska
Daniela Andreevska is Marketing Director at Mashvisor, a real estate data analytics company. She has previous experience in economic policy research and fundraising. Daniela holds a Masters Degree in Middle East and Mediterranean Studies from King's College London. You can read more of Daniela's articles on real estate on Mashvisor's blog page.