A Guide to Passive Real Estate Investing

Andrew Carnegie, one of the richest men in American history, famously said, “Ninety percent of all millionaires become so through owning real estate. The wise young man or wage earner of today invests his money in real estate.” Carnegie said it over 100 years ago but it’s still solid advice even today. Real estate can include simple asset protection, low transaction costs and offer you an asset class that everyone always needs in their life.

Most current American millionaires still derive the majority of their wealth from real estate investing, through real estate stocks, private ownership and more. So, should you ask your wealth manager to help you do the same thing? What would this investing approach look like?

If you want to invest capital in real estate but don’t want the hassle of active management, passive real estate investments might be right for you. 

You can choose from a number of real estate investing platforms and unique asset casses if you prefer passive real estate investments. This section reviews 3 of the best options out there. Whether you are interested in real estate crowdfunding or want to understand how to invest in REITs, these platforms have you covered. 

Arrived Homes allows virtually anyone to buy shares of income-producing rental properties in some of the fastest-growing markets throughout the United States. With a minimum investment of just $100, investors can easily diversify their portfolios across multiple properties and receive passive income each quarter through the rental income generated by each property.

The company takes care of all of the management headaches that go along with investing in real estate so investors can simply enjoy the best part; collecting passive income. After a target hold period of 5-7 years, Arrived Homes will choose the most opportune time to sell the property to realize the highest gains. Each investor will then receive their pro-rata share of the proceeds from the sale and their investment will be fully realized.

Crowdstreet is a passive real estate investing platform that specializes in commercial real estate. You must be accredited to use Crowdstreet. To be accredited, you must meet the net worth requirement ($1,000,000) or income requirement ($200,000 each year for the last 2 years). The platform lets users invest directly in commercial real estate projects. Crowdstreet is a marketplace, not a middleman (like a brokerage firm), where you can select the best options that fit your investment needs.  

A wide variety of investments are available on the platform, including office buildings, storage facilities and family living spaces. It’s free to view investments on the Crowdstreet platform. There are many one-of-a-kind opportunities available on the platform, including funds, tailored portfolios, and individual deals like self-storage facilities or major retail developments. Investors are able to commit capital to both equity and debt offerings. 

One downside to Crowdstreet is that investors are limited to the options available on the marketplace and it can be expensive to build a diverse portfolio. However, the platform supports high-quality education materials that can help you figure things out. 

Streitwise is a REIT that focuses on commercial real estate. That means that it acts as an investment trust that actually operates income-producing real estate and delivers pass-through income. Your minimum required investment is $1,000. The platform specializes in generating high-yield returns through investing in low-risk commercial real estate rental properties. Streitwise is known for consistently delivering quarterly dividends. 

The platform also has a transparent fee structure (and low fees) and a convenient and user-friendly interface. Streitwise makes diversifying your real estate investments easy. Streitwise makes investments in markets with growth potential that have low risk. 

However, Streitwise is a young and mostly unproven company. There is limited availability in its portfolio and the platform has limited technology capabilities. 

The platform is also one of the few that has investment options for non-accredited investors. While direct investments are only available to those that meet accredited investor requirements, non-accredited investors have access to the two RealtyMogul-sponsored non-traded REITs, each with a diverse portfolio of quality assets.

Groundfloor is an alternative real estate investing platform that offers investments in high-yield, short-term real estate loans. The platform is open to non-accredited investors and private individuals looking for active real estate alternative investment. Groundfloor has great volume with an average of 50-70 investments available at any given time.. 

Individuals with small portfolios will also like the low $10 minimum and 0 investor fees. The low minimum investment allows investors to easily diversify their Groundfloor portfolio across multiple loan offerings. 

When you want to invest in real estate, you may want to get into commercial real estate. This is made easier by the CRE Income Fund, which allows you to buy in with lower minimums, gain access to the industry and earn regular returns. You can try this platform if you know you want to focus on commercial real estate or believe that their philosophy matches your personal investment strategy.

Everyone knows investing in real estate can be a great way to build wealth. However, most people may not realize that one of the most compelling reasons to invest in real estate is that it gives you a chance to generate passive income. When you have passive income, you have true financial independence.  

In the real estate market, you could be investing in a rental home, expecting an income stream that comes from rent payments and a potential sale when the property reaches its peak value. Passive managers look at this investment vehicle as a while portfolio that often involves a property management company, an asset manager and a large crowdfunding group. You simply need to choose which works for you.

Perhaps the oldest and most traditional method of real estate investing is active real estate investment. In this method, active investors make direct investments where they buy an income property and then act as the property manager on a day-to-day basis.

They are the point of contact for the tenant and take responsibility for collecting the rent, arranging maintenance and showing vacancies. This type of active investor is often referred to as a mom-and-pop landlord because historically, active investors like this have been husband-and-wife operations. 

They usually have between 2 to 10 units earning rental income for them and handle the management to save money. Although you may first think of large, multi-unit apartment complexes when you think of landlords, most landlords in the U.S. who are active investors fit into the mom-and-pop category. They scout out a few real estate opportunities over time until they grow a small-to-medium-sized portfolio that earns solid rental income.

But that’s not the only kind of active real estate investment. Developers and home flippers buy and renovate single-family homes, commercial real estate or entire apartment buildings. Then these active investors supervise the property renovations on a daily basis. They choose the property and the level of luxury they’re going to rebuild with, all with the intent of adding value to the property and selling it at a profit. 

Both of these methods of active real estate investing are well-proven. They’ve made active investors a lot of money over time, and they will continue to do so. It allows investors to exercise a level of control over their properties and that peace of mind is important to them. With that said, active investing does have some significant drawbacks. 

First, it’s time-consuming. Tenants don’t just have problems during business hours. Being a landlord is a 24-hour, 7-day-a-week job. It takes a great deal of skill and knowledge to be an active investor who flips properties for profit. In both the case of the landlord and the flipper, you need to develop specific skills and be prepared to spend lots of hours managing your investments.

If that sounds like too much work for you, you’re not alone. Fortunately, there is another way: passive real estate investing. Passive investors employ a different investment strategy. They own rental properties, but they don’t deal with tenants. They don’t show vacancies or arrange maintenance. In fact, passive investors rarely if ever even see the properties they make money off of. How do they do this? Keep reading to find out.

The money generated by the properties in a passive investor’s portfolio is known as passive income. It gets this name because the investor can generate income without actively or directly managing any of the assets in their portfolio.

If you want to invest in real estate passively, you can use a number of methods to accomplish this. This investment opportunity allows fund managers to gather the crowdfunding they’ve collected, build a portfolio and generate income for every investor.

Crowdfunding is all the rage these days, but it’s actually a very old concept. Anytime you pool money with other investors to buy real estate, you crowdfunded that deal. For example, if you and your girlfriend both put together $50,000 to make a down payment on a house, that’s crowdfunding. It’s a small crowd, but it’s a crowd. 

Before real estate crowdfunding platforms, this concept was practiced with real estate syndication. The syndicator finds the opportunity and negotiates the deal, while individual investors put up most of the capital in exchange for a share in the equity and cash flow from the investment property. The syndicator then handles the management while the investors simply collect a passive income stream. Real estate syndication is most popular with multifamily real estate and commercial real estate.

Real estate crowdfunding platforms expand on that concept. They have large portfolios of different real estate offerings with buy-ins ranging from as low as $100 to $100,000. Usually, crowdfunding platforms allow you to take partial ownership of commercial properties – although some platforms have single-family home offerings – and you get distributions from the rental income. These distributions are typically paid out on a monthly or quarterly basis. 

You can pick and choose the properties you want to invest in based on your own intuition and preferences. Regardless of what properties you add to your portfolio, they will be managed by the project sponsor. You don’t take phone calls or tenant complaints. If it all works, you just sit back and enjoy your distributions. 

An equity REIT is a fund or corporation that uses a combination of the fund’s capital and investor contributions to purchase income-generating properties in multiple markets. In that way, the real estate deals that REITs conduct are also crowdfunded, but unlike crowdfunding platforms, REIT investors don’t directly choose what properties they will invest in. 

In equity REITS, investment decisions and the management of day-to-day operations are taken care of by the fund manager. REITs typically target underperforming commercial properties like apartment complexes in markets that are growing but haven’t reached the peak of their growth cycle. 

Once a REIT acquires a property, it usually institutes a series of planned upgrades – such as remodeling units and improving the common areas – with an eye toward increasing both the revenue generated by the property and the property’s overall value. Throughout this time, REIT investors earn regular passive income and hopefully get an even larger pay-out when the REIT sells the asset. 

Aside from the chance to earn income in two different ways, REITs offer passive investors a host of other advantages. Specifically, REIT shareholders get to make annual depreciation write-offs against their income and since the money they earn from the REIT is classified as pass-through income, shareholders can take a 20% write-off annually. All of this makes equity REITs one of the most popular passive investments in the real estate asset class.

Although equity REITs are the most well-known kind of REITs, they are not the only kind. Mortgage REITs pool investor contributions to buy mortgages or mortgage-backed securities. They also borrow money at low-interest rates for the purpose of lending money at a higher interest rate than they pay on the money they originally borrowed. 

Mortgage REIT investors profit from the money earned by the accrued interest. Mortgage REITs don’t usually offer as much growth as equity REITs because the interest rates are fixed and there isn’t upside in raising rents like there would be in an equity REIT.

Mortgage REITs are secured by the properties they finance, which means investors will still have an asset to liquidate in case of a borrower default. These investors may see less income but experience less volatility since the loans are secured. 

For passive investors who want the best of both worlds can invest in hybrid REITs. A hybrid REIT will have its investment capital split between equity investments and mortgage securities. The risk is comparatively lower than an equity REIT, but the potential income and long-term upside is a bit higher than a traditional mortgage REIT.

Passive investors can also choose from a number of different real estate funds, which are sometimes known as mutual funds. Instead of buying properties, real estate funds tend to build a diversified portfolio of real estate-backed securities. Whereas some REITs may focus mainly on multi-family properties or industrial properties, mutual funds tend to spread capital across different real estate assets in several different sectors. 

The long-term profit potential in real estate funds is not necessarily in monthly or quarterly distributions but in the appreciation of the assets in the fund. As those assets appreciate and reach peak value, they are sold off and the profits are distributed to the fund shareholders. In almost all cases, real estate funds are managed by an experienced team of real estate professionals. 

Theoretically, real estate funds offer passive investors a set-it-and-forget-it option where they can invest their money in a highly diversified portfolio of real estate assets and just wait for the dividends. However, investing in these funds requires investors to have tremendous confidence in the fund manager who will be choosing all the assets and making all the decisions. 

Remote real estate investing is another way for passive investors to earn income from making direct investments. In remote real estate investing, you would identify assets like apartment buildings, industrial centers or storage spaces; buy them; and then turn them over to a property management company to run on a daily basis. 

The management company collects rents, interfaces with tenants and takes care of the maintenance, usually in exchange for a percentage of the gross rent. Typical management fees range between 3% and 6% of the monthly rent generated by the property. Passive investors can choose this option for properties in their immediate area or properties located in other states. 

Remote real estate investing gives passive investors a higher level of control over what assets they choose and who will be managing those assets, while also freeing them from the time constraints of day-to-day management. It’s a popular way of passive real estate investing.

Every investor has a different idea of what is an ideal investment. For some investors, the idea of waiting for people to pay rent or hoping a developer will complete a renovation and sell an asset at a profit is just not their cup of tea. They may want something more secure even if it generates less income. 

For passive investors who want a little more security and direct control over what assets are in their portfolio, buying trust deeds and notes is a proven method of passive real estate investing. It’s basically what it sounds like. Trust deed investors buy notes from mortgage and lien holders for less than the remaining value on the note. They take over the note on the property and become the new mortgage holder, meaning the borrower pays them back instead of the original lender. 

If the borrower defaults, the trust deed holder can call in the note and foreclose on the property. At that point, they can sell the asset and once their capital is returned, they are free to purchase another trust deed. 

Historically, the high cost of real estate has been the single biggest barrier to acquiring it. That’s why crowdfunding platforms, REITs and mutual funds were conceived of. Minimizing investor risk by raising capital through a wide range of sources is a win for everyone. 

However, even within that framework, many of the highest-performing passive funds and private REITs can have six-figure buy-ins and are only available to accredited investors. Fortunately for investors, online crowdfunding platforms and a change in investor eligibility standards at the federal level has opened the playing field for non-accredited investors. Crowdfunding platforms with passive real estate offerings start as low as $100.

At the end of the day, only you can answer this question. If you enjoy being hands-on, dealing with tenants and being able to keep a direct eye on your investment portfolio, being an active investor in real estatecould be perfect for you. You’ll certainly meet a lot of interesting people and gain some excellent experience.

If you have the time to devote to managing your investments, a knowledge of how to do it, or a willingness to acquire this knowledge, being an active investor may suit you. Many active investors gain so much experience managing their own assets that they go on to start property management companies, which ironically, generate passive income for them. 

On the other hand, if you prefer to earn income from real estate investing without having to be hands-on, making passive investments through crowdfunding, REITs and mutual funds will be right up your alley. 

Over the long haul, the stock market has performed well and generated lots of wealth for passive investors, and the same thing can be said about real estate. Determining whether the stock market or passive real estate investing is better for you depends on a lot of variables. 

First among those variables is your risk tolerance. How much volatility and investment risk can you stand? Stocks can multiply in value exponentially overnight, but they can also fall that quickly. And you usually have to sell your stock to get the money out of it, although some stocks pay dividends. 

Passive real estate investing, on the other hand, allows you to keep your asset and earn money while it appreciates. The disadvantage of passive real estate investing is usually the cost factor. Acquiring real estate is an expensive affair, which is why crowdfunding and REITs came about in the first place. 

Additionally, it can be much easier to liquidate stock shares than real estate assets. You can sell a stock in minutes. Selling a single-family home or apartment complex can take several months, even if it’s a desirable asset. Most crowdfunded real estate investments, REITs or mutual funds have hold periods during which you can’t sell, even if you really need access to your capital.  

At the end of the day, the best answer to what’s a better passive investment between real estate and stocks is to take the middle road. Build a diversified portfolio with a nice mix of real estate assets and securities. Talk to a reputable investment advisor about your goals and formulate a solid passive investment strategy so you have the best of both worlds. 

Being able to generate passive income is one of the most important progress markers on the road to economic independence. When you’re earning passive income, your money is making money for you every day even if you’re unable to work. That’s why generating passive income should be the ultimate goal for every investor, which many REITs has a track record of doing. Adding them to your investment accounts, allowing for normal market increases which can produce quality market returns and adding more of them to your investment fund is often the way to go.

The good news is that there are more ways than ever for you to generate passive income through real estate investing. All you have to do is put your mind to it and start doing your research. If you conduct your due diligence and find something you like, take the plunge and hope for the best. In the meantime, you can count on Benzinga as a resource.