What Is Passive Real Estate Investing and Is It Right for You?May 14, 2023
As of 2022, you can expect to pay an average of over $350,000 for a home in the United States. As time goes on, the price of real estate will continue to increase.
This means that real estate investors can experience substantial returns if they allocate their money correctly. By extension, this will also establish a solid passive income stream.
Looking to learn more info about passive investments in real estate? Let's explore everything you need to know about passive real estate investing and how to make the most of it.
So, What Is Passive Real Estate Investing?
As the name implies, passive real estate investing is an investment strategy where you take a hands-off approach to the property.
To clarify, other professionals will handle your investment obligations for you. This allows you to generate income with minimal involvement. This is a highly favorable option for the average investor that allows them to free up time for other investment opportunities.
What Benefits Does It Provide?
There are a few key benefits of passive real estate investing. This opportunity can be a more affordable way to get started in real estate investing.
If you're able to find a good deal on a rental property, you may be able to purchase it without having to put up a large amount of your own money. This can help you start real estate investing without having to tie up a lot of your capital. From here, you can let other people take care of the more detailed nuances of your investment.
Passive investing can provide a steadier income stream than other types of investments. With passive real estate investing, you're not relying on the stock market or other volatile investments for your income.
Instead, you have a more predictable income stream from your rental properties.
It can be a great way to diversify your investment portfolio. By including passive real estate investments in your portfolio, you can reduce your overall risk while still having the potential for good returns.
This is essential to consider, as having most of your capital tied up in one type of investment is highly risky.
Are There Any Drawbacks?
There are a few potential Challenges to passive real estate investing. First, finding good deals on rental properties can be more difficult.
Since you're not actively involved in the property, you may have to rely on someone else to find and evaluate potential investment opportunities.
It's important to note that you may have less control over the property than if you were an active investor. As a passive investor, you're relying on the property manager to take care of the day-to-day operations of the rental property.
This can be a good or bad thing, depending on how reliable and competent the property manager is.
Your returns may be less than if you were an active investor. This is because you're not as involved in the property and cannot control all of the variables that can affect your investment.
Overall, passive real estate investing can be a great way to get started in real estate investing without having to put up a lot of your own money or time. However, it's important to understand these potential challenges so that you can make an informed decision about whether or not it's right for you.
What Are the Tax Implications?
The tax implications of passive real estate investing will depend on the specific structure of your investment.
However, you'll likely be able to take advantage of some favorable tax benefits. For example, you may be able to deduct certain expenses associated with the property, such as repairs and maintenance. You also have the benefits of a depreciation schedule on the improvements that can offset any taxable income.
Additionally, the income from your rental property will likely be taxed as passive income. This means you won't have to pay any taxes on the income until you receive it. This can provide a significant tax benefit.
Don't forget this detail, however. Some people overlook this obligation and then find themselves with a large tax burden once they decide to cash out of their investment.
For example, you want to avoid receiving your passive investment income and then immediately reinvesting it into something else. This may put you in a position where you do not have enough money to cover the taxes on your initial gains.
What Are Some Things to Consider Before Getting Started?
Primarily, you should make sure you understand the risks and rewards of this type of investing. As with any investment, there's always the potential for both good and bad outcomes.
Be sure to do your research and understand the pros and cons before you get started. Do your best to find a good deal on a rental property. As we mentioned earlier, one of the challenges of passive real estate investing is finding good deals.
You'll need to do your homework to find properties priced below market value with the potential for positive cash flow. Choose a reliable and competent property manager.
As we mentioned, you'll be relying on the property manager to take care of the day-to-day operations of the rental property. It's important to choose someone you trust to do a good job. Be patient and understand that your returns may not be as high as if you were an active investor.
Passive real estate investing is a long-term strategy, so don't expect to get rich quickly. However, if you're patient and stick with it, you can potentially make a lot of money over time.
What Should I Look For in a Property Manager?
Even though you won't be the one to choose the property manager, you should still understand how to recognize a good one. Primarily, you want someone who is reliable and competent. They should have experience in managing rental properties and be able to provide you with a list of references.
You also need someone who is responsive to your needs. They should be available when you have questions or concerns and be able to address them in a timely manner. As you might expect, it's essential to find someone who is transparent with their fees.
They should be upfront about how much they charge and what services are included in that fee. Otherwise, you may find yourself spending far more money than you expected.
What Are Common Mistakes That Investors Make?
One common mistake is not doing enough research. Remember, passive real estate investing relies on someone else to find and evaluate potential investment opportunities. It's important to do your due diligence to ensure the property is a good deal and has the potential to be profitable.
Another oversight that investors often make is not having realistic expectations. As we mentioned, passive real estate investing is a long-term strategy. It's important to be patient and understand that your returns may not be as high as if you were an active investor.
Some investors forget that they're still investing. Just because you're not actively involved in the property doesn't mean you shouldn't treat it like an investment. Be sure to monitor your property and your returns so that you can make adjustments as needed.
What Are the Different Types of Passive Real Estate Investing?
Real estate investment trusts (REITs) are one passive real estate investing type. With REITs, you're investing in a company that owns and operates income-producing real estate. You can buy shares of a REIT just like you would a stock.
Another passive real estate investing type is through joint ventures (JVs). With JVs, you partner with another investor to purchase a property.
You'll usually each put up half of the money and equally share in the profits (or losses). This is common for those who are just getting started with this endeavor. For example, you may have a friend, family member, business associate, etc., willing to manage the property while you actively provide the capital.
Real estate syndications are also an option. With syndications, a group of investors pools their money together to purchase a property. The group is then managed by a professional who handles the day-to-day operations.
How Do I Decide Between Active Investing Vs. Passive Investing?
It really depends on your goals and preferences. Active real estate investing requires more time and effort, but you have more control over the property and the potential for higher returns.
Passive real estate investing requires less work on your part, but you'll likely see lower returns. Ultimately, it's up to you to decide which approach is best for you. If you're looking for more of a hands-off approach, passive real estate investing may be the way to go.
On the other hand, if you're okay with putting in more work upfront, active real estate investing may be a better fit.
What Are Some Tips For Getting Started?
The first step you should take is to research potential investment opportunities thoroughly. Remember, you're relying on someone else to find and evaluate potential investments, so it's important to do your own due diligence. It's also worth noting that you will get a higher return by contributing more of your available capital.
So, you might want to accumulate enough money for a large investment before diving in. This will allow you to see greater gains in the future. Working with a professional is also something important to take into consideration.
Real estate can be a complex investment, so having someone on your side who can guide you through the process is helpful. A professional can also help you find and evaluate potential investment opportunities.
It's worth noting that while it's not impossible to find opportunities on your own, you likely won't be able to find the best ones for you without assistance. This is simply due to the fact that new investors don't know what to keep an eye out for.
What Should I Look For in a Passive Investment Professional?
It should come as no surprise that finding a reliable and competent professional is essential for passive real estate investing.
After all, you're relying on this person to find and evaluate potential investments. So, what should you look for? First and foremost, you want to make sure the person is knowledgeable about the industry.
They should have a good understanding of the market and know how to find properties that are priced below market value. You will need someone who is highly reliable. This person will be responsible for managing your property, so it's important to choose someone you can trust.
It's crucial to make sure your prospective professional is experienced. Someone with a substantial amount of experience will better understand the market and be better equipped to find profitable investment opportunities.
Passive Real Estate Investing Is Easier Than It Seems
Now that you know passive real estate investing, it's time to decide if it's right for you.
If you're patient, have realistic expectations, and are willing to do your research, passive real estate investing can be a great way to make money over the long term. Just be sure to work with a reliable, experienced professional to help you find and manage your investment.
If you are ready to create your own portfolio of passive income properties, take the first step by registering for our Real Estate Investing School Beginner Course. It will teach you everything you need to know to start looking for your first investment property.