Real Estate Concepts – July 30, 2024
Category: Real Estate Concepts
In this article:
- Passive Real Estate Investing Definition
- The Evolution of Passive Real Estate Investing
- Active vs. Passive Real Estate Investing
- How to Earn Passive Income from Real Estate
- Is Passive Real Estate Investing Right for You?
- FAQs about Passive Real Estate Investing
Passive Real Estate Investing Definition
Passive real estate investing involves putting money into a real estate venture without taking an active role in managing the property. This strategy allows investors to reap the benefits of real estate ownership without dealing with the hassles of property management.
The Evolution of Passive Real Estate Investing
Over the past decade, passive real estate investing has transformed, providing more opportunities for individual investors. Advances in technology and the rise of “wealthtech” platforms have democratized access to commercial real estate (CRE), allowing self-directed accredited investors to participate in lucrative deals without the burdens of direct management.
Platforms like EquityMultiple offer diversified, structured options for passive investing, including:
- Short-term notes based on real estate
- Real estate private credit (debt investments)
- Preferred equity real estate investments
- Private funds, including REIT-structured funds
Each platform may have its unique operating model and investor protections, so conducting due diligence is essential.
Active vs. Passive Real Estate Investing
Investors can choose between active and passive strategies based on their involvement preferences and goals:
- Active Real Estate Investing: This involves hands-on work, such as purchasing and managing rental properties. It appeals to those who want to control their investments and are willing to dedicate time to property management.
- Passive Real Estate Investing: In this approach, investors contribute capital and rely on sponsors to manage the properties. Passive investors typically receive distributions from the investment without being involved in daily operations.
- Active Investing with Passive Management: Seasoned investors may acquire properties and hire property managers to handle operations, combining aspects of both active and passive strategies.
Platforms like EquityMultiple enable accredited CRE investors to diversify their portfolios by investing in multiple assets with relatively low minimum investments.
How to Earn Passive Income from Real Estate
There are several ways to generate passive income from real estate:
- Real Estate Funds: These funds offer appreciation and are similar to mutual funds targeting REITs. Private real estate funds can provide less volatility and more alpha potential than public REITs.
- REITs: Real estate investment trusts acquire and manage income-generating properties, offering regular dividend payouts. Public REITs are highly liquid, while private REITs may offer more transparency and lower fees.
- Crowdfunding: Platforms like EquityMultiple allow investors to access curated commercial real estate opportunities with lower capital thresholds. This strategy offers more transparency and pride of ownership.
- Remote Ownership: Investors can own properties remotely, communicating with maintenance and management companies online. This strategy enables tapping into distant markets but may carry higher liability and capital requirements.
Is Passive Real Estate Investing Right for You?
Passive real estate investing offers the potential for regular cash flow without the headaches of property management. Here are some pros and cons:
Pros:
- Lower initial investment options
- Little to no physical labor involved
- Access to professional expertise
- Less liability compared to direct ownership
- Potential tax benefits
Cons:
- Potentially higher fees
- Trusting someone else with investment decisions
- Reduced control over property management
For those comfortable with these considerations, passive real estate investing can be an attractive way to diversify portfolios and generate income.
Passive Real Estate Investing FAQs
Q: What is passive real estate investing?
A: Passive real estate investing is a strategy where investors provide capital for real estate ventures without managing the properties themselves.
Q: Does direct ownership of property yield better returns than passive real estate investing?
A: Direct ownership can offer higher returns due to lower fees and full control, but it requires significant time, capital, and expertise. Passive investing provides diversification and professional management.
Q: How does passive real estate investing compare with investing in stocks?
A: Both can be done passively, but real estate often offers more tax advantages. Real estate investments can also provide diversification and lower volatility compared to stocks.
Q: Does passive real estate investing offer the same tax benefits as direct ownership of property?
A: Passive investors can receive similar tax benefits, but it’s essential to consult with a tax professional to understand the specific implications.
Q: How do real estate crowdfunding platforms work?
A: These platforms connect accredited investors with commercial real estate opportunities, conducting due diligence and streamlining the investment process.
Q: How does passive real estate investing compare with investing in REITs?
A: Public REITs are highly accessible and liquid but tend to correlate with the stock market. Private real estate funds and passive investing platforms offer less correlation and more alpha potential.
Q: What kind of research should I do before investing passively in real estate?
A: Research market trends, property types, locations, and the track records of platforms and sponsors. Due diligence is crucial for understanding risks and potential returns.
Q: How does EquityMultiple ensure the quality of its investment opportunities?
A: EquityMultiple conducts thorough vetting, accepting only a small percentage of investments to ensure high curation and quality control.
About the Author
Timothy Shaw
Timothy Shaw is a Founding Partner at The Stream Group. Leveraging his broad experience in real estate, he provides strategic guidance and advisory support. His background includes multifamily syndications, distressed asset acquisition, and serving as a licensed real estate salesperson in Ohio. At The Stream Group, Tim focuses on ownership and investment strategies, ensuring the firm’s long-term growth and vision.
Before his real estate career, Tim served as a lieutenant in the fire department. His career in public safety allowed him the opportunity to serve in many roles, including firefighter, flight paramedic, hazardous materials technician, and certified fire safety inspector. This background instilled a deep commitment to service and integrity, values he brings to his work with investors, tenants, and team members.
A graduate of the University of Cincinnati with a degree in Fire Science Engineering, Tim is dedicated to creating an environment where systems and data drive success. He admires Warren Buffett’s investment philosophy: “When others are greedy be scared, when others are scared be greedy.”
Tim is married with two children and enjoys traveling with his wife. They spend their free time at their second home on Amelia Island.