Passive Real Estate Investing: What Is It and Is It Worth It?

Before investing in real estate, you need to figure out your investment goals.

Ask yourself these questions:

• What is your risk tolerance?

• What kind of returns are you looking for?

• How much capital do you have to invest?

This will help you figure out what kind of real estate investment is the best fit for you and your financial situation.

Once you have defined your investment goals, you need to research the real estate market.

You’ll have to get to grips with a variety of factors, such as:

• The local real estate market

• Supply and demand

• Rental rates

• Vacancy rates

Researching the market will help understand where you should invest your money and how you can generate optimal returns.

There are different passive real estate investment strategies you can choose from, including real estate investment trusts (REITs) and crowdfunding platforms.

Deciding on a passive real estate investment method depends on your investment goals, risk tolerance, and personal preferences.

REITs are one of the most popular passive real estate investing methods—but you’ll need to research and select a REIT that fits your investment goals.

Once you’ve chosen a REIT, you need to open a brokerage account. Then you can start buying and selling shares.

If you choose to invest in a physical property, you’ll need to find one that meets your investment criteria.

Before committing to your investment, you’ll need to consider:

• Location

• Condition

• Cash flow

• Potential rental income

When looking into a property, you should also review financial statements, perform property inspections, and research the local real estate market.

Once you have your eye on an investment property—and gone through the motions of research and inspections—you’ll need to fund your investment.

This can involve:

• Using cash.

• Getting a mortgage.

• Investing through a crowdfunding platform.

Passive real estate investing is called passive for a reason—but you still need to manage your investment to make sure it performs well and gets you the returns you’re looking for.

If you want some help, you can hire a property manager to oversee the day-to-day operations or regularly keep tabs on your investment portfolio.

Real estate investment trusts (or REITs) are types of companies that work as trusts. They invest in real estate and have to payout at least 90% of taxable income to shareholders in the form of dividends.

You can earn cash by purchasing shares of REITs and compounding the high-yield dividends. And you can get some bang for your buck—REITs paid out an estimated $92.3 billion in dividends to shareholders in 2021. (Many use their retirement accounts to make investments, which are usually publicly traded.)

And the best part? REITs do most of the legwork by taking care of property ownership and rental collections (some will even fund mortgages or collect interest).

REITs are pretty low risk. Just be aware that you can lose money if the value of interest rises.

They’re also unlikely to grow in value like other types of investments. You can also avoid a lack of liquidity by opting for publicly-traded REITs.

Here are some popular REITs and passive real estate investing sites worth checking out—

• EPR Properties

• Simon Property Group

• Vanguard Real Estate

• Realty Income

• Progolis

Real estate funds are a type of mutual fund (a single collection of money put forward by investors that’s used to buy stocks and other types of investments).

But unlike other passive income mutual funds, a real estate fund only lets you invest in—you guessed it—real estate.

It also shouldn’t be confused with REITs, as real estate funds provide value through appreciation (increase in property worth) rather than through dividends.

Real estate funds typically invest in REITs and have them in their portfolio as a collection (rather than owning a single REIT).

Because you get value from appreciation, be prepared to be in it for the long haul. But if long-term investing sounds daunting, fund managers are there to take care of investment strategies for you while also managing your portfolio (by tracking performance, making buying and selling decisions, and managing risks).

Real estate funds come with low costs and aren’t usually affected by stock market volatility, but it’s still worth talking to a financial advisor to understand the ins and outs before getting stuck in.

They are also highly liquid as most real estate funds are traded on public exchanges—which means investors can buy and sell shares on a daily basis. However, the liquidity can also depend on the specific fund and the underlying assets it invests in.

Remote ownership is exactly what it sounds like—owning a passive income property from a remote location.

The word ownership doesn’t exactly scream passive investing. Sure, remote investing comes with more responsibility, such as choosing the right markets, real estate companies, and property values.

On the bright side, you can hire a property manager to deal with all the landlord duties and upkeep of the property. By remote investing, you’re also not held back by geographical restrictions—giving you free rein on real estate markets.

And thanks to technology, you won’t even need to step foot on the property. Virtual assistants can show you around the site and keep you updated on your investment (you can even sign documents electronically using eSign).

This is great if you want some control but are also happy to hand over a large chunk of responsibilities. And if you’re trusting a property manager to take care of your investment, make sure you pick the right one (and don’t skimp on research).

If you prefer local ownership, you can purchase a property and still get a relatively hands-off approach if you do it the right way.

Buying a property usually calls for an active approach—you need to organize your finances, do your research, find the right loans (and maybe have a meltdown in the process). This means your investment will come with a cost and could reduce the rate of return.

But once you’ve got the keys, you’re free to do whatever you want.

By hiring a property manager, you can earn a passive income through renting your property while they deal with all the landlord responsibilities.

You can also look into Airbnb and use a rental manager to take care of the management and cleaning duties.

You can communicate and collect payments online, so you’re not tied down to one location.

Of course, Airbnb will only deliver the big bucks if you’re in a touristy area or if you’ve got top-notch or unique property. If this isn’t the case, you might be better off sticking to traditional renting.

If you’re a real estate newbie, crowdfunding is a quick and simple way to get started.

Crowdfunding is expanding. The global real estate crowdfunding market was valued at USD 1.3 billion in 2019 and is predicted to show a compound annual growth rate of 58.1% from 2020 to 2027.

Online crowdfunding platforms let you pool your money with other shareholders to invest in real estate that would’ve been too pricey or large of an investment to go for alone.

You can choose to invest in commercial or residential real estate, earning passive income by getting cash distributions from rental income or property appreciation and sales.

One of the best things about crowdfunding is that you can diversify your portfolio. By spreading your eggs across several baskets, you reduce the risk of losing a ton of money through a single investment.

You also get the chance to tap into other real estate markets, no matter where you are in the country. Fancy investing in five different markets in five different states? Go for it.

If this sounds like your cup of tea, take a sip, and browse through the top crowdfunding sites:

• Yieldstreet

• Fundrise

• EquityMultiple

• CrowdStreet

• Realty Mogul

Active real estate investing involves more direct involvement and gives you the opportunity to take a more present role in your investments—using your time, money, and energy throughout the process.

As an active real estate investor, you could be involved in:

• Buying the property

• Construction and development

• Property management

• Repairs and renovations

• Rental collections

This amount of responsibility and control sets active investing apart from passive real estate investing (which usually involves working with a property or fund manager to take care of these key duties).

Unlike passive investing, your hands-on role means you’ll have to put much more time, effort, and expenses into your investments. And, in some cases, you’ll end up taking up the role of a full-time real estate investor.

The more you put in, the more you stand to lose. Active investing is high risk, high rewards—you’ll face issues like difficult tenants, unstable market conditions, structural problems, and bad locations.

That being said, sometimes the gamble pays off.

We’ve gone through the risks. But there’s a reason active real estate investing remains a lucrative investment strategy.

Here are some key benefits to consider—

• Greater control: With active investing, you can sit firmly in the driver’s seat, overseeing and managing critical investment decisions. Trusting someone else with your cash can be hard, so keeping control could help you rest easy.

• Flexibility: Being your own investment manager gives you the freedom to make any decisions without consulting a property manager. You can also buy and sell whenever you want—a quick exit strategy that can be difficult to do with passive investing.

• High returns: Like with most jobs, the more power and responsibilities you have, the more you can gain if the investment is successful. Active investing can turn a large profit, as long as you avoid the risks.

Derek Sall, financial expert and creator of Life and My Finances, says,

Returns could be as high as 10–15% cash on cash returns—plus you’d get the appreciation of the property, which could be another 5% or more per year. In total, you could earn 10–20% every year (rather than 10% on the stock market).

Derek Sall financial expert and creator of Life and My Finances

To sum up, if you want to take a step back, with less risk but lower returns (all about compromise), passive investing might be the right strategy for you. Especially if you’re a beginner.

But if you’re willing to take on more challenges (along with a ton of responsibility and day-to-day duties), active investing is a great way to earn a sizable income while staying in control.

Read more about the BRRRR method to maximize your investment strategy.

Passive real estate investing isn’t going to deliver returns overnight.

Your income will likely be generated through rental payments or appreciation—so it could take months or even years to reach your financial goals (but your future self will thank you).

As the name suggests, passive investing means you can take a backseat in the management and running of your property.

But that doesn’t mean you’re out of the woods. Before you put your feet up, you’ll need to do your research, find the right investment opportunities, and make sure the company or manager in charge of your investment knows exactly what they’re doing.

We’ve said it once (or twice), and we’ll say it again—doing your research is key if you want to succeed in any type of investment.

To make the right investment choices and decide on the best strategies, you’ll need to learn the ins and outs of the business.

There’s a ton of information out there, from real estate investment podcasts and videos to blogs and articles. And if you’d rather go old-school and chat with an actual human, you can speak to other passive investors in real estate through online forums or social media to get the inside scoop.

Don’t know where to start? Marco Santarelli offers some great tips on his Passive Real Estate Investing Podcast, and BiggerPockets has some useful videos on how to thrive in real estate investing.

The idea of watching the dollars roll in while you’re soaking up the sun sounds tempting—but it doesn’t quite work like that.

Whether you’re using REITs or a property manager to look after your investment, it takes a lot of trust to put your finances into someone else’s hands.

To make sure everything stays above board, you can ask for regular feedback on your investments, such as market values and updated reports.

Learning and growing as an investor can lead to greater and better things—so it’s fine to take a backseat when passive investing (just don’t get too comfortable).