Passive Real Estate Investing Examples


Here’s Howfrom Buying Rental Property To Reits And More

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Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.

Though a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate.

Guarantor / Key Principal

In order to secure debt for large commercial real estate projects, lenders often require that there is substantial net worth involved in the deal to be confident that if the project goes south, there are enough deep pockets involved to make it right. Typically, but not always, the general partner of a syndication must have a net worth at least equal the initial balance of the loan. There also must be enough liquid assets of the GP ( to cover debt service over a certain period of time. Lenders refer to the sponsor group including the GP and all loan guarantors, as Key Principals or KPs. This group is also known as the sponsor.

In many cases, a sponsor may have a proven track record in addition to the capital required to acquire a property, but their current net worth or liquid assets may not be sufficient for the lender to make the loan. In this case a sponsor may bring on an individual into the sponsor group as a guarantor and KP who has either a high net worth or substantial liquid assets that will satisfy the lenders requirement. By simply putting up ones balance sheet, one can negotiate compensation from the sponsor for taking on the risk of guaranteeing the loan.

The compensation for providing ones balance sheet and being a KP varies depending on the needs of the sponsor, the type of debt being guaranteed and the requirements of the high net worth individual. Some forms of compensation include a percentage of the GP and/or a fee based on the total loan value.

What Is Active Real Estate Investing With Passive Management

Active real estate investing with passive management has some attributes of both active and passive investing. Researching and buying rental properties is an active investment activity. But if you hire a property manager, your ongoing role can be passive.

The majority of my real estate investment dollars are in this last category. And I can tell you firsthand that investing in buy-and-hold rental properties is never a completely passive investment.

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There Are Primarily Three Types Of Reits

Equity REIT: One of the most common forms of investment, equity REITs buy, own, and manage real estate properties that generate revenue. The potential benefit of equity REITs as a long-term investment is the passive income generated primarily from rents.

Mortgage REIT: These entities loan money for mortgages to real estate owners and operators. They purchase either existing mortgages or mortgage-backed securities. In this case, the revenue is generated mainly by the interest they earn on the mortgage loans. Mortgage REITs are sensitive to changes in interest rates as the dividends are based on the interest payments.

Hybrid REIT: These have a combination of both the equity and mortgage REITs in their portfolios. They earn money through a combination of rents and interest. They structure the portfolio to more property or more mortgage holdings depending on the investing focus as stated by the trust.

REITs are further categorized based on how the shares are bought and sold.

Publicly traded REITs: These are REITs whose shares are listed on a national securities exchange and regulated by the U.S. Securities and Exchange Commission .

Public Non-traded REITs: These are also registered with the SEC but dont trade on national securities exchanges and tend to be more stable because they are not subject to market fluctuations.

2. Real Estate Funds:

3. Crowdfunding:

4. Investing in a turnkey rental property:

What Is Active Investing

How To Get Began in Passive Real Estate Investing

Active real estate investing occurs when an investor is hands-on. Active real estate investors research different markets to invest in, identify specific properties that meet the investment objectives, and negotiate a deal with the seller.

After escrow closes, an active real estate investor may also directly handle the property management. They will market the property for lease, screen tenants, draw up and execute the lease, handle rent payments and repairs, and be available 24/7 if repair issues ever arise.

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Pros And Cons Of Passive Real Estate Investing

  • Many deals dont require a lot of capital

  • Less time-consuming than active real estate investment

  • Produces income

  • Backed by a physical asset, unlike some securities

  • Can require long holding periods

  • Some investments can incur high tax burdens

Pros Explained

  • Many deals dont require a lot of capital.Investors can access residential and commercial real estate investing through REITs. Investors can own a piece of an office complex, a mall, or an apartment building without having to afford the full price of the real estate, Ricardo Pina, entrepreneur and founder of the Modest Wallet, said in an email to The Balance.
  • Less time-consuming than active investment.Passive investors are free to focus on other things after making this kind of real estate purchase.
  • Produces income.Whether you purchase a REIT or a home that you have managed by a third party, youll receive regular checks from your investment.
  • Backed by a physical asset, unlike some securities.Investments like stocks and bonds arent backed by a physical asset. Some investors like that they can see and feel their investment, which makes things like real estate seem more secure.

Cons Explained

Finding The Right Property

Not all real estate investments are created equal. Planning and zoning challenges, environmental issues, competing properties coming to market, and higher than anticipated operating expenses can all reduce the anticipated ROI on investment real estate.

By selecting a general partner with a proven track record of success, passive real estate investors can leverage the knowledge and experience of a sponsor to find the right property and participate in the best investments.

Sponsors of private equity real estate such as self-storage already have teams in place to scour the market and locate potentially profitable investments. This helps passive investors to maximize potential returns while minimizing downside risk.

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Active Vs Passive Investing Example

Many investment advisors believe the best strategy is a blend of active and passive styles, which can help minimize the wild swings in stock prices during volatile periods. The passive versus active management doesnt have to be an either/or choice for advisors. Combining the two can further diversify a portfolio and actually help manage overall risk. Clients who have large cash positions may want to actively look for opportunities to invest inETFs just after the market has pulled back. For retirees who care most about income, these investors may actively choose specific stocks for dividend growth while still maintaining a buy-and-hold mentality. Dividends are cash payments from companies to investors as a reward for owning the stock.

Moreover, it isnt just the returns that matter, but risk-adjusted returns. A risk-adjusted return represents the profit from an investment while considering the level of risk that was taken on to achieve that return. Controlling the amount of money that goes into certain sectors or even specific companies when conditions are changing quickly can actually protect the client.

For most people, theres a time and a place for both active and passive investing over a lifetime of saving for major milestones like retirement. More advisors wind up using a combination of the two strategiesdespite the grief the two sides give each other over their strategies.

Which One Is Right For You

Fundrise Review 2022: Best Passive Real Estate Investing?

Although we know are able to differentiate between active and passive investing, and know the advantages and disadvantages of each one, we still haven’t answered the most important question – which one is right for you?

That question can be answered by asking yourself a set of questions. These questions are:

  • How much risk are you willing to take?
  • What level of control do you want?
  • How much expertise and skill do you have?
  • How much time can you dedicate to investing?

These guiding questions are sure to help get you to the answer that you desire. Just make sure to consider all the factors in your life before making any decision.

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Passive Real Estate Investing: Key Concepts For Multifamily Investors

Real estate investments have the proven ability to deliver powerful benefits to investors, including consistent income, long-term capital appreciation, and portfolio diversification. To capture these benefits, real estate investors can choose from a vast range of strategies. Many market participants start by dividing the real estate investment universe into two major categories: Active and passive investments.

At Trion Properties, investors in our diversified multifamily funds are considered passive investorsso here well take a closer look at the definition of passive real estate investing. Well also explore models for investing passively and review key questions to ask when considering a passive investment in a multifamily real estate fund.

What is passive real estate investing?Passive real estate investing is a hands-off strategy in which investors are only responsible for providing capital that other professionals manage on their behalf. As a passive investor, you choose to put money into a real estate investmentand your involvement generally stops there. Youre not involved in buying, managing or selling the assets youre compensating other people to shoulder these ongoing responsibilities. In the eyes of many investors, a key advantage of passive investing is the opportunity to leverage the experience of professional sponsors and operators.

Models for passive real estate investmentThe most common passive real estate investment vehicles include:

Getting Started As A Passive Real Estate Investor

Joining a real estate syndication is an excellent method to begin as a passive real estate investor. Syndications are organizations of real estate investors that collaborate to acquire lucrative real estate projects such as multi-unit apartment complexes.

When it comes to real estate syndications, there are generally two participants: The General Partners and Limited Partners, also known as its passive investors. General Partners are active investors in the project, those in charge of locating and underwriting the property, the contracts, capital, and vendors. A Limited Partner in a real estate syndication essentially provides a portion of the capital to acquire the asset. Limited Partners receive monthly or quarterly updates on their investment, and passive income distributions.

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What Are Some Advantages Of A Triple

There are several advantages. First, the monthly lease agreement provides a very predictable, long term income stream to the property owner. Second, since there are no property expenses to be deducted, the income stream is not impacted by future increases in property operating expenses. The property owner can enjoy a rental income stream, without property management or property expenses.

Subject to the credit worthiness of the tenant and the terms and conditions of the lease agreement, the investor can enjoy a high degree of security and should expect to have additional rental income over time as the inflation hedge feature of the lease agreement comes into play.

Can a Triple-Net Leased Property Be Used To Complete A Real Estate Exchange? A triple-net leased property can be an excellent replacement property in completing a real estate exchange transaction. Many real estate investors dispose of their management intensive properties such as apartment buildings, duplexes, and office buildings, hoping to find management-free properties producing long term, predictable income. If you are thinking of disposing of your business or investment-held property, would like to Pay No Capital Gains Tax and reinvest into a management and headache free property, the purchase of a triple-net leased property through a real estate exchange, can be just what the doctor ordered.

Active Vs Passive Investing: An Overview

The Basics of Passive Real Estate Investing

Whenever theres a discussion about active or passive investing, it can pretty quickly turn into a heated debate because investors and wealth managers tend to strongly favor one strategy over the other. While passive investing is more popular among investors, there are arguments to be made for the benefits of active investing, as well.

  • Active investing requires a hands-on approach, typically by a portfolio manager or other so-called active participant.
  • Passive investing involves less buying and selling and often results in investors buying index funds or other mutual funds.
  • Although both styles of investing are beneficial, passive investments have garnered more investment flows than active investments.
  • Historically, passive investments have earned more money than active investments.
  • Active investing has become more popular than it has in several years, particularly during market upheavals.

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Cheap Out Of State Rentals

The idea here is simple.

Some states have properties that generate far better cash flow than other states. For example, California has very high property values. That makes investing for cash flow very difficult. So a lot of California real estate investors look elsewhere to find high cash flowing properties. These locations evolve over time as demographics change, but generally they are in areas that have a lower cost of living and lower property values.

Companies have flocked to these locations and bought up properties that will cash flow. They package these deals to investors who are looking for out of state properties. These companies usually buy these properties very cheaply, renovate them, find tenants, and then hire a property manager to manage the properties.

The companies are happy because they make money by selling these properties to investors for a profit. The investors are happy because they are getting a low-priced property and they are getting cash flow each month.

But there are risks.

Some of these companies dont do what they say. They may buy a terrible property in a terrible neighborhood and just slap on some paint and rent it out to awful tenants who will trash your place. Plus, some may overcharge you for the property because you may not know the local market values very well. In short, you need to work with a company that has a proven and long-standing reputation.

Investing For Beginners: 5 Reasons To Consider Passive Income Investing

Many people conflate the concepts of real estate investing and passive income. Real estate can be a form of passive investing, but often not in the ways that investors think. Passive real estate investing can be one of the most powerful ways to make your money work for you. But before we discuss the specific benefits of passive real estate investing, we need to clarify what this type of investing is and, just as important, to explain how and why it is different from active real estate investing.

Many people envision buying and renting out a piece of residential property a single-family home, condominium unit or apartment complex, for example as passive real estate investing. They view this as passive income because, as they imagine the investment playing out, they will simply buy a piece of property, rent it out, and then collect checks every month from the tenants. But this is not passive real estate investing.

At a minimum, the investor in this scenario must select the property to purchase, and then work with a property management company to make regular decisions about such matters as which tenants to accept, whether to fix or replace a broken water heater and when to re-carpet or paint the property. If the investor chooses not to outsource these operational tasks to a property management company, they will have to manage the day-to-day responsibilities of owning the property themselves. This is active real estate investing.

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How Do You Start Passive Real Estate Investing

You can use various methods to start passive investing in real estate, including REITs, real estate syndications, and money lending. The one you choose should depend on your lifestyle and goals.

REITs and real estate syndications are great for people with smaller amounts of capital. On the other hand, money lending requires a lot of capital to loan out, but you can make good returns doing it.

Why Should I Add Real Estate To My Portfolio

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Real estate is a distinct asset class that many experts agree should be a part of a well-diversified portfolio. This is because real estate does not usually closely correlate with stocks, bonds, or commodities. Real estate investments can also produce income from rents or mortgage payments in addition to the potential for capital gains.

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Some Examples Of Commercial Triple

If you drive through the business district of any city or town you will see commercial triple-net lease properties: for example all the major restaurants such as Burger King, Taco Bell, Kentucky Fried Chicken, Pizza Hut, the automotive after-market such as Goodyear Tire, Pep Boys, Jiffy Lube, retail outlets such as Toys R Us, K-Mart, and Home Depot to name a few. Most of the real property occupied by these companies are owned by real estate investors and leased to these companies under a triple-net lease arrangement.

If You Need To Get Rich Quickplay The Lottery

Thats a joke, of course, but at the same time, most get rich quick deals are mostly hot air and wishful thinking.

Speculation is the purchase of an asset with the hope that it will become more valuable in the near future. Speculating can be a lot like gamblingyou may get lucky hand or two, but play long enough, and the house always wins.

Make your investments with your long-term goals in mind.

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