Investing in real estate can help you generate cash flow that you can use to pay off debt, travel, or save for retirement. If you don’t have the time, money, or energy to flip houses or manage rental properties, passive real estate investing can be a good alternative.
What’s the Difference Between Active and Passive Real Estate Investing?
An active real estate investing strategy means that the investor plays an active role. That might mean buying a property, fixing it up, then selling it to make a profit, or it might mean purchasing a house or apartment building and renting it out. Passive real estate investing involves a hands-off approach. It allows people to reap financial rewards without investing a lot of money or being actively involved in managing properties, and it requires little or no prior real estate knowledge.
How Can You Passively Invest in Real Estate?
One option is crowdfunding, which lets people pool their money and invest in large commercial or residential properties via an online platform. Crowdfunding can give you an opportunity to invest in properties that you couldn’t afford to invest in on your own.
A real estate investment trust is a company that operates in a way similar to how a mutual fund works. Some REITs purchase properties, while others invest in mortgages, mortgage-backed securities and real estate debt. REITs are more diversified than crowdfunding, which usually invests in a single property. If you invest in a REIT, you’ll receive a share of the profits in the form of dividends.
Real estate funds are diversified mutual funds that invest in public real estate securities, which may include REITs. Real estate funds usually invest in a wider range of property types than REITs. Professionals manage the funds and decide which properties to invest in. Real estate funds gain value over time through appreciation.
With remote ownership, you can buy a property and rely on a local property manager to handle maintenance and repairs and collect rent. That can give you the financial benefits of owning a property yourself without the hassles associated with management. The risk is that the property manager might not do a good job, and you will have little or no direct oversight.
Should You Pursue Passive Real Estate Investing?
Passive real estate investing can be an effective way to diversify your financial portfolio. It might earn lower returns than active investing, but passive investing is also a lot less time consuming and stressful. Think about your goals and priorities, as well as your tolerance for risk. Before you pursue any type of investment, do your homework.
