How To Get Started in Passive Real Estate Investing
The opinions of entrepreneurs’ contributors are their own.
When you think of a real estate investor, you might imagine someone who owns rental apartments and manages their rental portfolio, finds tenants, hires salespeople on repairs or renovation projects, and collects rent. This is an example of an active real estate investor. However, passive real estate investments do not require daily participation in the operation of a real estate asset. As a passive real estate investor, your job is to contribute funds to the investment normally offered by a real estate group or syndication firm, while forgoing the maintenance of that asset and its path to profitability.
Passive investing does not mean that you are relieved of all responsibility. It is important to remember that if you invest passively, you still need to do your research!
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Benefits of passive investing in real estate
Passive investing takes less time. Between family commitments, hobbies, and a full-time career, actively investing in real estate is not realistic for most people. As an active real estate investor, finding the right deal, arranging financing and dealing with the day-to-day management of a property can be difficult. Passive investors benefit from having this set up for them, and if a toilet breaks or a unit needs servicing in the middle of the night, the passive investor sleeps through the night while things are fixed.
In addition, it requires less knowledge and experience as a passive investor as it does not require a deep understanding of the real estate market and the asset class you want to invest in, be it single family home, apartment, retail or any other commercial or residential property. Active investing requires a thorough understanding of the market you intend to operate in and the ability to differentiate between good and bad real estate deals. Passive investing does not require you to be a real estate professional as the passive investor leverages the skills, network and expertise of seasoned professionals.
Real estate investment also offers great tax advantages. All real estate investors, including passive investors, also enjoy the income, the increase in value and the stability of their assets as passive investors and also enjoy various tax benefits such as depreciation on impairments, even as a passive investor – and yes, you read that right: An asset appreciates , but you get a depreciation at the same time!
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Passive investing also offers great opportunities for risk diversification. As a passive investor in a real estate project like crowdfunding or a property syndication, you can combine your money with other investors to buy a more significant and stable asset than you could afford or risk buying on your own. As a passive real estate investor, you have the option of investing in different markets and asset classes and spreading your equity over several projects in order to diversify your risk.
Entry as a passive real estate investor
Joining a real estate syndication is an excellent way to start as a passive real estate investor. Syndications are organizations of real estate investors who work together to acquire lucrative real estate projects such as apartment buildings.
There are usually two participants in real estate syndication: The General Partners and Limited Partners, also known as their passive investors. General Partners are active investors in the project who are responsible for finding and subscribing to the property, contracts, capital and sellers. A limited partner in a real estate syndication essentially provides part of the capital to purchase the asset. Limited Partners receive monthly or quarterly updates on their investments and passive income distributions.
A theoretical example
Let’s say there is a $ 10 million apartment complex. It is in one of the best neighborhoods in the city so it should be a safe investment. The General Partners (GP), also known as real estate indicators, will work with an attorney to form the LLC, create the business plan for the building, and model the returns for the investors. In this case, sales should be increased and the property value should be upgraded. The family doctor has to raise some funds to buy the property and carry out a small value-added renovation. A 20% down payment is required, so they are recruiting 40 investors who will each invest $ 50,000 ($ 2 million) on a joint property value of 70%, bringing in $ 1 million in remodeling costs.
As a passive investor, you would look at the pitch and see if it seems like something you want. You would look at the GP’s business plan, which has a preferred return of 8% paid monthly for five years and a stock split at the end of the game. When syndication hits the bare minimum, you will receive monthly checks of $ 333.33 (8% x $ 50,000 over 12 months per year) for five years and then receive your share of the complex when they are resold to other parties.
Let’s say the family doctor keeps the complex on for five years. You would have accumulated monthly deposits of $ 20,000 during that period. Additionally, the remaining amount of the mortgage is now $ 7 million instead of $ 8 million, and the property has increased 20% to $ 12 million. So if they sell the apartment building, there will be $ 5 million in proceeds, 70% of that or $ 3.5 million going to the 40 limited partners. Hence, you get $ 87,500. Over five years you’ve raised $ 20,000 in rents and $ 87,500 in real estate sales, which means you’ve more than doubled your money!
Of course, there is risk in any investment, but passive real estate investing has the potential to be one of the most efficient ways to build wealth over time. It requires very little work, is scalable and diversifies your portfolio into one of the safest asset classes, real estate!
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