You may have heard the term "passive real estate investing" before, but what does it actually mean? Simply put, passive real estate investing is a hands-off approach to investing in properties. Rather than being an active investor who is heavily involved in the day-to-day operations of a property, you instead rely on other people to manage the property for you.
There are a number of ways to invest passively in real estate. Perhaps the most common way is to invest in a real estate investment trust (REIT). A REIT is a company that owns, operates, or finances income-producing properties. You can also invest in syndication, which is a group of investors who pool their money together to purchase a property.
The key to successful passive real estate investing is finding the right partner (Groundfloor 😉) or platform that you can trust to manage your investment properly. Doing your due diligence and research upfront will help ensure that your passive real estate investing experience is a positive one.
Why Passive Income Matters and What Is Passive Income?
Passive income is a type of income that requires little to no effort to earn. This means that you can generate an income without having to work for it. There are many different ways to generate passive income, but some of the most common include investing in rental properties, stocks, and mutual funds.
Here’s an example of how passive income works: let’s say you invest in a rental property. Once the property is rented out, you will receive regular payments from your tenants each month. This type of investment requires very little effort on your part but can provide you with a steady stream of income.
There are many reasons why passive income matters. First, it can provide you with financial security. If you have a steady stream of passive income coming in, you will be less likely to experience financial insecurity. This is because you will have a fallback if your primary source of income suddenly dries up. For example, if you lose your job, you will still have your passive income to rely on.
Another reason why passive income matters is because it gives you more time and freedom to pursue your passions. If you are generating an income without having to work for it, this frees up more time in your day to do the things you love. Finally, passive income can help you build wealth over time. If you reinvest your passive income into new investments, you can compound your earnings and build wealth more quickly than if you were only relying on active sources of income.
Active vs. passive real estate investing
There are two ways to make money off of real estate investments; there is the active way and the passive way. In order to decide which one is better for you, it is important to understand what each method entails.
Active real estate investing means that you will be more hands-on with your investment. You will have to put in more time to find the right property, get it repaired and up to your standards, find tenants, and handle any issues that may come up. Although it requires more work, active real estate investing can provide a larger return on your real estate investments.
Passive real estate investing generally means that you are not as hands-on with your investment. You may hire a property management company to take care of the day-to-day tasks or you may invest in a REIT (Real Estate Investment Trust). This method requires less work on your part but usually provides a smaller return on real estate investments.
Active Real Estate Investing
As we said before, active real estate investing means that you are more hands-on with your investment. This can provide a higher return because you have more control over what happens with the property. For example, if you were to buy a fixer-upper and put in the time and effort to repair it and make it look nice, you could then charge significantly more in rent than if you had just bought a property that was already in good condition. Groundfloor is a great way to not only fund the fixer-upper but also a great way to start investing in real estate.
The downside to being more hands-on is that it obviously requires more work and time from you. If you do not have the time or energy to put into repairing and maintaining a property, then active real estate investing is probably not for you. Additionally, being an active investor also opens you up to more liability should something happen on your property.
All in all, being an active real estate investor can provide a higher return on your investment but it requires more time and energy from you.
Passive Real Estate Investment
Passive real estate investments generally mean hiring someone else to handle the day-to-day tasks associated with owning an investment property such as finding tenants and repairs. This can provide peace of mind because someone else is handling the stressful tasks for you; however, this convenience comes at a cost–literally. Property management companies usually take a percentage of the monthly rent (anywhere from 4-12%) which cuts into your potential profits. In addition, many times when people take a hands-off approach they are not as diligent about making sure their properties stay in top shape which can lead to additional repair costs down the road.
Why should you get started with passive real estate investing?
So why would someone want to invest passively in real estate rather than take a more active role? There are a few reasons:
1. It's a hands-off approach. If you're not interested in being actively involved in the day-to-day management of a property, then passive real estate investing is likely a good fit for you to make passive income.
2. It's ideal for busy people. If you don't have the time or energy to devote to being an active real estate investor, then passive investing allows you to still participate in the market without having to do all the work yourself.
3. It offers the potential for high returns. While there's no guarantee that you'll make money by investing passively in real estate, it has the potential to generate high returns if it's done correctly.
4. It diversifies your portfolio. By diversifying your investments, you can mitigate some of the risks inherent in any one investment type. By adding passive real estate investments into the mix, you can add another layer of protection to your overall portfolio strategy.
5. You can still be involved as much or as little as you want. Just because you're not directly managing the property doesn't mean that you can't be involved in decision-making if you want to be. In many cases, platforms or partners will allow investors to provide input on things like major repairs or capital improvements.
Are passive real estate investments easy?
6. It's easier than ever before thanks to technology. Technology has made it easier than ever before for people to get started with passive real estate investing. Platforms like Groundfloor make it possible for anyone with an internet connection and some spare cash to start investing passively in real estate. That wasn't the case even just 10 years ago. So if you've been thinking about getting started with passive real estate investing, now is as good of a time as any.
7. Uncle Sam Works for You - One of the great things about passive real estate investing is that the government provides tax breaks for those who do it. This is because the government wants to encourage investment in the real estate market. When you invest passively in real estate, you can take advantage of these tax breaks, which means that more of your money stays in your pocket.
8. No Dealing with Tenants or Repairs - Another benefit of passive real estate investing is that you don't have to deal with any of the hassles that come with being a landlord. That means no dealing with tenants or repairs. Someone else takes care of all of that for you so that you can sit back and relax (or focus on other things).
9. Leveraging the Expertise and Experience of Others - When you invest passively in real estate, you are essentially partnering with someone who knows what they're doing. This means that you can leverage their expertise and experience to make more money without having to put in the work yourself.
10. Making Money While You Sleep - One of the best things about passive real estate investing is that it allows you to make money while you sleep. That's because your property will likely appreciate over time, providing you with a handsome return on your investment when you eventually sell it.
11. Generating Residual Income - Finally, passive real estate investing generates residual income, which is income that continues to come in even after you've stopped working. This is different from active real estate investing, which only generates income while you're actively working on the property. With passive real estate investing, you can take a hands-off approach and still make money over the long term!
Passive Real Estate Investing: Pros and Cons
The Pros of Passive Real Estate Investing
One of the biggest advantages of passive real estate investing is that it can generate significant income without requiring a lot of work on your part. For example, if you invest in a rental property, you'll likely only need to spend a few hours per month managing the property and dealing with tenants. This frees up your time so that you can focus on other things, such as your career or spending time with your family.
Another big advantage of passive real estate investing is that it can offer a higher return on investment (ROI) than many other types of investments. This is because real estate generally appreciates over time, meaning that your investment will be worth more in the future than it is today. And, as we mentioned earlier, rental properties also generate ongoing income in the form of rent payments. This combo of appreciation and income can lead to some impressive returns over the long run.
The Cons of Passive Real Estate Investing
While there are some clear advantages to passive real estate investing, there are also some potential drawbacks that you should be aware of before making any decisions.
One potential downside is that it can be difficult to find good investment opportunities if you're not actively involved in the industry. That's because the best deals are often snapped up by investors who have established relationships with agents and other industry professionals. However, there are ways to overcome this obstacle by working with a firm that specializes in finding passive investment opportunities, such as Metric Marketing Group.
Another thing to keep in mind is that even though passive real estate investing doesn't require much work on your part, it still requires some work. For example, if you're investing in a rental property, you'll need to find good tenants, deal with maintenance issues as they arise, and make sure that the rent is collected on time each month. While these tasks can be delegated to others, they will still require some effort on your part.
In conclusion, passive real estate investing is a hands-off approach to investing that offers many benefits including high potential returns and ease of use thanks to technology platforms like Groundfloor. If you're thinking about getting started with passive real estate investing, doing your research beforehand will help ensure that your experience is a positive one. Thanks for reading!