I’ve owned dozens of properties as a landlord. Today, I own none.
Why the change of heart? Did I stop believing in real estate as an investment?
Certainly not. I feel more passionate about real estate investing today than ever before. I just don’t want the headaches that come along with buying and owning investment properties.
As an expat who spends most of the year overseas, I’ve reevaluated how I invest in real estate. And I’m certainly glad that I have.
Investing from Overseas
When I first moved abroad in 2015, I still had over a dozen rental properties. By the end of 2018, I had none.
To begin with, managing properties long-distance comes with nothing but headaches. Making repairs, chasing down delinquent tenants, turning over vacant units — it’s a pain even when you live down the street. From the other side of the world, it’s a nightmare.
You can hire a property manager of course. But then you have to manage the manager. You have to double check their tenant recommendations and screening, double check their invoicing, and stay on top of them during turnovers. While not quite as much work as managing renters yourself, it’s not entirely passive.
That says nothing of finding deals and buying properties long-distance. You could buy turnkey properties of course, but it’s hard to find good deals that way. The best deals come from off-market properties and distressed sellers. That involves work, such as driving for dollars or direct mail campaigns to homeowners in foreclosure. And when you invest long-distance, it takes even more work.
The further you are from where you invest, the further you also lose touch with the regulatory risk. Too few real estate investors talk about it, but some tenant-friendly markets have increasingly made it difficult to earn a return on rental properties. Many of the markets in California offer case studies in this, from barring landlords from non-renewing lease agreements to lengthy eviction periods to rent control and more. Even now, anti-landlord Senate Bill 466 is working its way through California’s legislature.
I don’t want to have to worry about any of these headaches of buying and owning rental properties anymore. So I divested my portfolio and changed strategies.
4 Options for Passive Real Estate Investing
You have many options for passive real estate investing, in which you just write a check and sit back to earn returns. Start with these four broad buckets as you explore passive real estate investing.
1. Groundfloor & Other Property-Secured Debt
Rather than buying properties yourself, you can invest money towards other investors’ loans. You earn a return in the form of interest.
With a $10 initial transfer, Groundfloor lets you invest $1 toward individual loans, which makes it easy to diversify and spread your money among many different investments. Instead of investing thousands of dollars into a single asset (such as an investment property), you put small amounts in many different investments.
Most will perform as expected. Some will underperform, and some will overperform. Because you invest relatively small amounts, you don’t have to lie awake at night worrying about how one large investment performs. You simply look at the long-term average of how your many small investments perform.
Since inception, Groundfloor has averaged over 10% annualized returns. And not in the whipsaw way that the stock market averages around 10% over the long-term — Groundfloor has returned around 10% every single year since launching in 2013. These stable returns defy the ups and downs of the real estate market at large, even over the last year when the majority of buyers believe it’s a bad time to buy property.
Groundfloor also offers one of the few short-term real estate investments available on the market. Most real estate investments require a long-term commitment, whether you invest passively or actively.
Of course, Groundfloor isn’t the only option for investing in debts secured by real estate. Concreit offers a pooled fund backed by secured debt, with more liquidity but lower returns, and you can’t pick and choose individual loans. You can also invest in mortgage REITs, but those are volatile and closely correlated with the stock market (more on them later).
2. Real Estate Equity Funds
You can also invest passively for property ownership. Some crowdfunding and private equity funds let you buy into pooled funds that own many properties. As an investor, you collect passive income from the rents and are entitled to your share of the profits when properties sell.
Like all investments, this model has its pros and cons. Equity investments have unlimited upside potential — if the property values shoot through the roof, so do your investment shares.
Of course, they can also lose money. Fundrise, one of the largest real estate equity crowdfunding platforms, returned its first quarterly loss in late 2022.
These funds often pay regular quarterly dividends or distributions, for ongoing income. With so many renters feeling priced out of homeownership, there’s plenty of demand for rental housing in the U.S., and most analysts believe there will be for years to come.
Just beware that these funds are subject to interest rate risk like all owned real estate. When rates rise, as they have over the last 18 months, it can pinch owners with variable rate loans and leave others with expiring balloon loans at risk of radically higher debt payments.
While no owners are immune to this risk, at least debt investors earn higher returns when interest rates rise. That doesn’t remove the risk, but it keeps the returns in line with it.
As a final thought, most of these funds require a minimum investment period of three-to-five years. Some let you exit early, but charge you a penalty to do so. For example, Fundrise charges a 1% early redemption penalty on most assets in their portfolio. Streitwise charges between 2.5-10%, depending on when you withdraw your funds. Others, like Diversyfund, don’t offer the option of early redemption at all.
3. Fractional Ownership in Rental Properties
Rather than buy into a pooled fund that owns many properties, you can buy fractional ownership in a single rental property.
Platforms like Ark7, Lofty, and Arrived let you buy shares in individual properties for $20 to 100. Some even offer secondary markets, letting you sell your shares at any time — or at least after an initial holding period. That adds liquidity in a sector where it’s usually scarce. Groundfloor also offers some equity investing options as well.
While you own shares in the properties, you collect rent distributions. Upon sale, you receive your portion of the profits. You also typically get the same tax benefits as direct owners.
Like all investments, real estate equity investments come with risk. Property values could drop, the property could become vacant, expensive repairs could wreck your cash flow for the year. But as with other crowdfunded investments, the low minimum investment helps you spread your money among many assets, reducing the risk of a single underperforming asset ruining your returns.
4. Fractional Ownership in Multifamily & Other Commercial Properties
You can also invest as a fractional owner in large apartment complexes, self-storage facilities, industrial properties, mobile home parks, assisted living facilities, and other types of commercial real estate.
It works like this: Imagine a professional real estate investor finds a great deal on an apartment community for $10 million. She only has $1 million herself, so she borrows $7 million from a commercial lender and she raises the other $2 million from passive investors like you and me. In return, the investor and commercial lender are entitled also to a share of the property’s cash flow, profits upon sale, and full tax benefits.
These are called real estate syndications, and they often earn returns in the 15-30% range. If that sounds unbelievably high, they also come with some challenges for investors. To begin with, they offer no liquidity whatsoever: once you invest, your money remains locked up for usually two-to-seven years. Most only allow accredited investors to participate, and the minimum investment is typically $50,000 to $100,000.
The way around that high minimum is to invest alongside other investors. For example, we propose a new syndication deal each month in our real estate investment club, and the minimum investment if members want to participate is $5,000. While not chump change, it’s a lot more manageable than the numbers above. We also go out of our way to find deals that allow all investors, not just wealthy accredited investors.
A few real estate syndicators have started raising money via crowdfunding regulations, to open access to more investors. For instance, Goodegg Investments has offered syndications via crowdfunding with a $10,000 minimum investment.
Final Thoughts: Why Not Public REITs?
Traditionally, most people who wanted to invest passively in real estate to “diversify” did so by buying shares in real estate investment trusts (REITs). I don’t.
Why? Because they don’t offer much diversification benefit from the stock market. Publicly-traded REITs correlate too closely with the stock market, gyrating up and down like other stocks. Consider that U.S. REITs share a correlation of 0.59 with the stock market at large, comparable to other stock sectors such as telecommunications stocks, energy stocks, and consumer staples.
That defeats the purpose of diversifying your portfolio to include real estate.
Rather than invest in publicly-traded REITs, I invest passively in real estate through the four strategies above. I enjoy the stability of loan interest through Groundfloor, the upside potential of equity funds and fractional rental properties, and the high returns and tax benefits of syndications. You can effectively build your own custom equivalent to a REIT by investing in many different loans, and by adding other passive real estate investments to your broader portfolio as well — all without the 2am phone calls from tenants or the hassles of renovating properties or sending direct mail campaigns.
Invest passively, and let someone else take on those headaches. I don’t miss them one bit while my family and I travel the world and enjoy completely passive returns.
About the Author
G. Brian Davis is a real estate investor and cofounder of SparkRental who spends 10 months of the year in South America. His mission: is to help 5,000 people reach financial independence with passive income from real estate.