Consider Various Strategies for Income Generation in Real Estate Investments
When you think about real estate investing, it’s likely that two things come to mind. One option is the potential for property investment, which could involve purchasing a property, making improvements, and selling it for a profit. Another option is the idea of purchasing a rental property and finding and managing tenants. Both of these are examples of active real estate investing, and they’re smart choices for some investors. However, they aren’t the only ways to generate income through real estate, so read on to learn about passive real estate investing and whether it may be right for you.
What is Passive Real Estate Investing?
In essence, passive real estate investing is when you supply the money but someone else does all the work on your behalf. If you don’t have the time, know-how, or desire to get involved in active real estate investing, passive real estate investing could be right for you.
Types of Passive Real Estate Investments
Let’s review three of the most common ways you can begin investing in real estate passively:
- A real estate investment trust (REIT) allows investors to pool their money in order to invest in commercial real estate. REITs generally have a focus, which could be office buildings, apartment complexes, warehouses, and even shopping malls. This kind of passive real estate investing covers just about every type of commercial real estate. REITs are investment vehicles that are designed for passive real estate investing, with a requirement to pay out at least 90% of their taxable income to shareholders.
- A related option is to invest in other publicly traded companies doing business in real estate. An example is a land developer, or even a business such as Zillow, which is real-estate adjacent.
- Here’s one you may not have considered: investing in companies whose primary business is not real estate, and yet they own a great deal of real estate. For example, this could be a retailer with a popular flagship location and many store locations.
- A growing method of passive real estate investing is crowdfunding. There are several emerging platforms that allow investors to pool their money and invest in a real estate deal together.
- Finally, you might just take the simple approach of partnering with one or more other investors who want to take on an active role and allow you to remain passive.
In each of these options, you won’t have to handle the day-to-day work involved with acquiring or operating properties. You may potentially benefit financially.
Advantages of Passive Real Estate Investing
There are several notable reasons to choose passive real estate investing:
- You don’t need to be a real estate whiz or have experience – you only need to understand the basics of investment analysis.
- Passive real estate investing typically means a much smaller time commitment than, say, managing a retail property you have purchased.
- Starting a business may require varying amounts of capital, depending on the nature of the business. For example, you can purchase just a few shares to get started in a REIT or start small with crowdfunding.
- Passive real estate investing can potentially offer opportunities for your money to work. Consider the possibility that you may not be able to purchase a high-rise apartment complex, but you can explore other investment options in the apartment complex asset class, such as a REIT.
An active approach to real estate investing may offer the potential for higher returns and could provide more decision-making control. However, you’ll also take on more risk and a greater time commitment.
Is Passive Real Estate Investing Right for You?
As with any investment strategy, there’s no one-size-fits-all approach. As you consider whether passive real estate investing might be the right option for you, look at both the advantages and disadvantages. Consider your investment goals, your risk tolerance, and the time you have available to devote to real estate. These factors can assist you in evaluating whether passive real estate investing could be a beneficial addition to your portfolio.
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