Passive investing, generally, is a type of investment where you can generate income from your investments without significant active participation. Index investing is one of the more common forms of passive investing that allows investors to purchase an index fund comprised of stocks that closely track the underlying index without the need for active trading by the investor. In the equity markets, index funds are now widely accepted to provide equal or better returns than an actively managed portfolio, and at a lower cost to the investor.
For those looking to diversify their portfolios to include real estate without doing a lot of the heavy lifting, there are several passive investment options. Some of the more common passive real estate investment strategies that are available include crowdfunding, REITs, remote ownership, and trust deed investing, all of which have the potential to generate high returns if you make smart investments. If you want to invest in real estate but don’t want to take on too much risk with your investment portfolio, passive real estate investment may be ideal for you. Below is a general primer on these four passive investment strategies.
One method of passive real estate investing that has become increasingly popular in recent years is crowdfunding. Crowdfunding occurs when numerous smaller investors pool their resources to make a single investment. In real estate, crowdfunding is often used to provide debt or equity to real estate professional operators to invest in varying types of real estate including commercial properties, single-family homes, and apartment complex portfolios. These types of investments typically require investment minimums that can range from $500-$100,000, depending on the investment. Over the years, online crowdfunding platforms have specific to real estate have increased in popularity and sophistication.
There are a variety of questions that you should ask yourself before you get involved with investing through crowdfunding. As just one example, some platforms require that anyone wishing to join the platform be an accredited investor, which usually means that you need to have a high net worth or annual income. If you aren’t accredited, you may need to consider an alternative passive real estate investment option. You should also consider the reputation and legitimacy of the crowdfunding platform you select. They come in all different shapes and sizes, especially with their recent proliferation.
Regarding the investment itself, you will want to make sure you understand and carefully evaluate the investment and its terms. Crowdfunding platforms are typically just a “platform” or “marketplace” where third parties can post investments. Other than satisfying general criteria, the quality of the each investment has likely not been evaluated by the crowdfunding platform. Factors that you will want to evaluate include, among others, the quality and experience of the sponsor, the value of the underlying property or properties securing the investment, the terms of that investment, and whether you would rather invest in equity or debt. As to the latter consideration, certain crowdfunding platforms offer both investment options.
Online Platforms for Real Estate Crowdfunding for Passive Investments
While there are many online platforms that you can use for real estate crowdfunding investments, three of the more popular platforms include:
- Fundrise ($500 Minimum)
- Realty Mogul ($5,000 Minimum)
- CrowdStreet ($10,000 Minimum
While AB Capital does not endorse any of them, each of these three platforms are considered to be among the more widely used for crowdfunding real estate investments. Before you make a decision on which platform you would like to invest with, it’s highly recommended that you take a brief look at all of them to compare the features that they provide and the types of investments that they offer.
REITs (Real Estate Investment Trusts)
A REIT is a real estate investment trust wherein a company owns, finances, or operates real estate that is typically income-producing. It is similar to a mutual fund, except that instead of investing in stocks, the REIT invests in real estate. Certain REITs will directly buy a portfolio of properties that they believe will generate an appropriate return, while other REITs will invest in real estate debt, mortgage-backed securities, and mortgages. To best understand which REIT strategy is right for you, it’s important that you know more about the process of investing in a REIT. Like mutual funds that invest solely in real estate, REITs provide passive investors with stakes in substantial real estate deals without the usual high barrier of entry. A REIT also is required to distribute at least 90% of its taxable income to shareholders each year in the form of dividends, so it may provide an attractive option for income-seeking investors.
When comparing crowdfunding with a REIT, the main difference between the two is that REIT portfolios typically include investments in many different properties and even types of properties, whereas crowdfunding investments are typically property or project-specific. In that sense, REIT investments are typically more diversified. By investing in a broad range of properties at once, the failure of one property shouldn’t significantly damage your overall investment strategy. Spreading around the risk is a great strategy if you want to take a measured approach to investing.
There are three primary types of REITs that you can invest in, which include exchange-traded options, non-traded REITs, and private REITs. If you invest wisely, it’s possible to receive multiple income streams through annual dividend income as well as long-term appreciation. REITs also provide you with a good opportunity to diversify your portfolio. Many successful real estate investors find that REITs are a wise investment option when used alongside mutual funds and stocks.
There are also a couple of issues that come with investing in an REIT. For instance, these trusts are tied directly to stock exchanges, which means that your REIT can lose some of its value if the stock exchange that it’s tied to does poorly. You also don’t have control over your investments. However, this may be ideal for you if you would rather participate in passive real estate investing.
How to Invest in REITs
If you want to invest in REITs, it’s possible to directly buy shares in the REIT that you’re interested in. This can be done just like any other type of public stock listed on a major stock exchange. You can also use a broker, financial planner, or some type of other professional advisor who can help you analyze the REITs against your financial objectives, and who may also have access to other private REITs that are not available on a publicly-traded exchange.
Remote Real Estate Ownership
Remote ownership is another form of passive (though less passive) real estate investing that allows you to obtain complete ownership of remote property. This passive investment strategy is a favorite of many seasoned real estate investors because it allows complete ownership without requiring too a active role in managing the property. If you’re looking to invest in a remote property, you can do so by using an online platform to find, research, and purchase out-of-state rental properties that already have tenants in place as well as property management. The managers that are already tied to the property will manage the property for you while you collect rent each month.
In many cases, it’s possible to purchase remote real estate without ever visiting the property in question. The main benefit of using this specific strategy of passive investing is that if done properly you can obtain higher returns than other forms of passive real estate investing. Because you have complete ownership of a specific property, all of the appreciation for the building as well as the monthly rent payments will go directly to you. There may also be additional tax benefits available. The data that you need to analyze to make a wise investment decision is also typically readily accessible online. Indeed, many online platforms offer extensive data and information on the various homes and rental properties that you can invest in, which allows you to perform your research in a short period of time.
If you don’t have enough funds to purchase real estate nearby, this form of passive real estate investing gives you the opportunity to diversify your ownership of properties across numerous locations, which lessens the risk that a poorly performing market will substantially hurt your investment portfolio.
Like all investments, however, there are also some risks that you should consider. For one, you’ll be purchasing a home in a different location and potentially without having visited it in person. To mitigate this risk, you should do extensive research on the property you’re interested in before you invest and/or align yourself with a trusted person in the market. It can also be difficult to assess tenant reliability when you don’t have easy access to the property in question. If a tenant moves out unexpectedly or makes a late payment, following up with them may prove to be difficult. On the other hand, the managers at the property should be able to take care of these issues without much trouble on your end. In addition, property ownership comes with additional liability and costs such as insurance, vacancy, and repair costs.
Online Platforms to Buy Remote Real Estate
If you would like to invest in remote real estate, there are several highly popular online platforms that you can use to purchase remote properties, which include:
Keep in mind that each of these platforms is focused on a different location. Roofstock allows you to invest in single-family rental properties that are situated all throughout the U.S. While Lyvly gives you the ability to purchase rental properties in London. When you purchase one of these properties, weekly cleaners and an in-house maintenance team will take care of the property for you. When it comes to Property Finder, you can purchase apartment buildings, townhouses, villas, and penthouses in Dubai. AB Capital does not endorse any of these platforms.
Trust Deed Investments
Trust Deed investing provides yet another option to passively invest in real estate. With a trust deed investment, you are investing in a loan secured by a deed of trust recorded against a specific property. You will typically receive a stated interest rate of return that is paid monthly, and the return of your principal investment at maturity. In this sense, you are acting as the lender, as a bank would to someone purchasing a property.
*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. Nothing contained in this article constitutes, nor should it be construed as, an offer to sell or a solicitation of an offer to buy or invest in any securities. Additional information about investment opportunities will only be provided to persons who satisfy all investor qualification requirements. Offers to sell, or the solicitation of offers to buy, any security can only be made through official offering documents that contain important information about risks, fees and expenses. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering investing in trust deeds, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors. AB Capital is not an investment advisor or an investment company under the Investment Company Act of 1940.