Getting started with Passive Real Estate Investing
If you want to build lasting wealth by investing in real estate but don't want to be an active participant, passive real estate investing may be the way to go. When you think of a real estate investor, you might think of someone who owns rental properties, manages a rental portfolio, finds tenants, hires vendors for repair or renovation projects, and collects the rent. We can call it an example of an active real estate investor. However, passive real estate investing does not require daily involvement in managing real estate assets. Your role as a passive real estate investor is to fund the investments typically offered by a real estate group or syndication company but to give up that asset's maintenance and path to profitability.
The Meaning of Passive Investment
Passive investing is an investment strategy employed by investors who wish to minimize transaction costs and maximize returns. It is common for investors to simply buy a benchmark index, reinvest their dividends, and hold it for the long term. Index investing is the most popular form of passive investing because it allows investors to easily replicate the returns of established market indexes. The main reason passive investment strategies are so popular is that the market usually produces positive returns over a sufficiently long period. Another important advantage of being an independent investor is that, by purchasing an index fund, you can maximize your diversification benefits. The portfolio is only exposed to market risk, as diversification is required to mitigate the inherent risk. This market risk is synonymously referred to as non-diversifiable risk, volatility, or systematic risk.
The Benefits of Passive Real Estate Investing
Passive investing necessitates a smaller time commitment. Passive investors benefit from having someone set this up. If the toilet breaks down or the unit needs maintenance in the middle of the night, the passive investor will sleep peacefully through the night until things are fixed. Passive investing leverages the skills, networks, and expertise of experienced professionals, so you don't have to be a real estate expert. All real estate investors, including passive investors, enjoy the income, increase in value, and stability of their assets, and passive investors also enjoy various tax benefits, e.g., taxes. Assets are valued, but they also cost money!
Passive investing is also a great opportunity for risk diversification. As a passive real estate investor, you have the opportunity to invest in a variety of markets and asset classes and spread your assets across multiple projects to spread your risk.
Entered as a passive real estate investor
Participating in a real estate syndication is a great way to start as a passive real estate investor. A real estate syndication typically involves two parties:
General partners and limited partners (also known as passive investors). Limited Partners receive monthly or quarterly updates on their investments and passive income distributions. Consider the following example:
Suppose you have a $10 million multifamily house. It's in a prime location in the city, so it should be a safe investment. General Partner (GP), also known as a real estate syndicator, worked with lawyers to form an LLC, draw up a business plan for the building, and model the investor's return. In this case, the plan is to increase your income and increase the value of your property. GPs need to raise some money to buy properties and do small value-added modifications. A 20% down payment is required, so you recruit 40 investors to invest $5000 ($2 million) each at 70% of the shared property value and collect $1 million for remodeling costs.
As a passive investor, you look at the playing field and see if it looks like what you want. I was talking about being paid and having a stock split at the end of the game. Once the syndication reaches the minimum amount, you will receive a monthly check of $333.33 (8% x $50,000 @ 12 months per year) for 5 years, which you will resell to other parties to obtain a share of the complex increase.
Let's say the GP holds the complex for 5 years. During this period, they would have accumulated $20,000 in monthly deposits. Additionally, his outstanding mortgage balance went from $8 million to $7 million, and his assets increased by 20% to $12 million. If they sell the apartment, there will be $5 million in proceeds, of which 70% of his $3.5 million will go to 40 limited partners. Therefore, you will receive $87,500. In five years, you made $20,000 in rent and $87,500 in property sales. That is, your money has more than doubled.
Of course, all investments involve risk, but passive real estate investing can be one of the most efficient ways to build wealth over time. It is hassle-free and scalable, and it diversifies your portfolio into one of the safest asset classes in real estate.