Investing in real estate is a time-tested way to build long-term wealth. However, not everyone wants the responsibility and hassle of being an active landlord. Fortunately, there are several passive real estate investing strategies that allow you to invest in real estate without having to deal with tenants or toilets. In this article, we will explore the most popular options for hands-off real estate investing and how you can get started.
Invest in real estate investment trusts (REITs)
Real estate investment trusts (REITs) allow you to invest in real estate properties like apartments, hotels, office buildings, etc. without having to actually own the properties yourself. REITs are companies that own and operate income-producing real estate assets. They are required to pay out at least 90% of their taxable income as dividends to shareholders annually. By purchasing shares of a REIT, you can earn passive income from real estate without any of the management responsibilities of being a landlord. Publicly traded REITs are highly liquid investments that trade on major stock exchanges and offer diversification across different property types and geographic regions.
Invest in a real estate crowdfunding platform
Real estate crowdfunding platforms like Fundrise and CrowdStreet provide a simple online process for investors to pool their money and invest in real estate projects. The platforms pre-vet sponsors, conduct due diligence, and handle all the paperwork. Investors can browse investment offerings online and invest in deals with as little as $500. You earn passive income in the form of quarterly or annual distributions based on your share of ownership in the underlying properties. Real estate crowdfunding opens up opportunities to invest in private real estate markets like multifamily, mixed-use, and commercial developments.
Buy into real estate syndications
Real estate syndications involve a group of passive investors pooling their capital to acquire a large real estate asset that would otherwise be unavailable to individual investors. The sponsor sources the deal, secures financing, oversees renovations, manages the property, and distributes income to investors. As a limited partner, you contribute funds and earn predictable passive income without having to participate in the day-to-day operations. Real estate syndications allow investors to participate in institutional-grade deals and diversify across multiple properties and geographies.
Invest through a real estate private equity fund
Real estate private equity firms raise money from investors to acquire real estate assets, often using leverage to enhance returns. They target value-add or opportunistic deals, improve the properties through renovations or repositioning, and then sell at a profit. As an investor, you contribute capital to the fund and receive your share of profits when assets are sold, minus fees and carried interest. While minimums are high, real estate funds provide access to professional management and institutional-quality deals.
Use leverage wisely to enhance returns
Utilizing leverage in a prudent manner can enhance returns and allow you to purchase larger real estate assets than you could with all cash. For example, a 20% down payment on a property financed with a mortgage gives you a 5:1 leverage ratio. This multiplies the cash-on-cash return from the property. However, only use as much leverage as you are comfortable with, as it also amplifies downside risk. Setting rules for yourself, like a maximum loan-to-value ratio, can help manage risk.
In summary, there are many ways to invest in real estate passively without the responsibilities of being a landlord. Carefully researching options like REITs, real estate crowdfunding, syndications, and private equity can help you construct a diversified real estate portfolio that generates attractive risk-adjusted returns over time.