Is Passive Real Estate Investing Really Passive?
Most people agree that real estate investments are an effective way to generate additional sources of income. But when people start arguing How to invest … well, that’s when the disagreement arises. Many people are understandably intimidated by the idea of managing multiple properties, finding tenants, and doing repairs. You justify that when the goal is real passive Income then real estate is not really an option.
But of course, as with anything, there is more to the story. After all, there are tons of books, blogs, and podcasts claiming that real estate investments can be passive (myself included!).
In today’s release we will address the age-old question: Is “passive” real estate investing? Really passive?
The real estate investment continuum
To really understand real estate investing, it is important to get a scaled-down view of all the ways you can invest.
As you can see from the table above (borrowed from this postThe possibilities of investing in real estate exist in a spectrum: the more active the methods on the left, the more passive on the right.
Why is this useful? Partly because it shows how diverse real estate is. There are many, many more ways to invest than direct ownership. That alone might be enough to convince certain people that real estate can be a straightforward investment strategy.
In addition, it becomes clear that real estate investments can also be passive as you wish.
Really passive income
As you may have noticed, the big dividing line between “active” and “passive” is whether or not you take on the landlord role.
When you invest in other people’s businesses and they do all the work, I think passive real estate is investing.
For example, crowdfunding and syndication require virtually no oversight – at least once you’ve done your due diligence – and can produce great returns. Personally, I think both of these are great ways to dip your toe into the world of real estate investing.
Of course you have REITs further to the right. As with stocks, REITs allow you to simply invest some money and then let it grow in value. The downside is that REITs are highly correlated with the public market and are therefore subject to some volatility and may not offer real diversification.
The advantage of all of these is that they are really passive. You don’t have to worry about the properties directly at all. No calls and no decisions to make.
So what’s the catch?
If passive real estate investments are so amazing, why would anyone want to own a rental property? When you own the asset, you have complete control over what to do with the property.
Do you want to paint it Would you like to increase the rent? Do you want to sell the property? Would you like to pass it on to your children?
When you invest in passive real estate investing, you are giving up control. Someone is running the deal and you’re in it as a limited partner.
If someone else is doing and running the business, they must be paid and incentivized to create the opportunity for everyone. So there are fees and a sharing of profits.
So you are essentially giving up potentially higher returns and control in order to have more time when you decide to invest in passive real estate.
I have personally invested in nearly 30 transactions over the past 7 years and I can honestly say that the total time I spent on all 30 transactions after the initial due diligence is less than a few hours.
When I get quarterly updates, I read the reports and look for my dividends. I receive a K1 for the year that reflects my participation and pass it on to my CPA. That’s all.
All of the work happens at the front end of the deal when you do your sponsor and deal due diligence. It used to take me days to evaluate an offer. I had to cobble together information from a few books and everything I could find online. To be honest, it took me several years to feel confident about my decisions.
However, as I began to gain more experience and come up with a basic roadmap for evaluating these deals, those “days” shrunk into “hours”.
Now the income to time ratio continues to grow … more income for less time. This is my definition of passive income.
Ultimately, the answer to whether passive real estate investing is really passive is simply … Yes!
If you are looking for an opportunity where you want to invest the time and effort in order to maximize the return on investment, it may be better if you are a direct owner. I invest in real estate, but I only spend part of my time in it.
However, if your primary goal is to protect your time and use it in ways other than managing an investment, passive real estate investment might be a good option for you.