Real estate is a popular investment type for investors who prefer buying assets they can see and touch. It’s also an alternative asset class compared to bonds and stocks. Passive investors can explore investment options that offer real estate investment benefits without active management by the investor.
This blog post will discuss the forms of real estate investing for beginners and expert answers to frequently asked questions.
What Is Passive Real Estate Investing?
Passive real estate investing involves making real estate investments without the investor’s active participation or substantial effort. Also, passive income investments allow investors to get financial returns on their investment with little or no involvement.
Although rental income is a form of passive income, owning a rental property will require active involvement like tenant management, routine maintenance, and rent collection. However, investing in passive income with notable investment platforms like Peoples Capital Group, ensures you get steady returns without these responsibilities that active investors face.
Types of Passive Real Estate Investments
In real estate, passive investment is a wise investment option since passive investors can focus on other things after making a financial commitment. Here are some passive real estate investment options worth considering.
1. Crowdfunding
Crowdfunding is a group of investors who contribute money to purchase apartment complexes, single-family home portfolios, and commercial properties. Investors can be part of an expensive venture due to the number of investors contributing to the deal.
Sometimes, crowdfunding helps real estate investors who want a lucrative deal but don’t have the money for investment. Therefore, crowdfunding is advantageous since other passive investors contribute funds to help the active real estate investor seal a project then sell it at a high-profit margin.
Real estate crowdfunding is a majorly online platform that allows you to own a profitable property with just a few clicks. When investors browse through the opportunities on the online marketplace that appeal to them, they choose an investment that fits their requirements.
Afterward, their funds, together with other investors’ funds, are pooled, and the investment closes. Furthermore, the investors start observing their investment performance and collect the passive income their investment brings.
2. Turnkey Rental Properties
After purchase, a house that doesn’t need any repairs, updates, or renovation is a turnkey rental property. Investing in a turnkey rental property is a wise investment since it has the potential of generating a steady flow of income without much interference.
However, it’s a more active-passive real estate investing type. An investor first puts in money to purchase the rental, then hires a real estate management company to be responsible for maintaining the rental property.
The real estate investment company manages the rental, ensuring it’s never vacant and assisting in finding good tenants who will care for the property and pay rent when due.
A turnkey rental can be challenging for investors that do not know how to deal with tenants without the help of a management company. The investor starts making a profit when the income from the turnkey rental property exceeds the expenses.
3. Hard Money Lending
Hard money lenders provide loans to people who want to buy houses and renovate them. They focus on searching for borrowers who can succeed with their real estate investments. Also, hard money lenders, unlike banks, provide quick financing, although their interest rates are higher.
4. Real Estate Investment Trusts (REITs)
Corporations or trusts that invest in profitable real estate are investment trusts. With REITs, investors get the opportunity to invest in real estate without buying and managing an actual property.
Typically, REITs have lower risk factors, potential appreciation, and broader diversification, making them a prospective, helpful addition to a fixed income or equity portfolio. Therefore, REITs are a good investment opportunity for passive investors since they undergo exchange-like stock and offer lower investment costs – the price of a unit share is as little as $500.
Also, REITs must distribute 90 percent of their taxable income to shareholders as dividends, thereby meeting the SEC requirement. The shareholders will, in turn, pay income tax on the tips.
Types of REITs
There are three primary types of REITs.
1. Mortgage REIT
Real estate operators and owners receive loans from mortgage REIT, and they buy mortgage-backed securities or existing mortgages.
In this type of REIT, revenue is mainly from the interest on the mortgage loans. Since dividends depend on the interest payments, mortgage REITs are sensitive to interest rate changes.
2. Equity REIT
Equity REITs are among the most common investment forms that purchase, own, and maintain real estate investment properties. Equity REITs generate passive income primarily from rents as a long-term investment.
3. Hybrid REIT
Hybrid REIT combines mortgage and equity REITs in their portfolio and earns profits through interest and rents. Depending on the investment focus the trust states, hybrid REIT structures the portfolio to more mortgage holdings or more property.
Frequently Asked Questions on Passive Real Estate Investments
Here are answers to some frequently asked questions on real estate investment
1. How much do you need to start a real estate investment?
In real estate investing, the amount you require to begin depends on the type of investment involved. For most investors, buying a REIT share will be achievable and affordable. On the other hand, you may require thousands of dollars to buy a house and rent out or renovate and sell.
2. What are real estate investment groups?
A business that majorly focuses its capital and efforts on real estate is a real estate investment group (REIG). They can decide to buy, sell, finance, or renovate properties in search of profits. REIG usually buys multi-unit properties and sells its units to investors while they’re responsible for the maintenance and administration of the property.
3. What is the meaning of the “cap rate” in real estate?
“Cap rate” is an acronym for capitalization rate, which is the return rate real estate investors anticipate from a property. The cap rate typically evaluates various real estate investment opportunities as investors usually aim for higher cap-rate chances.
4. What is passive LLC real estate investing?
Passive real estate investing refers to when real estate investors form LLCs (Limited Liability Company) to purchase real estate investments, reducing the likelihood of one property disaster affecting other assets or personal finances.
Conclusion
Buying an investment property or investing in passive real estate is an excellent strategy to earn a constant cash flow with little participation on your part. The ways to benefit from passive real estate investing include crowdfunding, REITs, investing in turnkey rental property, and money lending.
If you’re still wondering, why invest in real estate? The answer is simple- it’s the most reliable wealth creation vehicle and experiences value appreciation.
