Real estate is often regarded as an alternative asset class, as compared to stocks and bonds. Though it is unchartered territory for many, it’s starting to garner more mainstream attention thanks to a number of digital platforms designed to make real estate investing more accessible to the masses. Let’s take a closer look.
The key difference between active and passive real estate investing is based on the amount of continuing work involved to support the investment.
In active real estate investing, though you might get the most control and the best tax benefits with fewest layers of fees, it requires extensive knowledge and can be a hassle for the landlord—the active participant. While in passive real estate investing, there are no landlords. Instead, investors invest through syndications, online crowdfunding, individual real estate funds, and real estate investment trusts. Passive real estate investing requires the least experience and hassle while offering more diversification and liquidity.
Put simply, passive real estate investing is investing in real estate without substantial hands-on effort or active participation from the investor. There are primarily two methods of passive real estate investing—direct or indirect.
Direct passive real estate investing
When it comes to direct real estate investing, an investor will purchase a property or portion of a property that is then rented out. Often, real estate investors that purchase entire properties will hire what is known as a property management company to take care of the day to day maintenance and tasks such as collecting rent. Post-purchase of the property, hiring a property management company allows an investor to essentially be hands-off in the management of the property. Hence the term passive real estate investing.
Indirect passive real estate investing
On the other hand, indirect passive real estate investing is a process where individuals invest in a REIT (Real Estate Investment Trust) or a real estate related mutual fund. This form of real estate investing is considered passive because there is no day-to-day management needed and it’s considered indirect because it doesn’t involve a specific piece of real estate. Investors collect passive income as returns or dividends from funds.
Passive real estate investing is often regarded as a smart way to invest in real estate. There are some simple ways to make money out of passive real estate investing.
1. Investing in Real Estate Investment Trusts (REITs)
Real estate investment trusts are corporations, trusts, or associations that invest in income-producing real estate. REITs give investors the option of investing in real estate without the expense of purchasing and maintaining an actual property. REITs generally have wider diversification, lower risk factors, and potential appreciation so they may be potentially beneficial additions to an equity or fixed-income portfolio.
This may work well for those looking to be passive investors because REITs are traded like a stock and one of the other potential benefits is the lower investment cost—as low as $500 for the price of one unit of a share. A REIT must also meet the SEC requirement of distributing 90 percent of its taxable income as dividends to shareholders, who then have to pay income tax on the dividends earned. Though it is appealing to income-oriented investors, sometimes it leaves less money in the end for reinvestment.
Equity REIT: One of the most common forms of investment, equity REITs buy, own, and manage real estate properties that generate revenue. The potential benefit of equity REITs as a long-term investment is the passive income generated primarily from rents.
Mortgage REIT: These entities loan money for mortgages to real estate owners and operators. They purchase either existing mortgages or mortgage-backed securities. In this case, the revenue is generated mainly by the interest they earn on the mortgage loans. Mortgage REITs are sensitive to changes in interest rates as the dividends are based on the interest payments.
Hybrid REIT: These have a combination of both the equity and mortgage REITs in their portfolios. They earn money through a combination of rents and interest. They structure the portfolio to more property or more mortgage holdings depending on the investing focus as stated by the trust.
REITs are further categorized based on how the shares are bought and sold.
Publicly traded REITs: These are REITs whose shares are listed on a national securities exchange and regulated by the U.S. Securities and Exchange Commission (the “SEC”).
Public Non-traded REITs: These are also registered with the SEC but don’t trade on national securities exchanges and tend to be more stable because they are not subject to market fluctuations.
Private REITs: These are neither listed with the SEC nor are they traded on a national securities exchange. They raise equity from a select group of private investors.
2. Real Estate Funds:
Real estate funds are types of mutual funds that invest mainly in real estate. Many real estate funds invest in REITs. They also offer certain benefits that may appeal to passive investors. They offer greater diversification, which is intended to lead to reduced risk and a higher potential for returns. A major portion of a real estate fund is often invested in commercial properties such as apartment complexes, office, retail, and land.
Real estate crowdfunding refers to a group of investors that each contribute money to become part of a real estate deal. These investors have the opportunity to be a part of multi-million dollar ventures thanks to the multitude of investors that each contributes to the deal. Sometimes it also works to help a real estate investor who may have a lead for a lucrative deal but does not have the funds to invest in it. This is where crowdfunding comes in handy as other investors pool their resources and help the active real estate investor to complete a project and sell it, ideally at a high-profit margin.
Real estate crowdfunding is mostly managed or operated through online platforms where you can own property and earn profits with only a few clicks. Investors visit the online marketplace and browse through the opportunities that appeal to them. Once they select an investment that matches their requirements, their funds are pooled with other investors and the investment is closed. Investors then begin observing the performance of their investment and collect the passive income that may accrue from it.
4. Investing in a turnkey rental property:
Though this is a more active kind of passive real estate investing, investing in a turnkey rental property can be a wise way to have a potentially steady flow of money without much interference. In this scenario, the investor can be a silent partner to someone who is doing the legwork. In this case, one needs to put in some money to acquire the rental first.
Then, a management company comes in to take on the responsibility of finding and maintaining the rental property. The professionals oversee the management while the tenants pay off the mortgage and/or increase the equity of the property. The company also makes sure that the rental is never vacant and helps to find quality tenants who will take care of the property and pay rent on time. Note that without a management company in the picture, this can be a challenging task for an investor who does not know how to deal with rentals and tenants.
Once the ball starts rolling on a turnkey rental property and the income exceeds the expenses, the investor starts making a profit from the investment.
The trends in major real estate markets have shown real estate value to appreciate more over time as compared to stocks and bonds. Inflation and the rise in the cost of living lead to an increase in rent and, therefore, passive income from rents also rise with time. In addition, real estate tends to be less volatile and the ability of REITs to generate dividend income as well as capital appreciation makes them a potential alternative to stocks and bonds. There are also certain tax benefits related to real estate investors that stock investors may not have. Real estate investment trusts receive extra tax benefits since they avoid high corporate taxes by paying out most of their income as dividends. This makes it easier for investors to buy with an IRA or other retirement accounts that allow for tax-advantaged investing.
Is passive real estate investing worth it?
Passive real estate investing can be one strategy to have a constant cash flow (either monthly, quarterly, or annually) without much active participation on your part. You can appoint trusted individuals with deep knowledge of the real estate world to put your money to work.
This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness or any other aspect of such website (or article contained therein).
1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.
2 Represents a net estimated, unrealized annualized internal rate of return (IRR) of your portfolio and is based by reference to the effective distribution dates and amounts to and from the investments, as well as any outstanding principal and accrued and unpaid interest as of the current date, after deduction of management fees and all other expenses charged to the investments.[read more]
3 "Annual interest" represents an annual target rate of interest and "term" represents the estimated term of the investment. Such target returns and estimated term are projections of the returns or term and may ultimately not be achieved. Actual returns and term may be materially different from such projections. These targeted returns and estimated term are based on the underlying agreement between the SPV and borrower or originator, as applicable.
4 Reflects the initial quarterly distribution declared by the board of directors on February 6, 2020, which will be payable to stockholders of record as of June 10, 2020, and the initial offering price of $10 per share.
5 The Fund will cease investing and seek to liquidate the Fund's remaining portfolio no later than 48 months after the Fund's initial closing. It may take up to twelve months thereafter to fully monetize any remaining illiquid investments in the Fund's portfolio.
6 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.
No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.
Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.
Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.
Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.
Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.
Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.
Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and willing and able to accept the high risks associated with private investments.
Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.
Banking services are provided by Evolve Bank & Trust, Member FDIC.
Investment advisory services are provided by YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission.