Many people hear the term “real estate investing” and think of people slaving away demolishing homes or actively managing numerous rental properties to generate income. While these are certainly legitimate methods of turning a profit, passive income is a bit different. If you’re willing to do a little research, passive real estate investment income is a real possibility. Here’s what you should know.
What is Passive Investing?
Passive real estate investing is a set of processes and procedures that require you to put in little effort to turn a profit. Passive real estate investment income can come in many forms, which range from pooling your money to buy shares of a property, real estate investment trusts (REITs), or remote ownership. Each of these comes with its own unique set of advantages and disadvantages, but none of them require you to do actual physical labor or act as a landlord on your own. Learning more about these investment types can help you determine what you want your portfolio to look like in the future.
Passive vs. Active Investing
There are three key differences that can help you determine whether an investment is passive or active.
- Property Management: If you own and manage a property, that’s considered an active investment. However, if you own a property and pay someone else to take on the management of that property, it’s a passive investment.
- Responsibilities: Active investments come with a lot of responsibility. If you’re overseeing the repairs or creating and maintaining lease agreements, it’s active income. Again, if you pay someone else to repair the property and create and maintain leases, it’s passive income.
- Investment Control: Finally, when you choose to make real estate investing an active income source, you maintain most of the control over the property. When you choose to hire a person or company to maintain and manage it on your behalf, you still maintain some control, but you’re handing a great deal of control over to the person or company you hired.
Remote & Managed Ownership
One of the best ways to enjoy a passive real estate income experience involves participating in remote ownership and/or managed ownership. Simply put, you let your money do the work for you. In a fix-and-flip situation, you would buy the property, have a contractor you trust to carry out the renovations, and then sell the property for a profit. Of course, the profit may be reduced when you pay the contractor, but if you aren’t doing the work yourself, you could potentially manage several of these projects at the same time.
Furthermore, you may choose to buy an entire apartment building, then renovate it and rent it out. Rather than spending your own time to carry out repairs, renew leases, and collect rent payments, you could easily hire a property management specialist to do it for you. Once again, you lose out on some of the profit because you’re paying another company, but you could potentially own six different buildings in six different cities and collect profits on all of them passively.
Passive real estate investing is not right for everyone. Many investors choose to remain active in all their investments, and others choose to have a few passive and a few active investments. There’s no one right way to invest, so take the time to determine what works best for you before you take the leap.