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What is Passive Real Estate Investing and How Does it Work?

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Passive real estate investing is a simple yet intriguing approach to bolstering one's portfolio.  The practice, which continues to grow in popularity with new technologies, involves strategically investing capital in either residential or commercial real estate while simultaneously handing off the accompanying commitments of a landlord to a third-party property manager.  Below, we take a closer look at the appeal behind such an approach, and how this works.

Why Passive Real Estate?

Investing in real estate is nothing new and remains popular for several reasons – passive or otherwise.  A few of these include,

  • Cash Flow: Real estate investments can generate steady cash flow through rental income.  This is particularly appealing for investors seeking a regular income stream alongside their investment's potential for appreciation.
  • Appreciation: Real estate values typically increase over time, offering investors the opportunity for capital gains when they sell properties.  This long-term price appreciation can significantly boost investment returns.
  • Leverage: Real estate also allows investors to use leverage more extensively than many other investment types.  For example, by using borrowed funds to finance a portion of the property's purchase price, investors can achieve a higher return on investment, assuming the property appreciates in value.
  • Diversification: Adding real estate to an investment portfolio also enhances diversification, reducing overall risk. This is possible because real estate often has a low correlation with other asset classes, meaning it can perform well while other investments flounder.
  • Tax Advantages: Real estate investing can also provide investors with various tax benefits.  These extend to include deductions for mortgage interest, operating expenses, property taxes, and depreciation.  Certain, more advanced strategies (1031 exchange) allow investors to defer capital gains taxes when reinvesting proceeds from a sale into another investment property.
  • Inflation Hedge: Historically, real estate prices and rents have each typically risen with inflation.  As a result, this makes real estate a good hedge against inflation, as increasing prices can lead to higher rental income and property values, protecting investors' purchasing power.

Considering these listed benefits, it is clear why real estate is an attractive addition to one's portfolio, as very few assets boast the diverse set of perks of owning property.

So, what can passive real estate investing bring to the table that investors do not already benefit from? The answers are simple: time, peace of mind, opportunity, and convenience.

By delegating property management duties to a third party, property owners no longer need to allocate the time and resources to maintenance and tenant oversight.  While this type of service does not usually come free, it is highly convenient as it allows property owners to consider investments locally and afar.  It also opens the door for investors interested in real estate who, even if they have the time, do not necessarily have the skillset to take on such responsibilities.

Passive Investing Accessibility

With its benefits in mind, various approaches to accessing passive investing exist.  Let's take a closer look at these and how they work.

Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate.  REITs, modeled similarly to mutual funds, provide individual investors the opportunity to earn a share of the income produced through commercial real estate ownership without having to buy, manage, or finance any properties themselves.

REITs are required by law to distribute a high percentage of their income (typically 90% or more) to shareholders as dividends, making them an attractive option for income-seeking investors.  The goal is to offer the benefits of real estate investment combined with the ease and liquidity of investing in stocks.

It should be noted that among REITs, there are a few different approaches that can be taken.  These include:

  • Equity REITs:  These are the most common type and own and manage income-generating real estate.  Revenues are generated primarily through leasing space and rent collection.
  • Mortgage REITs (mREITs):  These provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. They earn income from the interest on these financial assets.
  • Hybrid REITs: Hybrid REITs combine the strategies of equity REITs and mortgage REITs to own properties and provide real estate financing.

REITs can be publicly traded on major securities exchanges, publicly registered but non-listed, or private. Publicly traded REITs offer the advantage of liquidity, similar to stocks, allowing investors to buy and sell shares easily through the stock market. Non-listed and private REITs may offer less liquidity but can still provide access to diversified real estate investments.

Overall, REITs allow investors to gain exposure to real estate sectors such as residential, commercial (office buildings, shopping malls, warehouses), healthcare facilities, and more, without the complexities and significant capital requirements of direct property ownership.  They may also offer potential tax advantages, as they are generally not taxed at the corporate level if they comply with certain regulatory requirements, including distributing most of their taxable income to shareholders. This structure can help investors achieve a steady income stream along with long-term capital appreciation.

Crowdfunding Platforms

Another common way to gain access to passive real estate investing opportunities is through crowdfunding platforms.  Passive real estate crowdfunding platforms are online marketplaces allowing individuals to invest in real estate projects without buying, managing, or financing properties themselves directly.  A few examples of such platforms include,

While the idea is similar to a REIT, these platforms leverage the power of crowdfunding to pool funds from multiple investors, enabling them to participate in real estate investments with potentially lower capital requirements.

By lowering capital requirements, investors benefit in multiple ways.  Not only can smaller investors now partake in the real estate market, but those with the means can distribute capital across a broader range of opportunities (commercial, residential, warehouse, etc.)

Furthermore, the platforms that make such investing possible usually offer increased transparency into projects alongside the professional management services that make passive real estate investing so appealing.

Real Estate Syndications and Investment Groups (REIGs)

Finally, there are Real estate syndications and Real Estate Investment Groups (REIGs).  These are forms of collective investment in real estate, enabling investors to pool their resources to invest in properties that might be beyond their individual financial reach or expertise.  This approach is similar on the surface to crowdfunding, but with less autonomy/control over choice in capital allocation.  Instead of allowing the investor to selectively pick a property to invest in from a pool of listings, such choices are left to professionals tasked with assessing potential return on investments and associated risks.

Real estate syndications are temporary, project-specific partnerships formed to invest in a single real estate opportunity.  In real estate syndication, a sponsor (or syndicator) identifies an investment opportunity and is tasked with the acquisition, management, and eventual sale of the property.  To facilitate this process, potential investors (limited partners) are invited to supply the necessary capital.  While the sponsor contributes a smaller portion of the capital and shoulders the bulk of the project's management responsibilities, investors typically provide the majority of the funding with minimal involvement in the day-to-day operations, making their contribution more passive in nature.  The distribution of profits is structured in advance, with sponsors often earning a management fee and performance-based incentives, such as a share of the profits that exceed a predefined threshold, ensuring alignment of interests and potential for substantial returns.

Meanwhile, Real Estate Investment Groups (REIGs) are more permanent entities that invest in a portfolio of real estate properties. They are typically organized as companies that own and manage residential or commercial properties.  By purchasing shares or units in these groups, investors can indirectly partake in real estate ventures, benefitting from exposure to the property market without the responsibilities of direct ownership.

When comparing the two, there are a few key differences to keep in mind.

  • Scope and Duration: Syndications are generally focused on a single project and dissolve once the project is sold or the investment goal is reached.  REIGs, on the other hand, are more permanent and can invest in multiple properties over a longer term.
  • Investor Involvement: While both options are passive, investors in a syndication might have the opportunity to invest in specific projects that match their investment criteria closely.  REIG investors invest in a company with a broader range of properties, giving them less control over individual investments.
  • Investment Returns: Syndication returns are often tied directly to a single project's performance, which can offer higher rewards but also higher risks.  REIGs provide a more diversified investment, potentially offering more stable but possibly lower returns.

Both real estate syndications and REIGs offer unique opportunities and considerations for investors looking to diversify their portfolio into real estate with a passive investment approach. The choice between the two depends on the investor’s preference for involvement, risk tolerance, and investment goals.

Industry Players

So, what are some of the notable industry players offering investors access to passive investing opportunities? Below are a few for consideration, representing each of the previously described approaches.

*Figures provided below were accurate at the time of writing and are subject to change.  Any potential investor should verify metrics*

1. Prologis

finviz dynamic chart for  PLD

Market CapForward P/E 1 Yr.Earnings Per Share(EPS)

Representing a look at REITs, Prologis is a leading example that focuses on industrial real estate – particularly distribution facilities for logistics and supply chain management across the globe.  It offers investors passive real estate investment opportunities by owning and managing a vast portfolio of high-quality warehouses and distribution centers.

Prologis 40th Anniversary

By investing in Prologis, individuals can gain exposure to the booming e-commerce and logistics sectors without needing direct property management, making it an appealing option for those looking to diversify their investment portfolios with industrial real estate.

At the time of writing, PLD was listed by the majority of analysts as a ‘‘Strong Buy'.

2. Upright

Meanwhile, Upright stands out as a perfect example of what can be achieved and offered when considering passive real estate investing through crowdfunding platforms.  Formerly known as Fund That Flip, Upright offers accredited investors the ability to passively invest in residential real estate projects with potential returns of up to 13%.  Investors can choose from individual properties, pooled funds, or the Horizon Residential Income Fund, which operates with the tax advantages of a REIT.

How It Works: Invest in Real Estate Online with Upright

With a focus on strict underwriting criteria, Upright provides a selection of short and long-term debt investments across more than 35 states, developed by thousands of operators, offering diversification and control over investment choices with minimum investments starting from $1,000 for pooled funds and $5,000 for individual properties

3. Brixmor Property Group Inc.

finviz dynamic chart for  BRX

Market CapForward P/E 1 Yr.Earnings Per Share(EPS)

Finally, there is Brixmor Property Group, a real estate investment group (REIG) specializing in retail real estate, focusing primarily on owning and managing an extensive portfolio of open-air shopping centers.  It also offers investors passive real estate investment opportunities through its publicly traded REIT structure, enabling shareholders to benefit from the income generated by its properties without the complexities of direct property management.

Brixmor Property Group l NYSE TV Ad 2017

Brixmor's emphasis on community-centered retail locations positions it uniquely within the real estate market. These locations cater to everyday consumer needs and drive consistent foot traffic to their sites.

At the time of writing, BRX was listed by the majority of analysts as a ‘‘Strong Buy'.

Choosing the Right Property

Another critical step in passive real estate investing involves choosing the right property for you. Remember, after all, this is an investment, not a purchase meant to appeal to your personal taste.  This means that when choosing a property to invest in passively, an investor should first clarify their investment objectives, including expected returns, risk tolerance, and investment horizon.

Next, comprehensive due diligence is required, which involves a deep dive into the property's market analysis, location potential, and the credibility of the management team or platform facilitating the investment.

Evaluating the deal's financials, such as projected cash flows, expenses, and the structure of the investment, is crucial to understanding its viability and alignment with one's investment goals. Additionally, understanding the legal structure of the investment and any tax implications is essential.

Finally, considering diversification within the real estate portfolio to mitigate risk should guide the decision on whether to proceed with the investment.

Is a Hands-Off Approach Right for You?

At first glance, passive real estate investing may seem complicated. However, once you have decided on an approach that is right for you, this is no longer the case. The entire point is to replace operational burdens with convenience.

For the savvy investor, passive real estate initiatives have the potential to open up new avenues for generating revenue and building equity in an asset class that seemingly never goes out of vogue.

Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology.