A Primer on Passive Real Estate Investing

March 31, 2016

Crowdfunding is a good way to get started in real estate.

 

 

RealEstate

 

We’ve talked before about the differences between active and passive real estate investing. Unless you’re a landlord or a real estate developer, the odds are that you’re likely more interested in learning more about passive real estate investment opportunities. This article will discuss the advantages of passive real estate investing, analyze how real estate crowdfunding fits into that picture, and explain how crowdfunding for real estate can also give investors some of the advantages of active real estate investing as well.

The Advantages of Passive Real Estate Investing

So you’ve decided that you want to invest in real estate (and if you’re still not sure about real estate, here’s the case for real estate as an asset class).  If you’re not ready to jump all the way in as a landlord or property manager, passive investing is a good way to dip your toe in. Here are a few of the benefits:

  1. Smaller investment requirements. Even buying a small single-family house can often require a five or six figure down payment. This can be difficult for investors that are just starting out, but can also be problematic for investors with more resources, who have to worry about properly diversifying their portfolios without becoming over-allocated in real estate. Passive real estate investment options such as real estate crowdfunding and REITs allow investors to access the real estate sector for as little as several thousand dollars.
  2. No property management headaches. Unless you’re a full-time real estate professional, you probably don’t have much time to devote to managing tenants, repairing broken toilets and upgrading amenities. Even if you are a full-time real estate professional, you need help to manage larger commercial properties. Passive real estate investing allows you to leave property management to experienced real estate companies.
  3. Wider variety of available properties. As we previously mentioned, active investors are often limited by budget to smaller residential and commercial properties. What if you wanted to invest in a Class A office building in the central business district of a large city? If you’re an individual investor, you almost certainly won’t be able to afford this on your own. Passive real estate investing allows you to access these types of properties. You can also ensure proper diversification by investing small amounts in multiple types of properties, in multiple markets across the country.

Real Estate Crowdfunding - Passive Investing for the 21st Century

Crowdfunding is the newest form of passive real estate investing. Real estate crowdfunding portals help connect real estate developers seeking capital for their projects with investors looking for attractive investment opportunities.

Investing

From the investor’s standpoint, real estate crowdfunding is intended to be a passive investment. The crowdfunding portal conducts due diligence on the property and on the sponsor. The investor simply selects the desired property (or properties), makes an investment, and generates returns. The sponsor, or real estate developer, manages the property on a day-to-day basis.

Of course, the term “passive” implies that an investor simply has to kick back and watch the return on investment come in. The reality is a little more complicated. While crowdfunding portals conduct due diligence prior to listing investment offerings, there is no substitute for the investor’s own research and due diligence, keeping in mind the investor’s own risk profile. Some offerings may be wonderful investment opportunities, but simply may not fit the investor’s time horizon, investment goals or risk profile. In this respect, real estate crowdfunding investing is very much an “active” process, at least until the investment decision is made.

To some people, one of the main advantages of active real estate investing is that it allows them to use their own knowledge and skills to create opportunities. While real estate crowdfunding investors aren’t as hands-on with managing the property, they are able to leverage the skills and knowledge of some of the leading real estate companies in the country. While you may not have direct experience managing a 45-story office tower with 100+ tenants, many real estate crowdfunding sponsors have decades of experience with these types of properties. If you’re interested in more specialized niches, you can find a wide variety of deals on crowdfunding platforms, from senior housing to single-family fix and flips. Crowdfunding for real estate puts you in charge of your portfolio, while enjoying the advantages of passive investing.

 

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