When you think about investing in real estate, you might think about running a small rental business as a landlord. Or perhaps you're considering dabbling in something like Airbnb hosting, or house hacking, to get started.
But if you've ever managed a rental or know someone who has, you probably know it can have some hiccups. And even if a rental business runs smoothly and you have great tenants, it still takes a lot of work to manage one or more properties and to keep up with maintenance.
Thankfully, not every type of real estate investment has to be so active. In fact, there are several reliable, passive real estate investing strategies you can use to generate income without having to actively manage properties.
What Is Passive Real Estate Investing?
Passive real estate investing involves generating income from real estate holdings without having to actively manage them yourself. Typically, landlords achieve this by outsourcing property management responsibilities to professional companies. But you can also explore completely passive investment options like crowdfunding or REITs, which I'll cover below.
The goal of this investing style is to still reap the benefits of real estate – like steady cash flow and potential property appreciation – without having to give up your time. And while real estate sometimes requires upfront work, it's very possible to turn your investment into a semi or fully passive business.
How to Get Started With Passive Real Estate Investing
There are several ways to add real estate to your investment portfolio while keeping things passive. Some methods require more capital and upfront work than others. However, the following strategies can all become completely passive or mostly passive investments.
1. Use Real Estate Crowdfunding
One of the simplest ways to start passive real estate investing is to use crowdfunding sites. These platforms pool money together from investors to purchase income-generating commercial and residential real estate. As a shareholder, you earn cash distributions from rental income and can also earn from property prices appreciating and an eventual sale.
We like crowdfunding platforms at Investor Junkie since they're a beginner-friendly way to invest in real estate. In fact, several platforms don't require you to be an accredited investor to join. And investing minimums can be as low as $10.
|Account Fees||1%/year||1-1.25%/year asset management fee||2% annual management fee|
And crowdfunding is a completely passive investment. These companies work with their own network of property managers to find and manage tenants. All investors have to worry about is when distributions get paid out and eventually cashing out shares.
2. Work With A Property Manager
Another option for passive real estate investing you can explore is to run your rental business through a property management company. In other words, you can become a landlord and purchase single-family rentals or even multi-family homes if you have enough capital. But you can outsource tenant and property management to a local property management company to handle the active work.
The upside to this strategy is that you get to own equity in properties without having to actively manage them. However, the downside is that you have to pay a property manager to run your business for you.
According to Roofstock, property managers typically charge a one-time setup fee and ongoing management fees. Usually, this management fee is around 10% of monthly rent. Property management companies also charge various leasing fees if they have to find new tenants, lease renewal fees, and even maintenance fees.
This can get expensive quickly, so it's important to understand your property's cash flow, profit margin, and how much you can afford to spend on professional management. But if the math checks out, this strategy can create a passive real estate investment that also lets you enjoy equity.
You can also purchase single-family properties through Roofstock and then work with its team of property managers for a full-service solution. Our Roofstock review explains how the platform works and its pros and cons.
3. Invest In REITs
REITs, which stands for real estate investment trusts, are another passive real estate investing vehicle that's similar to crowdfunding. A REIT is a company that owns and operates income-generating real estate. By law, REITs have to pay out at least 90% of taxable income to shareholders in the form of dividends, making them an attractive income-generating investment.
There's also numerous types of REITs you can explore. For example, REITs might focus on different sectors, like healthcare or retail. There's also residential and commercial REITs that invest in very different types of properties.
The easiest way to begin investing in REITs is to look for publicly-traded REITs through your online broker. There's a range of REIT ETFs and mutual funds, and you can also invest in individual REITs. Some REITs aren't publicly traded, but you can work with individual brokers or some financial advisors to invest in non-traded REITs.
The main downside of REIT investing is that growth is generally lower than investments like growth stocks since REITs pay out most income as dividends. But it's another passive real estate investing strategy that's very popular and simple. And lack of liquidity isn't a high risk if you stick with publicly-traded REITs.
4. Run A Passive Airbnb Business
After I graduated college, I spent some time living in Medellin, Colombia. During that time, I shared an apartment with a man from New York who was traveling around South America for a few months.
When we started talking about work and businesses, he told me he ran a network of Airbnbs back in New York City. And even though he was spending months on the road at a time, his Airbnb business was thriving back home, bringing in consistent rental income every month.
I couldn't believe it at the time, but after doing some digging, I found that the side hustle of “remote Airbnbs” is certainly very real. And it's pretty simple on paper: you acquire an Airbnb rental in an attractive market, put some remote management systems in place, and work with a rental manager to clean and manage the place between renters.
Airbnb makes it very easy to manage your listing and communicate with renters through its app. And if you use systems like a lockbox or keypad access, guests can unlock your home without you having to be there. Once they leave, all you have to do is pay a cleaning company or property manager to prepare the unit for your next guest.
This strategy is how people manage Airbnbs in states like Arizona, California, and Florida while living thousands of miles away.
Personally, I think this is still a riskier type of passive real estate investing since serious property damage or problems aren't easy to solve remotely. But if you have the type of schedule where hopping on a flight last minute isn't an issue, maybe this risk isn't as large of a concern.
Additionally, you have to factor in Airbnb host fees, taxes, and cleaning/management fees into your profits. And if you don't get enough bookings per month, you're probably earning less than if you went with a long-term, single-family rental. But in touristy areas, Airbnbs charge a premium, which is why some hosts go remote and buy Airbnbs in busy markets.
Pros & Cons of Passive Real Estate Investing
Is Passive Income From Real Estate Realistic?
If you invest with crowdfunding platforms or through REITs, passive real estate investing is a given. This is one reason fractional real estate investing has become so popular, alongside the low barriers to entry.
As for owning rental units and outsourcing management, that strategy can also become quite passive. But I think it's important to know your numbers so that your expenses don't wipe out your positive cash flow. And if emergency strikes, there's the chance you might have to become an active manager for a period of time.
Ultimately, there are several ways to turn real estate into a passive investment. Just consider the level of active versus passive involvement that works for you, consider the pros and cons, and pick a business model that's right for you.