During my weekly read of Canadian Real Estate Wealth, I encountered this article by Corben Grant. This will be an interesting read for you if you are thinking about investing in Real Estate to create wealth.
By Corbin Grant, Vol 307, March 2022 Issue of Canadian Real Estate Wealth
“The whole point of growing your wealth through investing is to have your money work for you, and nothing better exemplifies this goal than the idea of passive investing. Passive investing promises to make you money with little effort on your part, allowing you to generate wealth and spend your time how you like.
But what a lot of people don’t realize is that real estate can actually be a passive investment too. You may imagine that investing in real estate means constantly being on call to fix every little leak and lightbulb that your tenants need. This isn’t true. The beauty of real estate is that you have so many different options in how you want to invest and grow your money, and there are, in fact, many passive options.
In this article, we will look at the different passive options for real estate investors to get you started.
What is passive real estate investing?
Passive investing is essentially the opposite of ‘active’ investments. Active investments require regular input from the investor. So if you rent out your property and manage all of the work such as finding tenants and property maintenance, this is a form of active real estate investing. Your time and effort go towards keeping your investment profitable.
With passive investing, there is no regular input required from the passive real estate investor. Now, this doesn’t mean that there is no effort required whatsoever. You will still need to research and choose your investments wisely and set them up correctly so they can begin earning on their own. You may want to also regularly check in on how your investments are doing and adjust them if needed. However, beyond these factors, your money will largely be doing the work itself.
How passive investing works
In general, passive investment requires a third party, for example, a property manager or the management team of a real estate fund, who takes the active role on your behalf. You provide the money, they provide the effort, and you both benefit financially.
Time is money
Naturally, the management costs required for passive investing will have to come from somewhere, and in some cases, you could see higher returns if you did it all yourself. But, if you believe in the mantra of “time is money” you may just find peace of mind by a hand-off approach. With the time you save, you could focus on even more money-making strategies.
Why choose a passive real estate investment?
One appeal of passive investing is apparent right on the surface: you can make money by doing nothing. Rather than just leaving your money to sit in a bank account or losing value to inflation, you can use that money you worked hard for to make even more.
Let the experts do what they do best
There are other benefits to passive investing that are especially pertinent to real estate as well. For example, when you buy into a real estate fund, you are trusting your money with qualified investment professionals who will use their expertise to make your money grow.
In this way, passive investing is a smart move if you lack the expertise to handle these investments yourself. This can allow you to access new fields of investing and potential returns that you would not be able to create on your own otherwise.
Some investors, however, do not like passive investing for the exact reason that others love it, and that is the hands-off experience. For some, they would prefer to have an active hand in how their investments perform and can be uncomfortable with the lack of control. If you are this kind of investor, passive options may not be for you, though you can always have a mixed portfolio of both passive and active investments.
Options for passive real estate investments
While you own a property, it can earn you money through appreciation and potential cash flow if you choose to rent, though this is not a truly passive investment. There will always be some level of maintenance required to keep your home in good shape and to maintain its value and appeal to tenants. This is where remote ownership comes in.
With remote ownership, you own the title to the property and simply hire others to run it. Hired staff may include property managers, leasing agents, maintenance staff, and more, depending on your needs. These hired workers will oversee all the day-to-day needs of your rental properties for you, meaning a truly passive investment. You don’t even need to hire individual positions as a property management company can handle everything for you. While you will need to pay for their services, using management staff can allow for options like purchasing a larger property with more units – allowing for potentially larger cash flows.
The benefit of this form of passive real estate investing is that you still own the property directly. You will get to choose exactly what rental property and market you are investing in and can take an active role on the property or even sell it at any time. This is a benefit over other passive investments where you may not have as much say in how the assets or portfolios are managed.
Real estate crowdfunding
Real estate crowdfunding is when many investors work together to purchase a property. Generally, there will be a lead member in this deal – a real estate investor who has identified the opportunity and done the work to connect with interested investors.
As a contributor to a crowdfund, you collect income from the property. Crowdfunding can be easy to take part in and requires very little setup or maintenance on your part and can offer sizable returns, especially for large properties you may not have been able to afford on your own. A downside is that you may not be able to cash out your position in a crowdfund as quickly or as easily as with other passive options.
Real estate investment trusts are an option to passively benefit from the real estate market quickly and easily. REITs are financial trusts that hold large portfolios in real estate and sell stakes in their organization on public markets.
In this way, shares in REITs are a lot like stocks and can be easily bought and sold. Many have a much lower financial entry point than other options in real estate. REITs generate income through their operations, usually through owning and managing rentals and distributing a large majority of their income to shareholders.
REITs are not only easy, but they offer competitive returns when compared to other investment products and can offer you exposure to other real estate markets like the commercial real estate sector.
The downside of REITs is that you will probably have very little say in the way the trust is managed, so you should make sure to research your REIT before you buy-in. You also need to be aware of the fact that, since REITs are publicly traded, they are very susceptible to market conditions and can fluctuate a fair amount over short periods.
Real estate funds
Real estate funds sit somewhere between a REIT and crowdfunding. Like crowdfunding, real estate funds pool medium or large investments from many investors to put towards real estate projects.
However, like a REIT, these funds usually work with larger portfolios and are managed by a team of experts. Real estate funds may take a bit more to invest in than a REIT, but they can offer more stability and larger returns over a longer period.
Like a crowdfunding strategy, it may not be as easy to sell your position in a real estate fund. In addition, because they are not usually public funds, you won’t always know exactly the value of your position on a day-to-day basis and may need to wait for monthly or quarterly reports from the fund managers.
Money lending can be a great way for investors with a lot of capital to see passive growth with a lot of flexible options.
As a moneylender, you essentially play the role that a bank would in a traditional mortgage, loaning money for the purchase of a property that you then collect back with interest over time. These alternative loans may be popular with people who flip homes who may have trouble getting a standard mortgage.
As the lender, you have the flexibility to choose who you work with and the terms of their loan. It will be crucial to do your due diligence to make sure your lender is trustworthy and protect yourself from default. However, if you do have a reliable borrower, you can count on consistent returns over the life of the loan.
Because people who work with alternative lenders tend to do so if they can not get a traditional mortgage, they may be more inclined to take higher interest rates or shorter terms, meaning a lot of flexibility for the lender and potentially high returns.
There are a few downsides to this strategy. For one, you put yourself at risk if the borrower’s investment loses money or they need to default.
Furthermore, while you can approve your loan based on the property the borrower intends to buy, you won’t have very much say in decisions beyond that point. You will also essentially collect a fixed amount based on the interest rate and loan term, meaning you will need to make multiple deals over time. Overall, this strategy will require a bit more setup to make sure that your loan is smart, minimizes risk, and remains legal, but can, nonetheless, be a good option for passive growth.
Passive investing can be a very lucrative way to grow your wealth with very little effort on your part. There are many options for passive real estate investing, even beyond the common ones we have outlined here. Though each has its benefits and downsides, there is surely a strategy that can work for you and save you time while making you money.”