risks of passive real estate investing

Real estate investing can have many benefits, including cash flow, asset appreciation and tax breaks. However, it can also be a lot of work, which many people don’t have the time to do. But investing in real estate doesn’t have to involve managing properties in person. In fact, passive real estate investors own their properties from afar. Here’s what to know about passive real estate investing. You may want to consult with your financial advisor to understand if this is a good investment for you. 

What Is Passive Real Estate Investing?

Passive real estate investing involves purchasing real estate investments without active involvement in their day-to-day management. This differs from active real estate investment, which may involve buying, selling and managing real estate investments, such as rental properties.

Active real estate investors often must commit a significant amount of time to their real estate investments. They might also be skilled in doing at least basic maintenance and repairs on their own.

Conversely, passive real estate investors take a hands-off approach. They typically aren’t involved in the daily management of the properties and may not have the skills to make repairs on investment properties. However, passive real estate investors often must pay fees to a property manager or pay investment fees.

Passive real estate investing can come in many forms, such as investing in real estate exchange-traded funds (ETFs) or buying shares in a real estate investment trust (REIT). Another way to passively invest in real estate is to purchase real estate properties directly and then hire a property manager to take care of their day-to-day management.

Benefits of Passive Real Estate Investing

Passive real estate investing can have many benefits that make it appealing to many investors. For instance, the time commitment is often much less than for active real estate investors. Passive real estate investors often outsource day-to-day management to a property manager, so they only need to monitor their investment periodically.

Passive real estate investing also offers diversification. Real estate investments typically have a low correlation with the stock market, allowing investors to reduce the overall volatility of their portfolios. In addition, the minimal time commitment allows passive real estate investors to invest in more properties in different regions, providing further diversification.

Passive real estate investing can also have less risk than active real estate investing. These investments are typically managed by a professional team with expertise in the real estate industry. These teams have the knowledge and experience to evaluate properties and make sound investment decisions on behalf of the investors. Owning multiple real estate investments can reduce one’s risk as well.

Risks of Passive Real Estate Investing

Passive real estate investing is not without its risks. For one, you have minimal control over investment decisions. This may not be an issue if the investment manager is highly experienced, but it could be a problem if the investment manager isn’t as knowledgeable.

These investments can also have a lack of transparency. For example, REITs can be complex investments with multiple projects and it isn’t always clear exactly how investors’ money is allocated. In addition, there can be inadequate regulation in the industry that leads to minimal disclosure of information.

There may also be volatility in the real estate market at times. We saw this with the Great Recession when the value of many homes collapsed. The real estate market can be overheated at times as well, leading to inflated prices. This volatility can have a serious impact on investments, both positive and negative.

How to Get Started with Passive Real Estate Investing

Passive real estate investing can be a great opportunity for investors but requires careful planning and due diligence. Before you get started, assess your financial goals. What are your financial goals, your risk tolerance and your desired returns? These questions will help determine which type of investment is the best choice to meet your needs.

Next, it’s time to find the right passive investing opportunity. As mentioned earlier, you can consider investments like REITs and real estate ETFs. You can also buy your own property and hire a property manager. Or you can consider crowdfunding platforms and private equity funds. Each of these has its own benefits and drawbacks and the questions you answered above will help you make the right choice.

However, you should also do your due diligence with each investment opportunity. That might involve researching the company’s past performance, reading customer reviews and assessing its risk and reward. You want it to be the right fit before you decide to invest.

The Bottom Line

Passive real estate has several benefits, such as a minimal time commitment, lower risk and diversification compared to active real estate investment. However, it can also have risks like lack of transparency, limited control and volatility. Do your due diligence before you invest and review the investment with a trusted financial advisor.

Tips for Investing in Real Estate

• Real estate investing can be complex. If you want some help, perhaps speaking with a financial advisor could be beneficial. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you decide to become a passive real estate investor, there will be a lot to think about. In addition to various laws and regulations, you may have to finance your investment properties. In that case, you can still use SmartAsset’s mortgage calculator to estimate your monthly costs.

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