When most people think of passive real estate investing, they imagine the scenario of receiving a rent check on the first of every month, which is much larger than their mortgage payment, covering all costs of ownership and resulting in some profits. While it is possible to locate, buy and manage a rental property that allows for this type of investing, it is not nearly as easy or as lucrative as many people believe.
The most common methods for passively investing in real estate fall into one of four categories: crowdfunding, REITs, real estate funds or remote ownership. Real estate crowdfunding uses an online platform to allow a multitude of users to pool their resources and invest indirectly in a mortgage loan. Real estate funds and REITs use professional investment managers to select, manage and operate properties. Real estate funds and REITs have higher liquidity than crowdfunding investments or remote ownership, but they also have a lower rate of return.
Some investors decide to make rentals their passive investment, which requires them to hire a property management company to handle the day-to-day tasks of managing a rental property. This can include finding and vetting tenants, collecting rent payments, and doing any maintenance needed on the property. However, this convenience comes at a cost, as the property management companies usually charge anywhere from 4-12% of monthly rent, which can cut into your potential profits.
Another form of passive real estate investing involves purchasing a property and leasing it to a tenant for short-term stays, such as those offered by Airbnb. This can be a good option for investors who are looking to earn a decent income from their investment and who have the time to manage their own rental property. However, there are several factors that should be considered when determining whether this type of passive real estate investing is a good fit for your unique financial situation.
Lastly, some investors turn to hard money lending to fund renovation and quick sale projects that are managed by a professional rehabber. While this is not the most profitable way to invest in real estate, it can be an effective way to quickly and easily generate a substantial return on investment without having to do any of the work yourself.
Whether or not passive real estate investing is right for you will depend on your unique situation, including your level of risk tolerance and how hands-on you want to be with your investments. Regardless of the type of passive real estate investment you choose, it is important to understand the trade-offs involved before making any big financial decisions. Luckily, with tools like Mint, you can effortlessly track all of your investments and see how they’re performing to help you make the most informed decision. Then, you can take the steps necessary to achieve your financial goals. Good luck!