Passive Real Estate Investing Explained

by | Jul 9, 2022 | Investing Advice | 0 comments

Passive Real Estate Investing

If you’re an experienced landlord, you already know that the role involves more than just buying a property, refurbishing it, and finding suitable tenants. It’s a job on top of your actual job and your family commitments. 

Investing in residential real estate has its pitfalls. For most investors, the main drawback is the amount of time and energy these investments require. You don’t just make the financial investment, you’re also responsible for all day-to-day tasks. If you’re like us, we’d rather spend our downtime with our kids and not be busy solving problems for tenants or finding contractors to fix the inevitable issues that arise with rental properties.

We wanted to free up our time and build legacy wealth in a way that works with our family’s lifestyle. 

Does Investing in Rental Property Really Build Passive Income?

We’ve invested in both small multifamily rentals and single-family homes. In our experience, multifamily properties have been the clear winner, with definite advantages over single-family homes. Here are the main reasons why:

  • Even if a family moves out, tenants in other units are still there to provide monthly cash flow.
  • It’s much less time-consuming to manage one property with multiple tenants than to manage multiple properties with only one tenant each. 

Of course, you can hire a property management team to help you keep on top of the finances, strategic decision-making, and everyday running of your rentals. But, at the end of the day, you’ll  still be required to put time and effort into overseeing your properties, which inevitably gives you less time to pursue your hobbies or spend time with your kids. 

Are There Any Fully Passive Real Estate Investments?

On the flip side, there are entirely passive investments in commercial real estate. These investments are professionally managed and operated investments which means that you’ll never have to deal with any of the three scary T’s  – Tenants, Toilets, and Termites. Oh my!

According to Forbes, once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:

1. Reduced Time Commitment

Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.

You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.

2. Opportunity to Diversify into Different Markets

It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets. 

By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.

3. Tax-Free Passive Income

Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Score!

You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA on your personal situation.)

4. Fewer Risks

When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, and none of your other assets would be at risk.

5. Changing Lives

With personal investments, you make a difference in two to four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.

Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you just can’t gain from stocks and mutual funds.

Are Rental Properties or Real Estate Syndications Right for You?

If you know you want to invest in real estate, but you’re not sure whether you’re better suited for the day-to-day management of a property or if you’d prefer a ‘set it and forget it’ investment, then you’re not alone. The first step to deciding what’s right for you is to research your options to see whether they align with your long-term goals. 

Remember, though, having experience as a landlord isn’t a prerequisite to commercial real estate syndications. You don’t have to have personal experience before exploring syndications before investing, diversifying your portfolio, and mitigating your financial risk. 

What we love about real estate syndications is that not only can we put our money to work for us without putting in the hours ourselves, but we can build a positive community for the kids and the families that live in our properties.

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