Old but gold method, Passive real estate investing, Property style impact, Modern home decor tips
Old But Gold Method — Passive Real Estate Investing
14 December 2023
Passive investments allow acquiring the property and profiting from it without the property management responsibilities, and sometimes even without the actual act of choosing and buying the property.
This opportunity provides investors with consistent returns and diversification of assets, requiring minimal involvement from their side. For this, they can use the services of different real estate projects, funds, and trusts to deal with the purchase.
Basic Types of Passive Real Estate Investments
There are a few main directions of passive investments that investors can choose from. They can be combined for the best results and for the sake of diversification.
Real Estate Investing Through Funds
One of the ways that beginner investors can use is by allocating their capital into funds that can buy properties, bonds, or stock using collective investors’ money. There are a few types of funds, including mutual, exchange-traded, and private equity funds. They mostly differ by the entry threshold — the first two are open for basically all investors, while the last one allows only institutional and accredited investors. Typically, the fund’s capital is managed by the fund manager who decides what properties to buy. This method comes with its benefits and limitations.
For example, investing through funds offers:
- Diversification allows you to passively invest in all types of property, lowering the risks of market fluctuations.
- Lower investment threshold — funds like ETFs ask for a minimum payment of around $100 and mutual funds accept capital up to $10,000.
- Minimized involvement from investors who can enjoy the profits without the need to manage properties.
As for limitations, they include:
- management fees that all funds have;
- limited control to administer the property since the fund managers act on behalf of all investors;
- liquidity options that may forbid selling the stock and getting back the invested money.
Real Estate Investment Trusts
REITs are quite similar to investment funds but still have some differences in status. REITs give investors an opportunity to invest money in income-producing properties like residential and commercial real estate, hotels, shopping centers, office buildings, warehouses, etc. They also have a special tax status — they are not subject to income tax as long as they distribute at least 90% (in some cases 100%) to their shareholders in the form of dividends. Sizable dividends from property ownership is one of the main REITs benefits.
The biggest distinction between trusts is whether they are publicly traded or not. Publicly traded trusts are registered with the stock exchange market, meaning you can buy and sell their stock (property shares) at any given second. Non-publicly traded trusts can only be accessed through a broker or a financial advisor who deals with such trusts. The latter also have quite high upfront fees — up to 10% of the investment amount, making it an expensive endeavor.
Still, REITs can be used for diversifying the investment portfolio and achieving stable income through dividends. They are also liquid — meaning they can be bought and sold at any given moment, provided they are publicly traded on the stock exchange. It is a valuable tool for investors looking to widen their portfolio with accessible real estate shares.
Probably the most accessible method of passive real estate investment is through crowdfunding. Using online resources and social media, people can raise funds for different projects and businesses. Often, it means reaching out to investors through online platforms. Entrepreneurs present to the audience their projects and ask to support them financially, and the backers (that can consist of thousands and even millions of people) can fund them.
We are used to hearing about donation-based crowdfunding that doesn’t require returns. However, in the case of real estate funding, there is a reward system used to attract investors and get them to invest in properties. In exchange, the investors gain ownership rights or equity. They can expect a financial return based on the success of the crowdfunding project.
The main characteristic of this method is that it’s accessible basically to everyone. It usually has no initial amount threshold and, in most cases, can be entered by non-accredited investors. But it also comes with its risks, typically higher than with real estate funds and trusts. There are no solid guarantees and no registration with exchange platforms. Still, it can be a nice way to diversify your portfolio.
Remote Real Estate Ownership
Remote real estate ownership requires a bit more hustle compared to other passive investment methods. However, in this case, you’re more in control of your profits and have full management powers. This tool can be illustrated well with the Airbnb business model, where you can list your house or an apartment on a specific platform that handles booking and communications with the guests for the commission.
Here, you have two choices — you can either manage the process yourself or hire the property manager who will do everything for you. Again, for a commission. If you decide to do it by yourself, there are plenty of supporting technologies to help you with it.
- The housing platform’s software offers price strategies, charges the guests, and ensures bookings.
- Keyless entry systems like smart locks eliminate the need to exchange physical keys, since check-in and check-out can be done using codes.
- Home automation systems allow for setting the climate, lighting, and energy consumption.
This method works well in tourist countries like European states. Due to this system, there is a lack of property for sale in Austria and other historic locations within the EU.
Active vs Passive Real Estate Investments
When choosing an investing strategy, investors can struggle between active and passive approaches. Although they have the same goal — making profits — they are quite different in characteristics.
|Full control – investors buy, sell, and manage the property and can access all the profits directly.
|Minimal control – investors have limited control over their possessions and can’t make decisions for them.
|High involvement – selecting, purchasing, and managing a property requires substantial time and effort.
|Low involvement – all the day-to-day operations are delegated to the property managers.
|Direct ownership – investors own the real estate directly on their own behalf and pay the taxes accordingly.
|Indirect ownership – investors use tools and vehicles like funds, trusts, and crowdfunding sources to buy and own real estate.
The risks associated with active and passive investments cannot be compared as they hugely rely on the type of investment vehicle, goals, jurisdictions, etc.
Passive investment in real estate is a great way to diversify the assets portfolio and ensure a steady income with minimum to no involvement. Investors can have a range of vehicles to choose from in this scenario — they include funds, trusts, crowdfunding platforms, and remote ownership. Each of these methods has its own risks and benefits and also differs by the entry threshold. So the best strategy would be analyzing all the details and diversifying a portfolio to avoid losses.
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