Clogged toilet? You’re not going to get a call at 3 am. When you are a passive real estate investor, you do not deal directly with the hassles of day-to-day management. The pass-through potential benefit of real estate ownership allows a share of the depreciation and expenses to offset the distributed income you receive from the partnership.Ģ No Dealing with Tenants, Toilets or Termites Interest payments or stock dividends can be taxed at the highest income brackets. This is one reason real estate (in general) can be a more powerful passive investment compared to other asset classes. In an equity real estate private placement, there are typically tax-deferred cash returns that allow you to keep more of your earnings throughout the hold period of the investment. This is a structure in which you “pool” your capital together with other investors in an equity or debt-based investment, so you can enjoy the benefits of being a real estate investor rather than a landlord.ĥ Reasons Passive Investing Might Be Right For You: Private placement offerings are not publicly traded on the stock market and are usually structured as a Limited Liability Company (LLC) or Limited Partnership (LP). I also mentioned private placement offerings or “real estate syndications” where you can make direct investments in individual real estate. I mentioned REITs (Real Estate Investment Trusts) which are essentially companies that pool investors’ capital together to purchase large real estate deals. You can passively invest in real estate in several ways. It is 100% hands-off, in terms of your time commitment, after making the initial investment. The biggest difference between active and passive investing is that you are not directly or indirectly managing the investment as a passive investor.
For example, as a passive investor, you make an upfront capital investment in a private placement offering (AKA real estate syndication) REIT, or stock and then receive an equity ownership stake in that investment, from which you are paid passive income or portfolio income. Passive investing is the strategy of acquiring income streams on autopilot. What does a passive investing approach look like? There’s nothing wrong with using an active approach to investing, just be aware that it can be time-consuming and difficult to scale. Even if a rental property only required 5% of your time, you can see how 20 properties x 5% of your time = 100% a full-time job. Try scaling this investing model to 20 properties and you quickly learn how active this investing model can be. In either case, this is an active investing approach because of the ongoing time commitment and asset management required. Should you re-carpet or paint the property? When is a good time to do that? Which company or contractor should be used? If you choose not to outsource these operational tasks to a property management company, you will have to manage the day-to-day responsibilities on your own.
#Hands off investor how to#
whether to fix or replace an appliance when problems arise, or how to address unforeseen issues when they pop up. Those of us who have used this model, we know at a bare minimum, that we must select a property to purchase, and then work with a property management company to make ongoing decisions about the property e.g. After all, you simply buy a piece of property, rent it out, and then collect the checks every month from your tenants.īut unfortunately, this is not a passive real estate strategy. Many investors mistake this business model as being “passive” because it’s easy to imagine the strategy playing out perfectly. Many investors starting out on their real estate journey envision buying and renting out a piece of residential property, such as a single-family home, condominium, townhouse, or perhaps a small multi-family complex like a duplex or triplex.
But before we dive into the benefits, let’s clarify what this type of investing is and explain how it is different from active investing. Being a “hands-off” passive investor can be one of the most powerful ways to make your money work for you. Real estate investing can be truly passive, but it might not be in the way you think.
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