Passive Real Estate Investing Explained

April 29, 2021
By Rachel Martinez

Broadly speaking, passive investing requires little to no effort for self-directed, individual investors. A classic example of this strategy is when individuals contribute a portion of their income toward a 401(k). You may be able to select which funds you would like to invest in but, generally, options will be managed by a financial services advisory group, so the account runs smoothly without your input. 

Passive real estate investing works in a similar fashion. Continue reading to learn about the definition of passive real estate investing, and how it compares to both active real estate investments, and passive equities. 

Key Takeaways:

  • Passive real estate investing may generate regular cash flow without the headaches of being a landlord or developer. 
  • Passive real estate investors are able to diversify their portfolios at scale. 
  • Historically, private real estate has exhibited less volatility than the S&P 500. 
  • Individuals can invest passively in real estate via Real Estate Investment Trusts (REITs) or direct real estate platforms like EquityMultiple, which offers access to private-market assets.

What is Passive Real Estate Investing? 

Passive real estate investing allows certain investors in a project to remain uninvolved in day-to-day property management while still receiving cash flow and/or capitalizing on appreciation. Passive investors do not need to acquire investment properties or make improvements themselves; they simply allocate funds, then receive distributions throughout the lifetime of their investment. This type of investment structure works because there is a symbiotic relationship between the passive investor, who provides capital, and the sponsor, who provides their expertise and executes on the project’s business plan. Learn more about the relationship between these two parties in this article.

Active vs. Passive Real Estate Investing

Active real estate investments require some amount of hands-on work. This type of investment may appeal to investors who want to get involved in real estate, and have the time to dedicate to being a full-time landlord. The general strategy is to purchase a rental property at an attractive going-in basis, unlock value, and then oversee its daily operations and management until you are ready to sell. As the commercial property owner, it would be your responsibility to deal with any leasing or maintenance concerns that come up. 

For instance, let’s say you are now the proud owner of a small 3-5 unit apartment building in an up and coming real estate market. Ideally, you can find reliable long-term tenants, in which case you would have no issues collecting rent. If, however, you end up with a bad tenant, you might have to deal with significant property damage or a lengthy eviction process.

Note: although it is possible to outsource some work to a real estate property management company, the act of buying and owning real estate is still active. After all, even the best property managers cannot make every decision independently. Even if day-to-day management is outsourced, the active investor must still navigate the buying and selling process as well as assuming any liabilities that come along with the investment. 

In contrast, passive investments are entirely hands-off. Individual investors select assets that interest them, contribute some capital, and then count on the sponsors to deliver returns. To put this another way, the sponsor typically takes on the role of the active investor or “General Partner (GP),” while passive investors take on “Limited Partner (LP)” interest in an investment. EquityMultiple delivers another benefit to passive real estate investors: the ability to diversify your portfolio at scale. Rather than tying up a large amount of capital in one or two properties, you can invest in multiple assets for as little as $10,000. Investors can even earn enhanced yields through investing in real estate debt and other bridge financing opportunities.

Passive Real Estate Investing vs. Passive Equities

Investing in equities can offer another way to build wealth through passive income streams. Investors often utilize a “buy and hold” strategy. Rather than selecting individual stocks and trying to time the market, passive investors typically opt for long-term investment opportunities. For example, they might invest in an S&P 500 index fund, and hold their position for years. This strategy affords a high degree of “beta” or returns driven by market performance.

The key difference between investing in passive equities and passive real estate is the level of cash flow over a given period of time. Dividend-paying stocks offer regular cash flow, but the typical yield ranges from just 1.5% to 5%. By comparison, EquityMultiple’s senior debt investments target annual returns of 6-11%*, and preferred equity investments target current preferred returns in the range of 7-12%*.

The stock market may also exhibit a high degree of volatility, especially in the midst of economic uncertainty. In fact, in the 20 years from 1999-2018, the S&P 500 exhibited nearly four times greater volatility than private real estate. Passive, private real estate investing has also historically offered a lower degree of correlation with public equities markets than REITs, due in large part to the illiquidity of private-market real estate assets. Hence many passive investors regard private real estate as a necessary complement to a “buy and hold” public equities strategy.

Passive Real Estate Investing vs. Stocks & Other Assets

For more information on passive real estate investing vs. stocks and common other investment options, please see this article.

How can I Invest in Passive Real Estate? 

There are two primary ways to invest passively in real estate:

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are companies that own or invest in income-producing real estate. While some REITs are privately traded or privately held, many are publicly traded, meaning investors are able to purchase shares on national stock exchanges. 

Direct Real Estate Platforms

Platforms like EquityMultiple provide individuals with access to private real estate investments for a small fee. After signing up and confirming they are accredited, investors can choose between distinct investments offering an array of risk/return profiles and strategies, including private funds. Business plans vary by project; but here are a few common things that happen on the EquityMultiple and sponsor side, while you remain a passive investor: 

  • Property sourcing and acquisition 
  • Renovation and improvement of deferred maintenance
  • Frequent check-ins with sponsors to review progress and asset performance
  • Proactively evaluating the asset’s performance to identify areas of opportunity and risk
  • Performing asset valuations for refinancing, and buy/sell analysis vs. original underwriting

The Bottom Line

Passive real estate investing is a great way to generate regular cash flow, without the headaches of being a landlord. Historically, passive real estate has also been less volatile than the S&P 500, which is closely tied to economic conditions. That said, diversification is the key to long-term success and mitigating portfolio risk. Individuals often choose to invest in a strategic combination of stocks and real estate or other alternative assets. 

If you are interested in generating passive income via a direct real estate platform like EquityMultiple, rest assured, every investment has been fully vetted by our Real Estate Team. No matter the approach, we will always work behind the scenes to maximize your returns. 

*Past performance does not guarantee future results

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