Passive Real Estate Investing in 2023

Passive real estate investing is a strategy where an investor puts money into a real estate venture but is not actively involved in the day-to-day management or decision-making of the property or properties.

Passive real estate investing is an excellent opportunity for commercial real estate investors who are less interested in being landlords and more interested in generating passive income.

With a rental property market that contains over 48 million units, CRE investors are beginning to see the advantages of passive investing in multifamily properties like apartment buildings and condominium complexes.

If you are an accredited CRE investor, EquityMultiple can offer you private market commercial real estate to passively invest in. All investors, however, can take advantage of this investment guide and learn more about the innovative investment strategies that make passive real estate investing possible.

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 the appreciation.

Once the investors supply the necessary capital, sponsors will provide their expertise and execute the project’s business plan. By working with a sponsor, passive investors do not need to acquire, maintain or actively manage their properties. Investors simply allocate funds, then receive distributions throughout the lifetime of their investment.

For example, passive investors investing through a CRE platform like EquityMultiple can rest assured. Every commercial investment has been fully vetted by our real estate team and will continue to be maintained and managed on the investor’s behalf.

Active vs. Passive Real Estate Investing

When it comes to real estate investing, there are three involvement levels that investors can choose from. Standard active and passive real estate investing strategies are the most popular.

Many passive investors regard private real estate as a necessary complement to a “buy and hold” public equities strategy. Active real estate investing with passive management, however, is another effective option to consider. Here is a brief overview of what each investing strategy entails:

• Active real estate investing requires 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. Active investors purchase a rental property, oversee its daily operations and perform management duties.
• Passive real estate investing is almost entirely hands-off. Individual investors select assets that interest them, contribute some capital and then count on the sponsors to deliver returns. 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.
• Active real estate investing with passive management is a flexible strategy that can potentially work well for seasoned investors who want to hand-select every investment in their portfolio. Niche commercial real estate investors, for example, can acquire their own real estate and work with a property manager to manage and maintain the property on their behalf.

EquityMultiple delivers another benefit to accredited CRE 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 passively invest in multiple assets for as little as $10,000.

“I want my investments to be very passive, so for my rental properties, I never considered that I would manage those myself. And when it comes to EquityMultiple deals, I see a lot of value in their due diligence and vetting of the deals on their platform.”

— Colin Webb, EquityMultiple Investor

How to Invest in Real Estate for Passive Income: 4 Types of Passive Real Estate Investments

Passive real estate investing is an umbrella term that encompasses investing strategies like crowdfunding, remote ownership and real estate funds.

There are multiple ways that both accredited and non-accredited investors alike can begin to generate passive income. Here are a few passive real estate investing examples that accredited CRE investors may enjoy.

Real Estate Funds

Real estate funds provide value through appreciation and are typically a broader form of mutual funds that can target REITs. This type of fund is usually more long term than REITs and shares of mutual funds are normally traded and highly liquid.

Generally, private real estate funds offer more of an opportunity to tap into alpha (returns driven by skilled management and asset selection) and are less volatile than traded funds and REITs.

EquityMultiple offers numerous private funds, including debt funds and private real estate funds offered through major multinational asset managers.

REITs

REITs, or real estate investment trusts, are companies that acquire, maintain and finance real estate opportunities that generate income. This model is comparable to investing in a business via dividend stocks.

When you invest in a REIT, you will receive regular dividend payouts. This investment strategy is extremely liquid and can allow investors to take advantage of multiple real estate asset types, including multifamily and industrial.

Crowdfunding

Crowdfunding platforms allow investors to pool their money with other investors and split returns accordingly. This strategy offers more transparency and pride of ownership for investors who still want to feel involved in their investment decisions.

If you do not have the capital to acquire an entire multifamily complex, crowdfunding platforms can offer you a way into the commercial real estate market. The best part is that this strategy can typically be done entirely online.

Crowdfunding is more passive than direct ownership but less passive than investing in a REIT since the investor is generally choosing specific assets to invest in. Note that real estate crowdfunding platforms vary quite a bit in term of how hands-off you can be with your investment. Some function more as a marketplace, connecting a crowd of investors with a sponsor who is looking to raise capital. In this case, you may need to do more due diligence on your own. EquityMultiple functions more as an asset manager, doing extensive vetting and asset management on behalf of investors.

Remote Ownership

If you are comfortable putting the day-to-day decisions into someone else’s hands, then remote ownership could be a viable way to generate passive income.

Remote ownership can take many forms. Most of them include remotely communicating with maintenance and management companies on a regular basis. This passive investment strategy was designed with portfolio diversification in mind.

Since communication can typically be done entirely online, CRE investors are awarded the opportunity to tap into faraway markets they would otherwise not have access to.

Update — July, 2023

Passive real estate investing has come into greater focus this year as capital markets continue to fluctuate. The 60/40 portfolio had a historically bad year in 2023. Many investors are turning elsewhere for sources of passive income. Passive real estate investing may provide an option for investors in terms of income and long-term growth potential. As we potentially enter a “quasi-stagflationary” period, commercial real estate (particularly asset classes like self-storage and multifamily) can potentially provide a timely investment thesis. Further, compelling risk-adjusted returns and income may be emerging in private CRE debt. Passive real estate investing through a platform like EquityMultiple can help you tap into these varied opportunities at a low barrier to entry.

Is Passive Real Estate Investing Right for You?

Passive commercial real estate investing may generate regular cash flow without the headaches of being a landlord or developer. Using this strategy, investors are able to diversify their portfolios at scale.

Working with a sponsor or management company, however, also has associated risks and considerations. Below are some of the key benefits and risks of passive real estate investing that non-accredited and accredited investors should be aware of.

Benefits of Passive Real Estate Investing

Individuals can invest passively in real estate via real estate investment trusts or direct real estate platforms like EquityMultiple, which offers access to exclusive direct private market assets. Passive real estate investing is more than just a way to earn uncorrelated returns. Here are a few of the many benefits associated with this sought-after investing strategy:

• Lower initial investment options are available for both accredited and non-accredited investors interested in earning passive rental income. At EquityMultiple, you begin earning passive income with as little as $10K.
• Little to no physical labor is involved when you invest in passive real estate ventures. By working with a sponsor, investors don’t have to spend time or energy vetting tenants, maintaining properties or marketing their real estate.
• Tap into the expertise of professional investors by working with sponsors who have a “boots on the ground” presence. When you work with direct real estate platforms like EquityMultiple, a professional investor will work behind the scenes to generate returns on your behalf.
• Less liability for passive investors when investors work with a general partner (GP) or sponsor. When you invest passively, you typically just need to know how to add investment capital to your account, and when to expect property updates and return payouts. The (GP) handles the rest.

Historically, private real estate has exhibited less volatility than the S&P 500, making passive real estate investing an attractive wealth-building strategy. Investors can also benefit from unique tax considerations while expanding their portfolio.

A recent New Investor Webinar introduces prospective investors to commercial real estate investing and the EquityMultiple platform

Risks of Passive Real Estate Investing

Despite its name, passive real estate investing is not always entirely passive. This type of investing strategy is still subject to typical commercial real estate risks like vacancies. Here are a few other risks associated with passive real estate investing:

• Active investing may carry higher profit potential than passive strategies. When actively investing in real estate, you are in full control of your investment. The physical labor and time that you put into acquiring and renovating investment properties can potentially earn you higher returns compared to passively investing in real estate with the help of a sponsor.
• Trusting a sponsor to acquire properties on your behalf is not always required, but does force you to leave some important decisions in the hands of a professional investor overseeing multiple portfolios. Although it is possible to take a hands-on approach to CRE property acquisition, that strategy makes passive real estate investing a little less passive.
• You will most likely not be the point of contact for your passive real estate investment property. This means that if something were to go wrong with your real estate, then it is up to a team of other people to handle the matter promptly and responsibly. This can be a difficult adjustment for investors who are used to being in full control.
• Added fees are normal when you allow someone else to manage your real estate investment. Fees associated with passive real estate are common and can add up quickly. Consider these fees a payment for the convenience and expertise that passive real estate investing offers.

If you are comfortable leaving your real estate investment portfolio in the hands of professional investors with years of experience? If so, generating passive real estate income may be for you, and these considerations may not seem like cons at all. No matter how passive your investments in real estate may be, it is worth taking a moment to understand the underlying structure of your investment. Your investment platform may offer varying degrees of intermediary diligence, asset management, or structuring. EquityMultiple, for example, structures investments to provide a higher degree of protections to individual investors, whereas other platforms may operate as more of a laissez-faire marketplace, leaving investors to deal directly with sponsors.

At EquityMultiple, we offer accredited investors the opportunity to invest in private commercial real estate without the hassle of being a landlord. Our experienced Real Estate Team carefully underwrites each opportunity and vets all sponsors. That said, we always suggest conducting your own due diligence. If you would like to evaluate the return possibilities, fee structures and investment minimums of various passive real estate investment options for yourself, please review our FAQs, or connect with our Investor Relations Team for more information.

Passive Real Estate Investing FAQs

Does direct ownership of property yield better return than passive real estate investing?

This is too broad a question to answer definitively. Direct ownership of property removes a layer of fees and involvement of other parties. Therefore, direct ownership of property by a skilled operator may yield greater return potential than passive real estate investing. However, many individual investors lack the time, capital, or experience to buy and manage property. In either case, passive real estate investing (REITs and real estate crowdfunding) feature much lower minimums versus a downpayment on property, and hence can offer greater diversification potential.

How does passive real estate investing compare with investing in stocks?

Both real estate investing and investing in the stock market can be accomplished passively. Given the advances in fintech over the past decade, it is quite possible for an individual investor to amass a portfolio that includes stocks, bonds, real estate, and other asset classes without actively managing any assets. Depending on the timeframe and various parameters, passive real estate investments may perform better or worse than the stock market. Generally real estate will offer more tax advantages than investing in the stock market. Ultimately, diversification is key and passive real estate investing could be a great addition to a portfolio that already includes exposure to stocks.

Does passive real estate investing offer the same tax benefits as direct ownership of property?

Depending on the structure of the investment, passive real estate investors as LP participants may realize similar “pass through” tax benefits. However, tax treatment of real estate investments depends on many factors, and you should always consult with a tax professional.

As always, happy investing.

EquityMultiple.com