Passive real estate investing sounds like a ticket to a life of relaxing on the beach, watching those dollars roll into your bank account. If only it were that easy.
Squeezing in some extra beach vacations certainly isn’t out of the question—but you’ll have to learn the ropes before diving into the world of real estate.
Find out how you can find success in passive real estate investing, and which strategy is the best fit for you.
The definition of real estate investing for passive income.
How to create passive real estate income.
How to get started in passive real estate investing.
The best passive real estate investment strategies.
The pros and cons of earning passive income in real estate.
Active vs. passive real estate investing.
If investing in real estate is worth it.
Check out more handy real estate articles:
What Is Passive Real Estate Investing?
Passive real estate investing typically involves earning an income from real estate without actively managing anything yourself. It’s a great way to generate a passive income without sacrificing too much time and energy.
But passive real estate investing isn’t black and white. You can choose your level of involvement depending on your investment strategy.
For example, you can earn some cash through real estate investment apps without buying any properties or becoming a landlord. This approach lets you bypass the physical labor and all the property owner’s typical duties.
But if you prefer a more hands-on attitude, you can also invest in tangible real estate and hire property and fund managers to run the daily operations and take care of all the details.
If you don’t mind playing the long game, passive real estate investing could be a nice fit. You can invest and hold onto your assets for an extended period.
How To Make Passive Income From Real Estate Investing?
How you make money depends on the method of passive real estate investing you choose. Most methods involve a hands-off approach, with a third party taking care of the investment decisions and management.
Types of passive real estate investing include:
Real estate investment trusts (REITs)
Real estate mutual funds
Remote ownership
Crowdfunding
Local renting
We’ll go into details further down—but before you choose your method, it’s important to identify your goals and preferences so you can choose the best strategy.
Find out how you can use interest to generate a passive income.
How To Get Started With Passive Real Estate Investing
Passive real estate investing can be a great way to generate passive income and build long-term wealth.
Here are some steps to get started with passive real estate investing—
Define your investment goals
Before investing in real estate, you need to figure out your investment goals.
Ask yourself these questions:
What is your risk tolerance?
What kind of returns are you looking for?
How much capital do you have to invest?
This will help you figure out what kind of real estate investment is the best fit for you and your financial situation.
Research the market
Once you have defined your investment goals, you need to research the real estate market.
You’ll have to get to grips with a variety of factors, such as:
The local real estate market
Supply and demand
Rental rates
Vacancy rates
Researching the market will help understand where you should invest your money and how you can generate optimal returns.
Choose your investment strategy
There are different passive real estate investment strategies you can choose from, including real estate investment trusts (REITs) and crowdfunding platforms.
Deciding on a passive real estate investment method depends on your investment goals, risk tolerance, and personal preferences.
REITs are one of the most popular passive real estate investing methods—but you’ll need to research and select a REIT that fits your investment goals.
Once you’ve chosen a REIT, you need to open a brokerage account. Then you can start buying and selling shares.
Decide on an investment property
If you choose to invest in a physical property, you’ll need to find one that meets your investment criteria.
Before committing to your investment, you’ll need to consider:
Location
Condition
Cash flow
Potential rental income
When looking into a property, you should also review financial statements, perform property inspections, and research the local real estate market.
Fund your investment
Once you have your eye on an investment property—and gone through the motions of research and inspections—you’ll need to fund your investment.
This can involve:
Using cash.
Getting a mortgage.
Investing through a crowdfunding platform.
Manage your investment
Passive real estate investing is called passive for a reason—but you still need to manage your investment to make sure it performs well and gets you the returns you’re looking for.
If you want some help, you can hire a property manager to oversee the day-to-day operations or regularly keep tabs on your investment portfolio.
Passive Real Estate Investing: Key Considerations
Before we dig deeper into the methods, there are some points to think about before diving into passive income real estate investing.
If you were going into the shoe-making business, you wouldn’t set up shop without researching which shoes are the most popular (maybe cowboy boots aren’t as profitable as you think).
The same applies to real estate investing.
It’s best to do your research and compare different investments, so you can get a clear picture before committing. Having some variety can’t hurt either—it helps reduce risks and maximize profits.
As with any venture, having a goal can keep you on track and focused on the result.
For more clarity, ask yourself these questions:
How much are you earning on your investment?
Do you want the money now or for the future?
What’s your budget, and how can you stick to it?
What are the risks, and how much can you afford to lose?
How involved or passive do you want to be?
Being passive doesn’t mean you have nothing to lose. Like with any investment decision, risks are always involved. Setting your intentions and finding the right strategy for your preferences can put you on the path to success.
Benefits of Earning Passive Income in Real Estate
So why passive real estate investing? Why not take a more hands-on approach?
Here are some reasons why investing in passive real estate is a popular money-making strategy—
Beginner-friendly: You don’t need to be a real estate expert to get in on the action. Crowdfunding and REITs are simple ways to get started, with property and fund managers taking care of your investment.
Time-saving: Time is precious. With passive investing, you can hand over the day-to-day responsibilities to a property manager and use your extra time and energy on other money-making ventures (or spending hours in the bathtub, whatever floats your boat).
Affordable: Like investing in fractional shares, platforms like crowdfunding let you put in what you can and pool your money together with other investors to invest in large properties that you wouldn’t have been able to afford alone.
Diverse portfolio: You get the opportunity to spread out your investments, rather than risk everything on one asset. Passive investing takes away geographical restrictions, so you have more freedom to choose the right investment and market for you.
Extra cash: Landing a seven-figure salary is a stretch for most of us. But passive investing is a great way to earn extra income and improve your wealth status (without working overtime in the office).
Real estate investor and mentor Chris Daniels says,
Earning passive income is key to any wealth creation strategy. There are only so many hours you can work a day, but your money can be working non-stop through compound interest and appreciation. Real estate gives you access to this—and if done correctly, can help you achieve your wealth goals
Chris Daniels Real estate investor and mentor
Downsides of Real Estate Passive Income
Investments of all shapes and sizes come with risks. Knowing what they are can help you avoid and manage them.
Here are some downsides to be aware of when going down the passive investing rabbit hole—
Lack of control: With less responsibility comes less power. If you’re willing to give up the driver’s seat, be prepared to put many investment and management decisions into the hands of someone else (choose wisely).
Unpredictable market: Many passive commercial real estate investments are low risk, but market fluctuations can cause property values (and your profits) to drop. Always research the market before sealing the deal on an investment.
Extra costs: If you’re considering local renting or putting your property on Airbnb, you’ll still have to foot the bill for any maintenance or damages to your property—even if you have a rental manager.
Low profits: While passive real estate investing can reward you with a decent amount of returns, it’s usually not as fast or profitable as active investing, where you get to keep all the profits for yourself.
Long-term investing: Fluctuating market means you could be waiting up to years to see any returns from your investments. So if you need some extra cash fast, this might not be the right path for you.
Passive Real Estate Investing Examples
You’ve set your goals and know what you want. (It’s green and rhymes with honey.)
If you’re serious about passive real estate investing, it’s worth weighing up your options to find the best strategy for your needs and preferences.
Here are some of the most popular types of real estate investing and some key estimates to consider:
MINIMUM INVESTMENT AMOUNT | AVERAGE RATE OF RETURN | LIQUID (CAN YOU SELL QUICKLY?) | |
REITS | $1,000–$2,500 | 9%–12% | Yes (1 day) |
Real estate funds | $30–$3,000 | 8%–11% | Yes (1 day) |
Remote ownership | $20,000–$75,000 | 9%–19% | Somewhat (typically months) |
Local renting | $20,000–$75,000 | 10–20% | Somewhat (typically months) |
Crowdfunding | $1–$5,000 | 5–26% | Often not |
The above investments could lose money in any given year. The above rates of return are what you can expect on average over the long term.
Let’s dig a little deeper into the different investment strategies—
Real Estate Investment Trusts (REITs)
PROS | CONS |
Managed by professionals. | Possibility of losing money if interest rates increase. |
Not necessary to have a deep knowledge of real estate. | REITs don’t gain as much appreciation as other investments. |
Range of REITs to choose from. | Tied closely to the volatile stock market. |
Real estate investment trusts (or REITs) are types of companies that work as trusts. They invest in real estate and have to payout at least 90% of taxable income to shareholders in the form of dividends.
You can earn cash by purchasing shares of REITs and compounding the high-yield dividends. And you can get some bang for your buck—REITs paid out an estimated $92.3 billion in dividends to shareholders in 2021. (Many use their retirement accounts to make investments, which are usually publicly traded.)
And the best part? REITs do most of the legwork by taking care of property ownership and rental collections (some will even fund mortgages or collect interest).
REITs are pretty low risk. Just be aware that you can lose money if the value of interest rises.
They’re also unlikely to grow in value like other types of investments. You can also avoid a lack of liquidity by opting for publicly-traded REITs.
Here are some popular REITs and passive real estate investing sites worth checking out—
Real Estate Funds
PROS | CONS |
A low-cost option for those with limited capital. | Typically requires long-term investing to gain over time. |
Less volatile, as they aren’t affected by the stock market. | The real estate market and interest rates can affect real estate funds. |
Highly liquid and publicly traded. | Returns are not guaranteed. |
Real estate funds are a type of mutual fund (a single collection of money put forward by investors that’s used to buy stocks and other types of investments).
But unlike other passive income mutual funds, a real estate fund only lets you invest in—you guessed it—real estate.
It also shouldn’t be confused with REITs, as real estate funds provide value through appreciation (increase in property worth) rather than through dividends.
Real estate funds typically invest in REITs and have them in their portfolio as a collection (rather than owning a single REIT).
Because you get value from appreciation, be prepared to be in it for the long haul. But if long-term investing sounds daunting, fund managers are there to take care of investment strategies for you while also managing your portfolio (by tracking performance, making buying and selling decisions, and managing risks).
Real estate funds come with low costs and aren’t usually affected by stock market volatility, but it’s still worth talking to a financial advisor to understand the ins and outs before getting stuck in.
They are also highly liquid as most real estate funds are traded on public exchanges—which means investors can buy and sell shares on a daily basis. However, the liquidity can also depend on the specific fund and the underlying assets it invests in.
Remote Ownership
PROS | CONS |
More time and energy for other investments. | Less control over your own property. |
Freedom to choose which area to purchase a property. | Greater upfront investment costs. |
Ability to travel while earning passive income. | Higher costs are associated with property upkeep, insurance, and vacancies. |
Remote ownership is exactly what it sounds like—owning a passive income property from a remote location.
The word ownership doesn’t exactly scream passive investing. Sure, remote investing comes with more responsibility, such as choosing the right markets, real estate companies, and property values.
On the bright side, you can hire a property manager to deal with all the landlord duties and upkeep of the property. By remote investing, you’re also not held back by geographical restrictions—giving you free rein on real estate markets.
And thanks to technology, you won’t even need to step foot on the property. Virtual assistants can show you around the site and keep you updated on your investment (you can even sign documents electronically using eSign).
This is great if you want some control but are also happy to hand over a large chunk of responsibilities. And if you’re trusting a property manager to take care of your investment, make sure you pick the right one (and don’t skimp on research).
Local Renting
PROS | CONS |
Rental properties can thrive in busy or touristy areas. | Lack of liquidity with long-term tenants. |
Freedom to choose when and where you want to rent your property. | Risk of property damage and tenant issues. |
You can take advantage of rental property tax deductions. | Extra management, maintenance, and mortgage fees. |
If you prefer local ownership, you can purchase a property and still get a relatively hands-off approach if you do it the right way.
Buying a property usually calls for an active approach—you need to organize your finances, do your research, find the right loans (and maybe have a meltdown in the process). This means your investment will come with a cost and could reduce the rate of return.
But once you’ve got the keys, you’re free to do whatever you want.
By hiring a property manager, you can earn a passive income through renting your property while they deal with all the landlord responsibilities.
You can also look into Airbnb and use a rental manager to take care of the management and cleaning duties.
You can communicate and collect payments online, so you’re not tied down to one location.
Of course, Airbnb will only deliver the big bucks if you’re in a touristy area or if you’ve got top-notch or unique property. If this isn’t the case, you might be better off sticking to traditional renting.
Crowdfunding
PROS | CONS |
Low minimum investments. | Must research the legitimacy of the crowdfunding platform. |
Simple and easy way to diversify your portfolio. | Low liquidity, depending on the timeframe of the investment. |
Potentially large dividend payments. | Dividends are taxed as ordinary income. |
If you’re a real estate newbie, crowdfunding is a quick and simple way to get started.
Crowdfunding is expanding. The global real estate crowdfunding market was valued at USD 1.3 billion in 2019 and is predicted to show a compound annual growth rate of 58.1% from 2020 to 2027.
Online crowdfunding platforms let you pool your money with other shareholders to invest in real estate that would’ve been too pricey or large of an investment to go for alone.
You can choose to invest in commercial or residential real estate, earning passive income by getting cash distributions from rental income or property appreciation and sales.
One of the best things about crowdfunding is that you can diversify your portfolio. By spreading your eggs across several baskets, you reduce the risk of losing a ton of money through a single investment.
You also get the chance to tap into other real estate markets, no matter where you are in the country. Fancy investing in five different markets in five different states? Go for it.
If this sounds like your cup of tea, take a sip, and browse through the top crowdfunding sites:
How Effective is Passive Investing in Real Estate?
The amount of passive income you earn depends on many factors. It’s important to do your research and find the best strategies before committing to passive investment in real estate.
Investing through REITs or crowdfunding is usually guaranteed to give you returns and is pretty accessible, even for beginners. But these returns probably won’t be as high as if you invested in property ownership—and it can sometimes prove tricky to cash out of an investment.
Local renting and outsourcing management typically generate more asset appreciation and cash income, especially if you’re in a desired or touristy area. But you’ll have to stay on top of your expenses to ensure a decent profit.
In general, remote ownership comes with the highest average returns (9–26%), followed by REITs, real estate funding, and crowdfunding. However, high returns usually come with higher risks.
Ownership requires an initial investment of $20,000–$75,000, which means you have more to lose if you face property damage, problem tenants, and changes to the property market.
On the flip side, crowdfunding is easy to enter with a low minimum investment—but won’t deliver the highest results and earning potential. And it comes with lower liquidity.
With that in mind, the effectiveness of passive real estate investing depends on your financial goals and how much money you’re willing to put into your investment.
Active Vs Passive Real Estate Investing
So you’re interested in the hands-off approach (that’s why you’re here). But we don’t like to pick sides.
When deciding on active vs. passive investing, real estate investor Martin Perdomo says,
Active investing involves finding the deal and executing your business plan, while passive investing means partnering with others and sitting back to earn passive cash flow or above average returns. Both options can be very lucrative—but how you invest depends on your particular situation
Martin Perdomo real estate investor
Here’s a quick breakdown of the main differences between active and passive investing strategies. Maybe it’ll tempt you to switch teams—
What is active real estate investing?
Active real estate investing involves more direct involvement and gives you the opportunity to take a more present role in your investments—using your time, money, and energy throughout the process.
As an active real estate investor, you could be involved in:
Buying the property
Construction and development
Property management
Repairs and renovations
Rental collections
This amount of responsibility and control sets active investing apart from passive real estate investing (which usually involves working with a property or fund manager to take care of these key duties).
Unlike passive investing, your hands-on role means you’ll have to put much more time, effort, and expenses into your investments. And, in some cases, you’ll end up taking up the role of a full-time real estate investor.
The more you put in, the more you stand to lose. Active investing is high risk, high rewards—you’ll face issues like difficult tenants, unstable market conditions, structural problems, and bad locations.
That being said, sometimes the gamble pays off.
What are the benefits of active real estate investing?
We’ve gone through the risks. But there’s a reason active real estate investing remains a lucrative investment strategy.
Here are some key benefits to consider—
Greater control: With active investing, you can sit firmly in the driver’s seat, overseeing and managing critical investment decisions. Trusting someone else with your cash can be hard, so keeping control could help you rest easy.
Flexibility: Being your own investment manager gives you the freedom to make any decisions without consulting a property manager. You can also buy and sell whenever you want—a quick exit strategy that can be difficult to do with passive investing.
High returns: Like with most jobs, the more power and responsibilities you have, the more you can gain if the investment is successful. Active investing can turn a large profit, as long as you avoid the risks.
Derek Sall, financial expert and creator of Life and My Finances, says,
Returns could be as high as 10–15% cash on cash returns—plus you’d get the appreciation of the property, which could be another 5% or more per year. In total, you could earn 10–20% every year (rather than 10% on the stock market).
Derek Sall financial expert and creator of Life and My Finances
To sum up, if you want to take a step back, with less risk but lower returns (all about compromise), passive investing might be the right strategy for you. Especially if you’re a beginner.
But if you’re willing to take on more challenges (along with a ton of responsibility and day-to-day duties), active investing is a great way to earn a sizable income while staying in control.
Read more about the BRRRR method to maximize your investment strategy.
Things To Know Before Passive Investing in Real Estate
Knowledge is power. If you want to succeed in passive real estate investing, here are some top tips to keep in mind before you splash the cash—
Be patient
Passive real estate investing isn’t going to deliver returns overnight.
Your income will likely be generated through rental payments or appreciation—so it could take months or even years to reach your financial goals (but your future self will thank you).
Don’t underestimate the workload
As the name suggests, passive investing means you can take a backseat in the management and running of your property.
But that doesn’t mean you’re out of the woods. Before you put your feet up, you’ll need to do your research, find the right investment opportunities, and make sure the company or manager in charge of your investment knows exactly what they’re doing.
Do your research
We’ve said it once (or twice), and we’ll say it again—doing your research is key if you want to succeed in any type of investment.
To make the right investment choices and decide on the best strategies, you’ll need to learn the ins and outs of the business.
There’s a ton of information out there, from real estate investment podcasts and videos to blogs and articles. And if you’d rather go old-school and chat with an actual human, you can speak to other passive investors in real estate through online forums or social media to get the inside scoop.
Don’t know where to start? Marco Santarelli offers some great tips on his Passive Real Estate Investing Podcast, and BiggerPockets has some useful videos on how to thrive in real estate investing.
Stay aware
The idea of watching the dollars roll in while you’re soaking up the sun sounds tempting—but it doesn’t quite work like that.
Whether you’re using REITs or a property manager to look after your investment, it takes a lot of trust to put your finances into someone else’s hands.
To make sure everything stays above board, you can ask for regular feedback on your investments, such as market values and updated reports.
Learning and growing as an investor can lead to greater and better things—so it’s fine to take a backseat when passive investing (just don’t get too comfortable).
Is Investing in Real Estate Worth It?
You can earn good money through passive real estate investing with wise investment decisions.
For example, REITs (Real Estate Investment Trusts) have the potential to provide returns ranging from 9% to 12% on average, while private real estate funds can deliver higher returns ranging from 8% to 11%.
Plus it’s a great choice for those who want a steady flow of cash without doing the legwork.
Passive real estate investing also gives you the chance to create a diverse portfolio—even for beginners who are just entering the world of real estate.
But investing comes with risks. So if this is just a strategy to get some fast cash, think twice—as you could end up losing. Before you invest in real estate, make sure you have enough savings to support yourself in case you face any obstacles.
Always have a budget so you don’t get carried away (it’s easy to do), and see how you can align different strategies with your financial goals.
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