There are many ways to make money and get rich, but there aren’t as many options to create generational wealth. Over the last two centuries, about 90 percent of the world’s millionaires have been created by investing in real estate. I am not trying to tell you that you can’t make money by other means, in fact; quite the opposite. You should be buying a solid collection of long-term holdings; balanced across multiple industries, sectors, market capitalization sizes, and even countries. Having a well-balanced portfolio that can withstand the ups and downs of the stock market should be the goal of any investor.
Passive investing in regards to indexes uses market-weighted indexes and portfolios to invest funds to reduce fee associated with more active investment strategies such as day trading. What I want to share with you today is the contrast between passively investing in real estate and actively investing in real estate. What you will discover as you read this article is some people only passively invest, others only actively and some do both. Let me state, there is no right or wrong answer. Each investor has their own circumstances they must consider whether that’s someone who is just getting starting investing in their early 20’s or someone who is nearing retirement. Each strategy can be a winning strategy if you play your cards right.
There really isn’t anything better than making money while you sleep, also known as mailbox money. Passive investing in real estate is a good way to make money with little to no effort on your part. Let me make one point here, just because you are investing passively doesn’t mean you don’t have to spend time researching the opportunities and operators out there. Similar to when you are investing in the stock market you will be spending considerable time researching the company and what makes it unique; additionally, you will also be looking at the leadership of the company to see if they are someone who can keep the momentum going. You will also have to dedicate time into reading the quarterly reports to make sure your money is still safe.
3 ways to passively invest in real estate
1.Buy shares of a REIT
Real estate investment trusts (REITs) are an alternative to buying real estate actively. They are very similar to the stock investing. REITs have been around since the 1960’s, they buy large sums of real estate assets and issue stock to be traded on the public stock market exchange. You can purchase different kinds of REITs. Some REITs focus only on one asset class whereas other invest in industrial, office, multifamily, residential, self-storage, health care, etc.
Some of the advantages to investing in a real estate investment trust are guaranteed dividends, low minimums, passive investment, liquidity and mandatory distributions to investors. Some disadvantages of REITs are declining property values will directly impact the value of the stock and dividends. They are more liquid, but if your trading in and out of stocks often, the fees will add up. The REIT can be affected by the flows of stock market. The last disadvantage of a REIT is your gains will be taxed at your ordinary income rate.
Crowdfunding is a method of raising capital by reaching out to friends, family and individual investors. This is often achieved by using websites in conjunction with social medial websites such as Facebook, Instagram, Twitter and LinkedIn. Crowdfunding platforms let you invest with low sums of money into many different offerings.
Syndicators and many other investors flock to these platforms because it magnifies their reach and ability to raise capital for their deals. Just like anything there are advantages and disadvantages to investing in crowdfunding platforms.
Some the advantages you will find with crowdfunding platforms are the following. It is really convenient, they make it easy to understand the opportunity and they streamline the process. Once an opportunity starts to get funded it provides you with social proof because a lot of people are investing and it gives you the ability to invest in new markets.
Some of the disadvantages to investing in crowdfunding platforms are the following. The real estate opportunity you invest in could fail horribly. It is critically important to vet the opportunity and operator before you write a check. Returns are not guaranteed so you could lose everything. Unlike REIT’s, it can be difficult to sell shares. Lastly, the crowdfunding platform itself could go belly up.
3.Invest in a Syndication
Real estate syndication is a way for investors to pool their capital and intellectual resources together to invest in properties way bigger than they could do on their own. Since the JOBS Act was passed in 2012 real estate syndications has become a great tool for many investors. Syndicates are commonly structured as special purpose entities, such as limited partnerships (LPs) or limited liability companies (LLCs). There has to be a lead sponsor, also known as the general partner (GP’s). This person is typically responsible for sourcing deal opportunities through relationships with brokers, financing the deal through relationships built with loan brokers, hiring a Rockstar property manager, working with attorneys to get all legal documents in order and finally raising capital from passive investors also known as limited partners (LP’s). To learn more about what a Rockstar should look like, check out my article Building Rockstar Teams.
Investing in syndications has many advantages. The lead sponsor typically has a lot of experience or they have someone on the team that does. Syndications allows you to diversify your investment by investing in different asset classes such as: multifamily, self-storage, mobile home parks and senior living facilities. It gives you the ability to invest in much larger properties than you would normally have access to. You have minimal risk because of putting all of your eggs into one basket, you can diversify your funds across many syndications. Syndications are a great hedge against inflation, because as prices goes up, you also have the ability to increase leases accordingly. Finally, you get the benefit of appreciation which is a phantom expense that you get to write off. Tax benefits are a huge bonus. The best syndicators use accelerated depreciation through cost segregation studies. If you want to learn more about what cost segregation see episode eight on my podcast called Generational Wealth Through Commercial Real Estate.
Some of the disadvantages of syndications are the following. You have limited rights as to the directions of the asset. Some syndicators give investors voting right and majority rules. Holding time can be a drawback of syndications, business plans can tie your money up for 3 to 8 years. As with the other passive vehicles mentioned before there is a lack of liquidity with syndications.
REIT’s, crowdfunding and syndications are the most common ways to invest in real estate passively. As you can see each model has pro’s and con’s, I am bias, but I personally like syndications because they give you the ability to know the general partner and have some level of control of what goes on with a particular investment. Bottomline, if you are a full time employee or a busy entrepreneur, investing passively in real estate can be a great way to grow your wealth passively.