A-to-Z Guide to Passive Real Estate Investing Income

Passive investing in real estate is a way for investors to have a financial stake in real property without all the hassle of hands-on management and the time that entails.

Some real estate strategies using passive investment can also offer small investors an opportunity to earn profits through ownership of real property.

Passive income from real property can come in the form of dividends, increased property appreciation, increased stock value, or cash from corporation or trust investments after a real property sale.

After reading this guide, you’ll understand how to invest in real estate for passive income and have the foundation to become a passive real estate investor.

Comparing active investing with passive property investment superficially involves the amount of time and personal effort the individual takes to purchase, occupy and provide maintenance for real property, typically a rental property.

The Internal Revenue, however, has specific guidelines in classifying rental real estate as active or passive.

Passive investing is easier to define. It’s a term used to describe others completing the process of acquisition, management, and maintenance of real property.

The investor doesn’t do anything except personally select a type of investment and then receive the income, appreciation, or profits from that investment.

If you want to invest in real estate but don’t want the hassle of an active investment, one way to eliminate the time and extra expense of hands-on, active investing is to build passive income with real estate.

The next segment in this guide outlines the ways of creating passive income with real estate.

Some strategies to build passive income with real estate require only a minimal cash amount and access to a regular stock trader.

Others require larger cash infusions and the assistance of an investment specialist with contacts to property developers and operators, trusts, investment funds, and other real estate private equity firms.

Read on to learn how to passively invest in real estate.

#1 Turnkey Property Investing

“Turnkey” is an industry term that’s used for properties that have no major material defects and require no repairs or remodeling. A material defect is something that would reduce the value of the property.

Turnkey property rentals supervised by a property management company can offer property investors a way to cash in on real estate appreciation without becoming an active landlord.

The rental payments can also offer investors a cash return before the sale of the real property.

Turnkey properties are just one way to earn passive income by investing in real estate. There are many others.

#2 Real Estate Investment Trusts

A real estate investment trust, also known as a “REIT,” owns, manages, and/or operates income-producing properties.

These properties can be commercial or residential. Many REITs are securities that trade on major exchanges.

If the REIT is on a public exchange, investors can buy and sell shares through a broker or an online brokerage.

When the REIT isn’t listed on an exchange, share owners must wait for the REIT to liquidate to exit the trust. Each trust has different terms, and some may assess a penalty for early withdrawal.

REITS must distribute 90% of their taxable income to shareholders, according to federal tax laws.

Most REITS pay quarterly dividends on shares, but some pay monthly or semi-monthly. Since their creation in the 1960s, REITS have offered one way to get passive income from real estate investment.

#3 Real Estate Investment Funds

A real estate investment fund (REIF) organized as a corporation solicits investors to pool cash to buy residential and commercial real property.

REIFs’ passively managed funds typically offer a portfolio of investments that also include stocks and bonds, in addition to real property.

While REITs must distribute taxable income through dividends, REIFs have no such rule.

There are several types of REIFs, including:

Real Estate Exchange-Traded Funds (ETFs): ETFs are traded on the market and are open to the public for investment. ETFs use an underlying index, a collection of stocks, to return profit to individual investors.

Real Estate Mutual Funds: Mutual funds offer a passive way for investors to purchase a portfolio of professionally managed real properties.

The pooled money purchases a variety of real estate. Investment is open to the public, but funds typically set a minimum buy-in amount to participate.

Real Estate Private Equity Funds: Equity funds typically aren’t available to the general public. Targeted investors include institutional investors and people with exceptional worth.

REIFs offer another way of owning real estate for passive income.

#4 Real Estate Syndication

A real estate syndication is a corporation that solicits money from individuals in order to purchase real property as investments.

The corporations generally require a minimum investment to buy into the syndication.

The person serving as the syndicator typically invests some personal cash, but then solicits other investors in order to purchase real property.

Investors pay additional acquisition, management, and disposition fees to the syndication.

Understanding how and when these real estate syndication fees apply, especially during the exit phase, is an important part of evaluating the full investment picture.

Investors wanting to invest in a syndication must locate a reputable real estate investor with a history of sound investments that involve syndicated real property.

These days, this type of investment is done via real estate syndication platforms.

#5 Real Estate Crowdfunding

Crowdfunding raises capital for a real estate venture by collecting smaller amounts of investment cash from a collective of people rather than from one or two investors.

Real estate crowdfunding allows investors to buy into a property for a percentage purchase price typically by using the internet or a computer application tailored specifically for real estate investment.

Crowdfunding collects capital for passive commercial and residential development. It can fund new housing or purchase existing units that will then be rehabbed and converted to rental property to return dividends to investors.

The advantage to the investor is they don’t need to qualify personally for a mortgage, and they can participate as a passive owner without the need to do hands-on activity with the property.

Shares in a real estate crowdfunded property typically incorporate the costs associated with the property purchase.

Maintenance and ongoing fees and taxes are deducted from the income produced by the property. Dividends are then paid to the investors from the remaining funds.

Crowdfunding is a relatively new way to build passive income with real estate, and it’s done with real estate crowdfunding platforms.

While some crowdsourcing investment opportunities are open to the general public, many are restricted to investors with a high, regular source of income.

Crowdfunding groups typically aren’t publicly held or traded.

#6 Triple Net Leases

Commercial triple net leases, known as NNN, may include a single tenant of real property, such as a fast food franchise, or a number of tenants, as in a shopping mall.

The cost of the lease varies with the strength of the tenant’s credit. Big-box vendors typically pay less than mom-and-pop leasees.

The NNN includes the net of taxes, net of insurance, and the net of maintenance (of the common area). The utilities are also included under maintenance.

A triple net lease differs from a “bond-type lease.” Tenants are responsible for the physical structure in the bond arrangement, while the physical property owners are responsible for the structure in a triple net lease.

Property owners in triple net leases hire a management company that charges a fee to ensure the property is functioning.

Owners also charge a CAM, or common area maintenance administration fee. This fee pays to operate the area shared by all the tenants.

The tenant in triple net leases pays for everything. The owners/landlords don’t absorb any of the expenses.

Some financial advisors or property developers have opportunities for investors to buy into NNN leases.

These offerings are typically reserved for seasoned investors who have a firm grasp of market conditions and the risks involved in the investment.

Below are a few companies through which you can passively invest in real estate. Among them are turnkey rental companies, crowdfunding platforms, and REITs.

Rent to Retirement

Rent to Retirement (RTR) offers turnkey property rentals for people looking for passive real estate investments.

RTR has a wide selection of turnkey properties located in various geographic regions across the country.

Rent to Retirement provides the expertise to select varied property investment opportunities and the management skills to keep the properties rented and maintained in turnkey condition.

The monthly income from the passive investments flows from the properties to the investor every month.

While older turnkey properties require considerable cost to keep the inventory looking attractive and new, RTR focuses on a portfolio of new rental construction opportunities that require less money for maintenance and upkeep.

RTR also offers investors access to individualized online education information and media courses through their proprietary Academy.

Instructional materials, media center, blog, and interactive counseling are available to the public for a one-time fee.

The Academy offers instruction on the various strategies for passive investing, and also explores the best investments in retirement products like IRAs or 401(k).

Read our detailed Rent to Retirement review to learn more about this company.

REI Nation

REI Nation offers investment opportunities in turnkey single-family homes and also investment in property management services.

Turnkey property management includes real estate purchased through REI Nation, as well as turnkey process for homes purchased through others that contract with REI Nation for services.

Passive investing with REI Nation is open to new investors without any properties in their portfolio, as well as seasoned investors with a volume of investment real estate.

REI Nation’s services include investment property renovation, premiere property management, and customer service staffing that’s available for each of the firm’s services.

Clients with five or more properties managed by REI Nation become members of the exclusive WOW Group.

Membership includes the services of a dedicated management member, preferred rent schedule, reduced monthly management fees, and exclusive webinar opportunities.

Landa

Landa is a cloud-based real estate crowdfunding platform that allows investors easy access to important information necessary to make investing decisions.

The mobile app allows trading through both iOS and Android devices.

Investors can make passive property investments through Landa via a system that divides the real property into shares. Inventors can also participate in lending on real property investments by using the app.

Users have instant access to information about a property and the activity related to the potential investment.

That information features the management fees, property taxes, and the history of dividends paid on the passive investment properties. The documents supporting this information are also available on the app.

Landa also individualizes the investment experience by providing a personal account and a portfolio where the investor can see investment history.

The app also allows the user to set filters to meet individual investment preferences, such as the type of property preferred and the expected dividend amounts the property will return.

Read our detailed Landa review.

Arrived Homes

Arrived Homes, also known as Arrived, is a crowdfunding real estate investment platform that is open to the general public and allows passive investment by using the platform’s app.

Arrived Homes focuses on single-family residences and vacation rental properties.

Investors can select from short- or long-term held rental properties, and determine the number of shares in a particular investment that align with the investor’s budget, preferred property type, and geographic location, expected dividends, as well as the preferred term to hold for the property to appreciate.

Dividends are paid quarterly for each property to individual investors.

Read our detailed Arrived Homes review.

REITs

REITs offer a common entry to the passive investment market. A number of REITs have returned major dividends and continue to appreciate in value.

Public Storage (PSA), a company founded in 1981, is the largest self-storage rental company in the United States.

PSA purchases land for sale in prime areas that appreciates in value while also collecting rental storage fees that return a dividend to passive investors.

PSA also offers reinsurance to self-storage clients for the stored goods. The REIT pays a quarterly dividend and typically a high return on investment.

REIT investors have an opportunity to purchase shares of Medical Properties Trust (MPW) for a price that’s more in line for entry-level investors.

MPW owners include institutional and individual investors and the general public. Founded in 2003, the trust invests in hospitals and centers as well as medical office buildings — facilities that Americans currently need and will continue to need in the future.

Your return depends on how savvy you are in selecting the passive investments and the amount of liquid capital you have to invest, but most who invest in passive real estate target 10% as the minimum return they expect to see on their investment.

It’s possible to see a much higher return on your passive investment in a sizzling hot real estate market, but passive investors who hold long-term properties typically average the hot market years with other slow-moving annual markets.

Passive investors earning the highest ROI are those who closely follow the markets and are on the front of shifting market trends.

Passive investments on single-family rental units may earn the highest ROI one year, for example, but the trending market then shifts to multifamily rentals.

A passive investor with the skill to move quickly in and out of the new market surge will have the highest return on their investments.

Passive investments don’t offer the same returns as active real estate investments in most markets, but the investor also doesn’t have the significant risk posed with active investments.

Returns aren’t guaranteed in any sort of real property investments, active or passive, but when the investor works with professionals who have expertise in real estate investing, the chances for a larger return are significantly greater!

The Internal Revenue Service defines passive income as business activities that an investor doesn’t materially participate in during the year.

Rental activities are also considered passive income, unless the investor operates as a professional landlord or property manager.

The rental activities can include your active participation, for the private individual investor, and still be considered passive by the IRS.

Passive income is usually taxed according to the investor’s usual marginal tax rate. That rate is based on the person’s tax bracket for that year.

What is the most passive form of real estate investing?

REITs and real estate mutual funds offer the most passive form of real estate investing.

They also have the most consistent return for the investor, although it’s not always the highest amount compared with other types of real property investing.

Is rental property considered passive income?

Rental property is typically considered passive income when the investor owns the property and even when the investor does the management for that real property.

Rental property owned as part of a fractionalized ownership agreement, like a REIF, syndication, or a REIT, is also considered passive income for tax purposes.

What is passive turnkey real estate?

A passive turnkey real estate investment is one that requires no initial investment to upgrade, remodel, or modify the property before renting or resale. These investments could be single- or multifamily properties.

The real estate turnkey property is also managed by a professional firm that takes a fee for their services.

Investors might receive a return on their passive turnkey investment through rental fees or when the property is sold.

How are small investors making passive income in real estate?

There may be many opportunities for small investors to make significant passive income in real estate, depending on the market.

Entry-level and small investors can make passive income with minimal investment by purchasing shares of REITs, ETFs, or through crowdsourcing real estate offers.