What It Is & How To Get Started

When thinking about investing in real estate, you might consider running a small rental business as a landlord. Or maybe you’re thinking of doing something like Airbnb hosting or home hacking to get started.

But if you’ve ever managed a rental or know someone who has, you probably know it can have some issues. And even if a rental business is running smoothly and you have great tenants, it’s still a lot of work to manage one or more properties and keep up with maintenance.

Fortunately, not all types of real estate investment need to be so active. In fact, there are several reliable passive real estate investment strategies that you can use to generate income without actively managing properties.

What is passive real estate investing?

Passive real estate investing involves generating income from real estate properties without having to actively manage them. Owners typically achieve this by outsourcing property management responsibilities to professional companies. But you can also explore completely passive investment options, such as crowdfunding or REITs, which I’ll cover below.

The goal of this style of investing is to reap the benefits of real estate, such as steady cash flow and potential property appreciation, without having to give up your time. And while real estate sometimes requires some upfront work, it’s very possible to turn your investment into a semi- or fully passive business.

How to get started with passive real estate investing

There are several ways to add real estate to your investment portfolio while keeping things passive. Some methods require more capital and upfront work than others. However, the following strategies can become completely passive or mostly passive investments.

1. Use real estate crowdfunding

One of the easiest ways to start passive real estate investing is to use crowdfunding sites. These platforms pool money from investors to buy income-generating commercial and residential real estate. As a shareholder, you earn cash distributions from rental income and can also gain from property price appreciation and eventual sale.

We love crowdfunding platforms at Investor Junkie because they are an easy way to invest in real estate for beginners. In fact, several platforms do not require you to be an accredited investor to join. And investment minimums can be as low as $10.

Fundrise is an excellent starting point due to the low minimum investment and low annual fee. But RealtyMogul and Streitwise also allow you to add real estate to your portfolio without needing hundreds of thousands of dollars.

And crowdfunding is a completely passive investment. These companies work with their own network of property managers to find and manage tenants. The only thing investors need to worry about is when the distributions are paid and ultimately the shares will be cashed out.

2. Work with a property manager

Another option for passive real estate investing that you can explore is to run your rental business through a property management company. In other words, you can become a homeowner and buy single-family rentals or even multi-family homes if you have enough capital. But you can outsource tenant and property management to a local property management company to handle the active work.

The advantage of this strategy is that you get to own capital in properties without having to actively manage them. However, the downside is that you have to pay a property manager to manage your business.

According to Roofstock, property managers typically charge a one-time setup fee and ongoing management fees. Typically, this management fee is around 10% of the monthly rent. Property management companies also charge various lease fees if they have to find new tenants, lease renewal fees and even maintenance fees.

This can get expensive quickly, so it’s important to understand your property’s cash flow, profit margin and how much you can afford to spend on professional management. But if the math checks out, this strategy can create a passive real estate investment that also allows you to enjoy the capital.

You can also purchase single-family properties through Roofstock and then work with their team of property managers for a full-service solution. Our Roofstock review explains how the platform works and its pros and cons.

3. Invest in REITs

REITs, which are real estate investment trusts, are another passive real estate investment vehicle similar to crowdfunding. A REIT is a company that owns and operates income-producing real estate. By law, REITs must pay out at least 90% of taxable income to shareholders in the form of dividends, making them an attractive income-generating investment..

There are also numerous types of REITs that you can explore. For example, REITs may focus on different sectors, such as healthcare or retail. There are also residential and commercial REITs that invest in very different types of real estate.

The easiest way to start investing in REITs is to search for publicly traded REITs through your online broker. There are a variety of REIT ETFs and mutual funds, and you can also invest in individual REITs. Some REITs are not publicly traded, but you can work with individual brokers or some financial advisors to invest in non-traded REITs.

The main downside to investing in REITs is that growth is generally less than investments like growth stocks, since REITs pay out most of their income as dividends. But it is another passive real estate investment strategy that is very popular and simple. And lack of liquidity is not a high risk if you stick with publicly traded REITs.

4. Run a passive Airbnb business

After graduating from college, I spent some time living in Medellin, Colombia. During this time, I shared an apartment with a man from New York who was traveling through South America for a few months.

When we started talking about work and business, he told me he had an Airbnb network in New York. And even though he was on the road for months at a time, his Airbnb business was thriving at home, bringing in steady rental income every month.

I couldn’t believe it at the time, but after doing a little digging, I found that the “remote Airbnbs” side hustle is definitely very real. And it’s pretty simple on paper: You buy an Airbnb rental in an attractive market, put in some remote management systems, and work with a rental manager to clean and manage the place between tenants.

Airbnb makes it super easy to manage your listing and communicate with renters through their app. And if you use systems like a safe or keypad access, guests can unlock your home without having to be there. After they leave, all you have to do is pay a cleaning company or property manager to prepare the unit for your next guest.

This strategy is how people manage Airbnbs in states like Arizona, California and Florida while living thousands of miles away.

Personally, I think it’s still a riskier type of passive real estate investment, since serious property damage or problems aren’t easy to fix remotely. But if you’re on the kind of schedule where getting on a last-minute flight isn’t a problem, maybe this risk isn’t as big of a concern.

Additionally, you must factor Airbnb host fees, taxes, and cleaning/management fees into your profits. And if you’re not getting enough bookings per month, you’re probably making less than if you were going with a long-term single-family rental. But in tourist areas, Airbnbs charge a premium, which is why some hosts are moving and buying Airbnbs in busy markets.

Pros and cons of passive real estate investment