“Even if you’re new to real estate investing, you’ve probably seen the success stories touted on social media. Real estate entrepreneurs with private jets boasting a glamorous lifestyle and “guaranteed returns.” Newbie investors extolling the virtues of “mailbox money,” passive income that flows in with minimal effort” writes Jay Schuminsky for Forbes. “There are many paths within real estate investing, all with their risks and rewards. Some offer great potential for steady wealth building. But remember, those that seem too good to be true probably are.”
Investing in real estate can be an excellent way to build wealth and to create a income stream. But active investment in real estate means taking a hands-on role in buying, owning and managing rental properties or fixing and flipping houses. It is very time-consuming — an average of 750 hours a year, according to the IRS — and requires deep pockets. Active investment is not for everyone.
On the other hand, passive investment, as its name implies, requires less active participation. It’s a great way to create wealth over the long term without actually having to renovate a property or be someone’s landlord. With passive investment you are paying someone to play an active role and therefore the return is potentially lower, but those active participants have the know-how to make an investment successful. For many investors, this is the way to go.
Of course, no investment is without risk. Always do your own due diligence, read contracts and pro formas and don’t be afraid to ask questions before making a financial commitment.
Here are three ways to make passive real estate investments:
Real Estate Investment Trust (REIT)
A REIT permits you to invest in property through the stock market. REITs are like mutual funds. Investors buy shares and managers invest their money into a portfolio of income-producing property like commercial property, apartment buildings, offices, data centers or hospitals. A good REIT will offer diversification in its portfolio, providing liquidity and long-term growth as well as balancing any short-term under-performance. REITs are legally required to distribute at least 90% of their taxable income as dividends to shareholders. They offer exposure to property types that most individuals couldn’t afford to invest in directly. Syndication.
When a group of investors pool their money as a limited partnership, it’s called a real estate syndication. Generally, the partners combine skills, resources, and capital to purchase and manage property they otherwise couldn’t afford alone. There are two distinct roles within a syndication – the investor and the syndicator (or sponsor) who acquires and manages the property.. Syndication can offer higher returns than REITS but also require more knowledge and carry higher risk.
Investors can also pool their funds online to fund a real estate project through crowdfunding. The process of identifying a property remains the same, as does the role of investor versus developer. Only with crowdfunding, the pool of investors will be much broader than just people the developer knows. Real estate crowdfunding has become increasingly popular over the last few years, and for good reason. Crowdfunding allows you to invest in assets that may otherwise be unavailable to you. You can turn to the internet to browse a bevvy of investment opportunities, some offered as little as $500. Crowdfunding can provide excellent diversification and returns are generally high — most crowdfunded deals that have completed have produced annual returns of over 14 percent.
Most importantly, crowdfunding gives you control over what you invest in, making it the perfect choice for impact investors. If you’re interested in crowdfunding and you want to invest in projects that make a difference to our cities and neighborhoods, look no further than Small Change.
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