Generating a passive income isn’t exactly as passive as it seems. The misconception behind it lies on this one word: passive. People who don’t know much about investing are under the impression that passive investing means just putting money in and not doing anything at all after that.
Any successful investor knows that you still have to be on top of things even if they are passive investments. You still have to monitor how your stocks and mutual funds are doing; otherwise, you might miss on certain opportunities brought about by market fluctuations. That or you could end up losing money for the same reason.
It’s pretty much the same with real estate investing. There is such a thing as hands off real estate investing. But it is entirely different from passive income. Let’s talk about it some more.
Mashvisor’s Guide to Hands Off Real Estate Investing
Before we really take a dive into hands off real estate investing, we need to first understand what it is and how different it is from other types of investing methods. We’re all pretty familiar with both active and passive income and how they can be generated.
Active and Passive Income Defined
Active income involves actively performing specific tasks and providing services that have to do with one’s job or career. This is what typically takes up most people’s schedules. It involves going to work and clocking in hours of service to generate income.
Passive income, on the other hand, is not as time-consuming as an active income source, but it doesn’t mean that you’re completely hands off with it. To put it in the context of making money in real estate, let’s say an investor decides to buy a property to help not just make a profit but also expand their real estate portfolio. The investor has a few options to choose from. He or she can choose to go with the fix-and-flip method, microflipping, or rental property strategy.
While all three methods may seem like good passive income opportunities, all three of them still require the investor to be actively involved to a certain extent.
House flipping generally involves buying undervalued properties and rehabilitating them to sell them for a profit. Scouting for the right house takes time. So does home improvement. And even if you’re working with a real estate agent, you still need to be involved in the sales process, especially during inspections and the closing. So essentially, it isn’t as passive as one would think.
Microflipping is pretty much a scaled-down version of house flipping, with the main difference being that it does not require any renovation or updates and can be done remotely with the help of technology. Just like the more common fix-and-flip approach, investors look for and buy properties that are below market value and sell them to house buyers online. They no longer need to fix the property, which speeds the process up, with deals usually being closed in as little as a week or two. The only thing is, unlike conventional house flipping, microflippers don’t earn as much.
Most folks have this misconception that owning rental properties is as good as it gets as far as passive income is concerned. After all, once you find the right tenant, you don’t have to do much except collect the rent at the end of the month. However, any rental property owner will tell you that it’s simply not the case. Owning a rental property, whether it’s a traditional rental or a vacation home, can take up a lot of your time, especially if you own multiple rental properties.
Related: The Best Way to Find an Income Property for Sale
You have to make sure that the house is in good condition and that everything is working well. Whenever specific issues arise, landlords and property owners need to address them immediately. The transition period between tenants can also be very time-consuming and costly with all the required repairs and maintenance work. Hiring property managers can help ease the burden, but you still need to be on top of things. Just because it says passive investing doesn’t mean you can detach yourself from your investment because other people are handling it. There is a big world of difference between being efficiently smart (or is it smartly efficient?) and being carelessly unaware.
So these three passive income sources aren’t exactly as hands off and hands free as you might think.
What Does Hands off Real Estate Investing Truly Mean?
True passive or hands off investment means having the ability to earn income on the side on autopilot. It means not having to be directly or indirectly present to manage the investments. A hands off investor thinks of ways how to become a property investor that 100% does not take up any of their time and commitment after the initial investment has been made.
A lot of people are looking for different ways to augment their income by looking at different investment opportunities, especially during these trying times. And while an investment may not be ideal for immediate returns (most are illiquid and require time to grow), they do help protect investors against the long-term effects of inflation. Well, of course, it will still depend on the type of investment, but ideally, prospective investors should do their homework before making any decision.
For instance, the previous examples mentioned (fix-and-flips, microflipping, and rental properties) all require different levels of involvement and commitment. However, all of them also require investors to conduct their due diligence to protect and grow their money. They need to gather the necessary market and neighborhood data that will show them how profitable a certain property is.
Regardless of whether they intend to resell the unit or rent it out, investors will benefit from performing thorough research and analysis on potential investment properties. Doing so will require the right investor tools like the ones found on Mashvisor.
Mashvisor is a platform that specializes in property location and profitability analysis to help investors make the wisest and most confident decisions, regardless of whether they go with rehabilitating and reselling properties or 100% hand off real estate investing. It has different tools that have helped thousands of investors locate the right properties.
The site’s users have access to different tools that allow them to locate a property like the Property Finder and the Real Estate Heatmap. These tools give investors access to updated and accurate information they can use to analyze whether a property is worth investing in or not. The Investment Property Calculator is used by investors to see if the math checks out based on the data they gathered from the site’s massive database.
Related: 5 Best Real Estate Investment Tools
For more information about Mashvisor’s tools and how they can help investors, be sure to visit the website here.
An investor can come up with a positive cash flow without being involved in the investment if they have the right real estate investment strategy. This not only allows the investor to get additional income but expand their real estate portfolio as well. Hands off real estate investing, therefore, is just about matching your investment needs and goals with providers and avenues that give you a sense of comfort and security.
Use Mashvisor’s Heatmap Tool to Find the Best Properties for Hands Off Real Estate Investing
Benefits of Hands Off Real Estate Investing
The following are some of the reasons why hand off real estate investing might work for you:
Tax Benefits
One of the ways a person can make a real estate investment that’s completely passive is by placing an upfront capital investment in a real estate syndication or private placement offering. This type of investment typically comes with tax-deferred cash returns allowing investors to hold on to more of their earnings for the entire duration of the investment’s hold period.
Leveraging Others’ Experiences and Expertise
When it comes to real estate investing, prospective investors can either go at it all by themselves, such as buying their own properties, or partner with other more qualified and experienced experts to help them navigate the investment process. Passive investors are presented with a great advantage when they join forces with people who have extensive know-how and experience in this industry.
No Dealing with Banks
Following 2008’s Great Recession, banks now require more documentation from loan applicants, not to mention the stress of having to wait for the entire loan underwriting process to be completed. Hands off investors are relieved of these burdens mainly because their investments are handled by real estate companies that already have existing relationships with banks and lenders.
No Hassles of Day-to-Day Management
Unlike traditional or vacation rental properties, hands off investors don’t have to deal with the daily hassles of managing operations. They don’t get late-night calls from tenants complaining about a clogged toilet or broken furnace. Neither do they have to ensure that the property is fully stocked with toiletries and other essentials.
Make Money While You Sleep
Perhaps the best thing about passive investing is how it gives investors the luxury of making money even as they do nothing. Of course, it can only be as active as one chooses to make it. Investors still need to perform their due diligence before they put their money into a certain investment. However, once they’re past all of the homework and paperwork and their investments have been processed, they automatically become equity owners in a real estate property venture, thus allowing them to grow their money without doing much.
Hands Off Real Estate Investing Options for Investors
Now that we’ve clarified what it really means to be a hands off real estate investor, the question we need to address is what options are there for investors who want to take this approach? If owning an Airbnb rental isn’t exactly as hands off as it seems or if an investor isn’t suited for rental properties, what other choices do you have?
Real Estate Investment Trusts (REITs)
Real estate investment trusts, or what is commonly referred to as REITs, are a great way for people to get into passive investing without actually having to buy and manage a property. REITs purchase and operate different types of income properties, such as commercial buildings, office spaces, hotels, condominiums, apartment buildings, and other similar properties. They are then bought and sold, like other regular stocks, on major stock exchanges.
This gives investors a chance to expand their real estate portfolio and generate a return on investment without having to deal with conventional real estate transactions.
Real Estate Investment Groups (REIGs)
A real estate investment group (REIG), on the other hand, provides access to income and appreciation with a more hands off approach compared to buying and managing a rental property. Being involved with one, however, will require access to financing and a greater capital cushion.
REIGs typically invest in rental properties through companies that buy or build rental homes. They then sell units to investors without passing on the responsibilities of managing the property.
The most common REIG structures are partnerships and corporations. However, real estate crowdfunding also falls under the REIG umbrella since it is also structured as a form of partnership.
Real Estate Syndication
Lastly, investors can also choose to go with real estate syndications. A real estate syndication is a type of investing method where groups pool their money together to use as capital to buy a large real estate property. It is typically structured as a Limited Partnership (LP) or a Limited Liability Company (LLC) and is not traded publicly on the stock market. Simply put, real estate syndications offer people a chance to become real estate investors with all of the trappings of an investment property and none of a landlord’s headaches.
Related: Real Estate Investing: 5 Simple Ways to Get Started
Is This Type of Investment Approach the Right One for You?
After all is said and done, the final decision is really up to you. Do you think this type of investment approach is the right one for you? Does it line up with your investment goals? What about your present situation? These are some questions you need to ask yourself to determine whether a hands off real estate investing approach is truly the right choice.
If you wish to be a real passive investor in every sense of the word, you need to consider all the options available to you, not just real estate investment. However, real estate investing offers a lot of great benefits that other conventional investment methods cannot, especially with rental properties.
Talk to a real estate agent or a more experienced investor for guidance. Get insight from them and take as much as you can to help you come up with the right investment decision. And when you do decide to invest in real estate, you have a friend in Mashvisor to help you find investment properties that offer the best possible returns.