Passive Real Estate Investing Definition
Passive real estate investing is a method of gaining exposure to real estate whereby an investor deploys capital into a real estate venture but isn’t actively involved in the day-to-day management or decision-making of the property or properties.
When you hear “real estate investing” what do you think? If you’re like most people, you think of rundown rental properties, 3AM calls from tenants with clogged toilets, and cracked dry-wall. In other words, fix-and-flips. While direct, active ownership of real estate can be lucrative, it is far from the only way to tap into the benefits of real estate. Passive real estate investing means investing in property without managing “tenants and toilets.” Critically, passive real estate investing can bring individual investors access to professionally managed commercial real estate. This means access to greater scale, greater diversification, and more opportunity to tap into a range of idiosyncratic return opportunities.
In short, passive real estate investing means:
- Investing at a lower capital amount / barrier to entry (and “owning a piece” of the real estate transaction or project)
- Less involvement in the day-to-day management of the asset (perhaps none)
- Removing personal liability
- Being able to access assets across the country, not just in your own back yard
- Because of these “ease of use” factors, generally accepting lower total return than the party who is actively managing the property
Passive real estate investing in the modern era also means being able to tap into a wide range of commercial real estate, not just single-family homes. Multifamily is the largest CRE asset class, with 48 million units, nationwide. However, with a platform like EquityMultiple, you can also invest passively across commercial real estate asset classes like industrial, self-storage, and even niche property types like car washes. This is key. Commercial real estate transactions are complex, especially with less straight-forward property types. Being able to passively tap into diverse CRE opportunities can allow individual investors to potentially access a wider range of return profiles.
Passive real estate investing offers a unique opportunity for accredited investors to diversify their portfolios and generate steady income streams without the day-to-day management of properties. If you are an accredited CRE investor, EquityMultiple can offer you private market commercial real estate to passively invest in. In the era of fintech-powered real estate investing, you can invest passively across property types, markets, and even positions in the capital stack. In this article, we discuss these options, as well as the pros and cons of passive real estate investing.
The Evolution of Passive Real Estate Investing
Passive real estate investing has come a long way in the past 10 years. Self-directed accredited investors can now participate in the lucrative world of commercial real estate (CRE) without the burdens of direct management or hefty initial capital. This transformation owes much to innovative “wealthtech” investment platforms and mechanisms that democratize access to real estate markets. Whereas real estate syndications were structured entirely offline as recently as 2015, investors now have a number of digitalized options.
EquityMultiple, for one, provides unique options for passive real estate investing. In addition to passive real estate investments in JV equity, EquityMultiple offers these diversified, structured options for passive investing:
- Short-term notes, predicated on real estate
- Real estate private credit (i.e. investments in real estate debt)
- Preferred equity real estate investments
- Private funds, including those that feature a REIT structure.
Note that passive real estate investing platforms may look similar, but each may have their own operating model. Not all platforms offer the same degree of investor protections. Be sure to do your own due diligence as you are considering options. Ultimately, any LP investor may opt to invest across a number of platforms for optimal diversification.
What’s Passive Real Estate Investing?
Passive real estate investing allows certain investors in a project to remain uninvolved in day-to-day property management while still receiving cash flow and/or capitalizing on the appreciation. (Note that passive real estate investing through a platform could entitle you to a varying degree of protections and rights vis a vis the sponsor. You can read more in this article.)
Once the investors supply the necessary capital, sponsors will provide their expertise and execute the project’s business plan. By working with a sponsor, passive investors don’t need to acquire, maintain, or actively manage their properties. Investors simply allocate funds, then receive distributions throughout the lifetime of their investment.
Not every passive real estate investing opportunity is created equal. Online syndication platforms offer a varying degree of due diligence on behalf of investors, with some operating more as laissez faire marketplaces. Every commercial real estate investment offered on EquityMultiple has been fully vetted by our Investments Team, been approved by our investment committee, and will continue to be maintained and managed on the investor’s behalf. EquityMultiple builds in the maximum degree of investor protections and employs an in-house asset management team to work toward the best possible returns. While all investments entail risk, these measures should give passive real estate investors comfort.
Active vs. Passive Real Estate Investing
Regarding real estate investing, there are three involvement levels that investors can choose from. Standard active and passive real estate investing strategies are the most popular.
Many passive investors regard private real estate as a necessary complement to a “buy and hold” public equities strategy. Active real estate investing with passive management, however, is another effective option to consider. Here’s a brief overview of what each investing strategy entails:
- Active real estate investing requires some amount of hands-on work. This type of investment may appeal to investors who want to get involved in real estate and have the time to dedicate to being a full-time landlord. Active investors purchase a rental property, oversee its daily operations, and perform management duties.
- Passive real estate investing is almost entirely hands-off. Individual investors select assets that interest them, contribute some capital, and then count on the sponsors to deliver returns. The sponsor typically takes on the role of the active investor or general partner (GP), while passive investors take on limited partner (LP) interest in an investment.
- Active real estate investing with passive management is a flexible strategy that can potentially work well for seasoned investors who want to hand-select every investment in their portfolio. Niche commercial real estate investors, for example, can acquire their own real estate and work with a property manager to manage and maintain the property on their behalf.
EquityMultiple delivers another benefit to accredited CRE investors: the ability to diversify your portfolio at scale. Rather than tying up a large amount of capital in one or two properties, you can passively invest in multiple assets for as little as $10,000.
For passive real estate investing to be truly passive, a sponsor or investing platform must make the process easy. EquityMultiple does this both through technology, and via experienced professionals who work behind the scenes on behalf of investors.
“I want my investments to be very passive, so for my rental properties, I never considered that I would manage those myself. And when it comes to EquityMultiple deals, I see a lot of value in their due diligence and vetting of the deals on their platform.”
— Colin Webb, EquityMultiple Investor
How to Earn Passive Income from Real Estate
Passive real estate investing is an umbrella term that encompasses investing strategies like crowdfunding, remote ownership, and real estate funds.
Passive real estate investing is an umbrella term that encompasses investing strategies like crowdfunding, remote ownership, and real estate funds.
There are multiple ways that both accredited and non-accredited investors alike can begin to generate passive income. Here are a few passive real estate investing examples that accredited CRE investors may enjoy.
Real Estate Funds
Real estate funds provide value through appreciation and are typically a broader form of mutual funds that can target REITs. This type of fund is usually more long term than REITs and shares of mutual funds are normally traded and highly liquid.
Generally, private real estate funds offer more of an opportunity to tap into alpha (returns driven by skilled management and asset selection) and are less volatile than traded funds and REITs.
EquityMultiple offers numerous private funds, including debt funds and private real estate funds offered through major multinational asset managers.
While public REITs generally offer more liquidity and the lowest barrier to entry, private real estate funds can offer returns potentially less correlated with the stock market, as well as more transparency into the selection of individual assets. EquityMultiple’s Ascent Income Fund targets compelling yield from real estate debt positions, a potentially strong pick for passive investors going forward.
While not technically a fund, EquityMultiple Alpine Notes also provides a real estate-backed, yield-focused vehicle that may appeal to passive investors.
REITs
REITs, or real estate investment trusts, are companies that acquire, maintain, and finance real estate opportunities that generate income. This model is comparable to investing in a business via dividend stocks.
When you invest in a REIT, you’ll receive regular dividend payouts. This investment strategy is extremely liquid and can allow investors to take advantage of multiple real estate asset types, including multifamily and industrial. Publicly traded REITs are highly accessible, however their historical performance tends to correlate more closely with the stock market.
Private REITs often carry high fees (as high as 10%). Private funds in some cases may take advantage of a REIT structure to offer tax benefits, while potentially offering more transparency and lower fees versus a typical REIT. EquityMultiple’s Ascent Income Fund, for example, makes use of a REIT structure.
Crowdfunding
Real estate crowdfunding platforms have emerged as a game-changer, making it easier than ever for investors to access a variety of real estate deals. EquityMultiple, for instance, stands out by offering a curated selection of commercial real estate opportunities that have undergone a rigorous vetting process. With investments starting at a relatively low threshold, these platforms have opened the doors to a broader range of investors.
To illustrate, a platform like EquityMultiple might offer an opportunity to invest in a commercial building in a prime urban location with a minimum investment of $5,000. (Technically EquityMultiple is not a real estate crowdfunding platform, but we do operate under a similar passive, fractional investing model.) This building could be part of a larger development project with projected returns based on the area’s economic growth and real estate market trends. For beginners, this approach simplifies entry into the market, as they can start with smaller amounts and gradually increase their investments as they gain confidence and experience.
This strategy offers more transparency and pride of ownership for investors who still want to feel involved in their investment decisions.
If you don’t have the capital to acquire an entire multifamily complex, crowdfunding platforms can offer you a way into the commercial real estate market. The best part is that this strategy can typically be done entirely online.
Crowdfunding is more passive than direct ownership but less passive than investing in a REIT since the investor is generally choosing specific assets to invest in. Note that real estate crowdfunding platforms vary quite a bit in terms of how hands-off you can be with your investment. Some function more as a marketplace, connecting a crowd of investors with a sponsor who is looking to raise capital. In this case, you may need to do more due diligence on your own. EquityMultiple functions more as an asset manager, doing extensive vetting and asset management on behalf of investors.
Remote Ownership
If you are comfortable putting the day-to-day decisions into someone else’s hands, then remote ownership could be a viable way to generate passive income.
Remote ownership can take many forms. Most of them include remotely communicating with maintenance and management companies on a regular basis. This passive investment strategy was designed with portfolio diversification in mind.
Since communication can typically be done entirely online, CRE investors are awarded the opportunity to tap into faraway markets they’d otherwise not have access to. While remote ownership may carry attractive return potential, it is subject to some of the same drawbacks as direct ownership: higher liability, capital requirements, and lack of diversification.
Update — Passive Real Estate Investing in Today’s Market
The 60/40 portfolio has been up and down over the past few years, with generally stable performance in 2024. While we believe any moment in a market cycle if favorable for passive, private real estate investing, today’s economic conditions present some challenges, but lots of potential opportunity. We have entered a falling-interest rate cycle; while the Fed could pause rate cuts if inflation reappears, we seem headed for the “soft landing” scenario in which rates gradually fall. This would benefit real estate capital markets, as values are depressed from their early 2022 highs. Furthermore, the stock market could exhibit volatility, as evidenced by current P/E ratios and over-reliance on a handful of large tech stocks. Diversification, therefore, may be key. Many investors are turning elsewhere for sources of passive income. Passive real estate investing may provide an option for investors in terms of income and long-term growth potential. Although rates have already fallen some, real estate private credit may offer compelling risk-adjusted returns and income potential for some time. Passive real estate investing through a platform like EquityMultiple can help you tap into these varied opportunities at a low barrier to entry.
In general, private-market real estate has the potential to help investors decorrelate from a traditional 60/40 portfolio. Looking at the last couple decades of data, including the pandemic and the beginnings of the current higher-rate, higher-inflation environment, private real estate stands out as bearing almost no correlation with stocks in any environment. Additionally, private real estate equity bears a significant negative correlation with large and small cap stocks in positive market environments, and also bears significantly less correlation with stocks than do REITs in any environment.
Passive real estate investing also allows individuals to tap into what’s called “temporal diversification.” In a fluctuated market like today’s, opportunities may emerge at different moments. By giving yourself the opportunity to invest passively in a wide range of properties at different times, you can potentially both mitigate risk and tap into distressed asset opportunities. As of early 2024, these opportunities may now be emerging in greater volume.
In this moment, with valuations suppressed and higher rates creating distress, distressed asset opportunities may emerge, as well as new opportunity for cap rate compression. For these reasons, equity real estate investing may still offer a timely thesis. Passive real estate investing via a platform like EquityMultiple offers a streamline way to access private equity real estate investments.
Passive real estate investing via a platform like EquityMultiple allows you to fractionally invest in larger CRE investments. This video highlights just some of the real estate individuals have invested in.
Is Passive Real Estate Investing Right for You?
Passive commercial real estate investing may generate regular cash flow without the headaches of being a landlord or developer. Using this strategy, investors are able to diversify their portfolios at scale.
PROS | CONS |
Working with a sponsor or management company, however, also has associated risks and considerations. Below are some of the key benefits and risks of passive real estate investing that non-accredited and accredited investors should be aware of.
Benefits of Passive Real Estate Investing
Individuals can invest passively in real estate via real estate investment trusts or direct real estate platforms like EquityMultiple, which offers access to exclusive direct private market assets. Passive real estate investing is more than just a way to earn uncorrelated returns. Here are a few of the many benefits associated with this sought-after investing strategy:
- Lower barrier to entry. Passive real estate investing on EquityMultiple, for example, starts at just $5K, with the most typical minimum investment being $10k.
- Little to no physical labor is involved when you invest in passive real estate ventures. By working with a sponsor, investors don’t have to spend time or energy vetting tenants, maintaining properties, or marketing their real estate.
- Tap into the expertise of professional investors by working with sponsors who have a “boots on the ground” presence. When you work with direct real estate platforms like EquityMultiple, a professional investor will work behind the scenes to generate returns on your behalf.
- Less liability for passive investors when investors work with a general partner (GP) or sponsor. When you invest passively, you typically just need to know how to add investment capital to your account, and when to expect property updates and return payouts. The (GP) handles the rest.
Historically, private real estate has exhibited less volatility than the S&P 500, making passive real estate investing an attractive wealth-building strategy. Investors can also benefit from unique tax considerations while expanding their portfolio.
Investing passively as an LP investor means you can potentially benefit from the expert knowledge and experience of professional management. Our proprietary investment sourcing and underwriting methodologies are one potential benefit of passive real estate investing via EquityMultiple.
Risks and Downsides of Passive Real Estate Investing
Despite its name, passive real estate investing isn’t always entirely passive. This type of investing strategy is still subject to typical commercial real estate risks like vacancies. Here are a few other risks associated with passive real estate investing:
- Active investing may carry higher profit potential than passive strategies. When actively investing in real estate, you are in full control of your investment. The physical labor and time that you put into acquiring and renovating investment properties can potentially earn you higher returns compared to passively investing in real estate with the help of a sponsor.
- Trusting a sponsor to acquire properties on your behalf isn’t always required, but does force you to leave some important decisions in the hands of a professional investor overseeing multiple portfolios. Although it is possible to take a hands-on approach to CRE property acquisition, that strategy makes passive real estate investing a little less passive.
- You’ll likely not be the point of contact for your passive real estate investment property. This means that if something were to go wrong with your real estate, then it is up to a team of other people to handle the matter promptly and responsibly. This can be a difficult adjustment for investors who are used to being in full control.
- Added fees are normal when you allow someone else to manage your real estate investment. Fees associated with passive real estate are common and can add up quickly. Consider these fees a payment for the convenience and expertise that passive real estate investing offers.
Are you comfortable leaving your real estate investment portfolio in the hands of professional investors with years of experience? If so, generating passive real estate income may be for you, and these considerations may not seem like cons at all. No matter how passive your investments in real estate may be, it’s worth taking a moment to understand the underlying structure of your investment. Your investment platform may offer varying degrees of intermediary diligence, asset management, or structuring. EquityMultiple, for example, structures investments to provide a higher degree of protection to individual investors, whereas other platforms may operate as more of a laissez-faire marketplace, leaving investors to deal directly with sponsors.
Passive real estate investing isn’t just about structure. It’s about the people in your corner — the professionals managing the investment on your behalf. At EquityMultiple, our Investor Relations and Asset Management services are a big part of the equation.
At EquityMultiple, we offer accredited investors the opportunity to invest in private commercial real estate without the hassle of being a landlord. Our experienced Real Estate Team carefully underwrites each opportunity and vets all sponsors. That said, we always suggest conducting your own due diligence. If you would like to evaluate the return possibilities, fee structures, and investment minimums of various passive real estate investment options for yourself, please review our FAQs, or connect with our Investor Relations Team for more information.
Passive Real Estate Investing FAQs
What is passive real estate investing?
Passive real estate investing is a strategy where investors contribute capital to real estate ventures without taking on the responsibilities of property management or day-to-day operations.
Does direct ownership of property yield better return than passive real estate investing?
This is too broad a question to answer definitively. Direct ownership of property removes a layer of fees and involvement of other parties. Therefore, direct ownership of property by a skilled operator may yield greater return potential than passive real estate investing. However, many individual investors lack the time, capital, or experience to buy and manage property. In either case, passive real estate investing (REITs and real estate crowdfunding) feature much lower minimums versus a downpayment on property, and hence can offer greater diversification potential.
How does passive real estate investing compare with investing in stocks?
Both real estate investing and investing in the stock market can be accomplished passively. Given the advances in fintech over the past decade, it is quite possible for an individual investor to amass a portfolio that includes stocks, bonds, real estate, and other asset classes without actively managing any assets. Depending on the timeframe and various parameters, passive real estate investments may perform better or worse than the stock market. Generally real estate will offer more tax advantages than investing in the stock market. Ultimately, diversification is key and passive real estate investing could be a great addition to a portfolio that already includes exposure to stocks.
Does passive real estate investing offer the same tax benefits as direct ownership of property?
Depending on the structure of the investment, passive real estate investors as LP participants may realize similar “pass through” tax benefits. However, tax treatment of real estate investments depends on many factors, and you should always consult with a tax professional.
How do real estate crowdfunding platforms work?
Real estate crowdfunding platforms like EquityMultiple connect accredited investors with a range of commercial real estate investment opportunities. These platforms conduct due diligence on each deal and allow investors to contribute funds online, streamlining the investment process.
How does passive real estate investing compare with investing in REITs?
A public REIT is a very low-barrier-to-entry method of accessing real estate. However, REITs tend to correlate more closely with the stock market. REITs are highly liquid, but by virtue of their traded nature generally do not carry the same opportunity for alpha as private-market alternatives (like passive, private-market real estate investing).
What kind of research should I do before investing passively in real estate?
Investors should research the market trends, property types, geographic locations, and the track record of the platforms and sponsors involved. Due diligence is key to understanding the risks and potential returns of each investment.
How does EquityMultiple ensure the quality of its investment opportunities?
EquityMultiple conducts a thorough vetting process for each investment opportunity, accepting only a small percentage of considered investments to ensure a high level of curation and quality control.