How to Build Wealth Through Real Estate Investing

by Aaron G.
February 24, 2024
Commercial, passive income, Rentals
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Introduction to Passive Real Estate Investing

Passive real estate investing refers to putting money into real estate assets like properties or funds without taking an active, day-to-day management role. It allows investors to earn income, benefit from appreciation, and diversify their portfolio through real estate without having to deal with tenants, maintenance, and other hands-on operational aspects of owning properties directly.

The main benefits of passive real estate investing include:

Income – By investing in assets like REITs or rental properties managed by others, you can earn dividends, rents, interest payments and more.
Appreciation – Real estate values often appreciate over time, allowing your investment to grow.
Diversification – Real estate performance often has low correlation to stocks and bonds, allowing passive real estate investments to improve your portfolio’s risk-adjusted returns.

Passive real estate investing opens up opportunities in the largest asset class in the world to investors who don’t have the time or experience for active real estate ownership. It allows everyday investors to benefit from real estate much like large institutions do.

Options for Investing with Limited Funds

There are several great options for getting started in passive real estate investing without needing a lot of capital upfront. Two of the most accessible are real estate investment trusts (REITs) and real estate crowdfunding platforms.

REITs (real estate investment trusts) allow investors to invest in portfolios of real estate assets the same way they might invest in stocks or bonds. According to Investopedia, a REIT is “a company that owns, operates or finances income-producing real estate.” They offer great liquidity compared to physical real estate and also provide passive income in the form of dividends.

The minimum investment for most publicly traded REITs is the share price of the stock, often between $10-30 per share. This makes them very accessible for beginner investors. Investing in a REIT ETF (a fund comprised of many REITs) is another option that further diversifies risk. Many of the top REIT ETFs have no minimum investment at all.

Real estate crowdfunding platforms allow investors to pool money with others to invest in real estate projects. The platforms vet the deals, manage the investments, and distribute any profits. According to The Millennial Money Woman, minimum investment requirements have come down to as low as $500 on some top real estate crowdfunding platforms.

By pooling capital with other investors, crowdfunding makes real estate investing possible even with limited funds. However, it’s important to carefully research platforms as regulations are still evolving in this newer industry.

REITs Explained

REIT stands for real estate investment trust. REITs are companies that own, operate, or finance income-generating real estate. Some key points about REITs:

There are several different types of REITs:

Equity REITs – Own and manage income-producing real estate properties like apartments, offices, malls, etc. They generate revenue from rents and possibly sales of appreciated properties.
Mortgage REITs – Lend money to real estate owners and operators either directly through mortgages and loans or indirectly through the acquisition of mortgage-backed securities. Their revenue comes from the interest they earn on those loans.
Hybrid REITs – Engage in both equity and mortgage investing.

REITs have several benefits that make them attractive to investors:

Diversification – Allow investors to gain broad exposure to real estate as an asset class.
Passive income – Require high dividend payouts to shareholders. The average REIT dividend yield is around 2.7%, higher than the S&P 500 average (REITs and Real Estate Outlook for 2018).
Liquidity – Publicly traded REITs are bought and sold on major exchanges, allowing investors to easily buy and sell shares.
Transparency – Are subject to SEC reporting requirements.

How to Invest in REITs

There are two main ways to invest in REITs – researching and investing in individual REITs or investing in a REIT ETF that provides broad exposure.

When investing in individual REITs, it’s important to research the company’s properties, management, dividend history, and financials. Look for REITs with a solid track record of dividend growth and properties in strong real estate sectors. According to recent performance, some popular REITs include:

Tanger Factory Outlet Centers (SKT)
Prologis (PLD)
Annaly Capital Management (NLY)

Another option is investing in a REIT ETF, which provides instant diversification across many REITs and real estate sectors. Some of the top REIT ETFs based on 2023 performance include:

Vanguard Real Estate ETF (VNQ)
Schwab US REIT ETF (SCHH)
iShares U.S. Real Estate ETF (IYR)

REIT ETFs offer a low-cost way to gain broad exposure to real estate while avoiding the need to pick individual companies.

Real Estate Investing Crowdfunding Explained

Real estate crowdfunding is a method of investing in real estate that allows individuals to pool their money together to invest in properties. This enables broader access to real estate investments that were traditionally only available to high-net-worth individuals and institutions.

Real estate crowdfunding platforms allow investors to browse available deals, perform due diligence, and invest in specific properties. The crowdfunding company pools together capital from multiple investors to purchase the property. Investors can diversify across multiple deals with much lower minimum investments than required to purchase properties outright.

There are a few main types of real estate crowdfunding investments:

Equity – Investors receive an ownership stake in the property and earn returns through cash flow distributions and appreciation when the property is sold.
Debt – Investors earn interest on the loan provided to purchase the property. This is usually a shorter-term, fixed return investment.
Funds – Investors put money into a managed fund that purchases multiple properties. The fund manager handles day-to-day operations.

By providing a platform for pooled investment, real estate crowdfunding opens up real estate to a wider pool of investors. It allows for diversification across multiple properties and markets with lower minimums compared to direct real estate ownership.

Top Real Estate Investing Crowdfunding Platforms

There are several excellent real estate crowdfunding platforms to consider for beginner investors. Some of the top options include:

Fundrise

Fundrise (https://www.nerdwallet.com/best/investing/real-estate-crowdfunding-platforms) is considered one of the best real estate crowdfunding platforms, especially for beginners. They offer low minimums starting at just $500. Investors can choose from various eREITs focusing on different types of real estate. Benefits include dividend payments and potential appreciation.

RealtyMogul

RealtyMogul (https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790) offers both debt and equity real estate investments with minimums as low as $1,000. They thoroughly vet deals and focus on providing passive income and diversification. Investors can browse offerings online and build a portfolio.

Groundfloor

Groundfloor has offerings starting at just $10 and focuses on short-term real estate loans with terms of 6-12 months. This can appeal to investors wanting to try real estate crowdfunding without locking up capital long-term.

Other Passive Real Estate Options

In addition to REITs and real estate crowdfunding, there are a couple other ways to invest in real estate passively with limited funds:

Turnkey Rental Properties

Turnkey rental properties allow you to purchase an investment property that is already renovated, tenanted, and managed by a property management company. This enables hands-off real estate investing without having to do any of the legwork yourself. Turnkey providers typically charge a markup on their properties to account for their fees, so returns may be lower than investing directly. However, turnkey rentals provide a truly passive way to invest in real estate. According to BiggerPockets, average cap rates for turnkey rental properties range from 4-8% depending on location and asset class.

Real Estate Apps

There are various real estate investing apps that enable you to invest in rental properties, crowdfunded deals, and REITs with minimal capital. For example, Fundrise and DiversyFund allow you to invest in their privately managed real estate funds with low minimums around $500-$1000. Roofstock and Arrived Homes facilitate investments in single-family rentals starting at $5000. Real estate apps provide easy diversification across multiple properties.

Risks of Passive Real Estate Investing

While passive real estate investing can provide benefits like diversification and income potential, it does come with some downsides to be aware of.

One major risk is liquidity. With direct real estate ownership, you can typically sell a property when you want. But with passive vehicles like REITs or crowdfunded real estate, your money may be tied up for years depending on the investment terms. This lack of liquidity needs to be considered.

Another key risk is that due diligence is still required on passive real estate investments. Just because it’s a “passive” approach doesn’t mean you can invest blindly without researching the investment vehicle, underlying properties, fees, etc. It’s critical to still vet investments thoroughly before committing capital.

Additionally, fees can cut into returns on passive real estate investments. Platform fees, property management fees, and other costs can lower overall yields. It’s important to pay close attention to the fee structures.

In summary, while passive real estate investing can simplify the process, investors still need to weigh risks like liquidity, due diligence requirements, and fees against the potential rewards.

Tips for Mitigating Risks

While passive real estate investing can be a great way to grow your wealth, it does come with some risks that investors should be aware of. Here are some tips for mitigating those risks:

Diversify your investments across multiple platforms and property types. Don’t put all your money into one REIT or crowdfunding company. Spread it out to reduce your risk exposure. As the saying goes “don’t put all your eggs in one basket.”

Thoroughly vet any sponsors or platforms before investing. Look at their track record and read reviews from other investors. Make sure they have a history of successful investments and satisfied investors.

Don’t over-leverage yourself with debt. While you can use leverage to amplify returns, it also amplifies risk. Make sure you have enough equity and reserves so you aren’t overextended.

Pay close attention to fees, which can eat into returns if excessive. Look for platforms and investments that charge reasonable fees.

Invest for the long-term. Don’t panic if your investments drop in the short-term. The longer time horizon you have, the more time your investments have to recover and pay off.

Consult with a financial advisor to make sure passive real estate investing aligns with your overall investment strategy and risk tolerance.

Summary

In summary, passive real estate investing can be a great way to build long-term wealth, even with limited capital. The key benefits we covered include:

Generating passive income through investments like REITs and real estate crowdfunding
Benefiting from real estate appreciation without having to buy or manage properties directly
Diversifying your portfolio beyond just stocks and bonds

While passive real estate investing does come with some risks like lower liquidity and lack of control, proper due diligence and portfolio diversification can help mitigate those risks.

The bottom line is that passive real estate investing opens the door for nearly anyone to benefit from the historically strong returns offered by real estate. With options like REITs and real estate crowdfunding now available, it’s possible to start investing with minimal capital. This makes passive real estate a potentially powerful wealth-building tool for beginner investors.

If you’re looking to get started with passive real estate investing, the best place to begin is by educating yourself on the different options and setting clear investment goals. Take the time to thoroughly research any investments and ensure you understand the risks. Start small to test out different platforms and find an investing style that matches your risk tolerance. With the right knowledge and preparation, passive real estate can indeed help you work toward financial freedom.