Passive real estate investing, best investment strategies, opportunities and more.

Private Market Investment Opportunities

• 
  MVA2, Multifamily Value Add Fund by Paperfree.com
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  [closed] MFF2, Multifamily Florida Fund 2
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  [closed] CMF. Cedar Multifamily Fund
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  SHF1, Investing in senior housing to drive capital growth
• 
  BTRF, Invest in build to rent fund

What is Passive Real Estate Investing?

Before diving into real estate investing, let's cover passive investing.

What is Passive Investing?

Passive investing is an investment strategy based on buying and holding a diversified portfolio of securities for the long term rather than actively trading individual securities or trying to time the market. Passive investing often contrasts with active investing, which involves more frequent trading and a greater focus on individual security selection.

Passive investing real estate

Picture: passive cash flow

Passive real estate investing is a hands-off method that only requires a capital contribution to secure ownership interest in a prominent real estate investment.

Passive real estate investing is a long-term wealth-building investment strategy that involves purchasing a passive real estate investment and holding on to it for an extended period.

The exact portion of your ownership depends on the cash amount of your contribution in proportion to the other passive real estate investors in the deal. Also, passive investing in real estate allows you to receive proceeds from lucrative real estate property deals you could not afford to buy alone.

Although a passive investment in real estate doesn't require physical or mental energy, you must conduct due diligence before deciding to invest through a fund, platform, or real estate company. In addition, many passive real estate investments require a hefty initial cash investment and a sober understanding of the higher risks than other investments.

Who is a passive real estate investor?

A passive real estate investor is a person who seeks or owns real estate that doesn’t require active participation in the management or day-to-day operations of the property. A passive investor commits capital to an investment pool to purchase, manage, and sell the property as part of a silent partner relationship with a real estate company or investment group.

Picture. Passive real estate investors

The real estate company or the investment group handles all the managerial, operational, and marketing tasks. From this investment, the passive investor can receive a steady income. However, passive investment arrangements don’t allow investor input into the property or managerial decisions. You may be interested in becoming a passive investor if you want to access returns from a property you could not afford or desire a real estate property investment that won’t demand your time, effort, or mental energy.

What is the difference between an active and passive real estate investor?

Active real estate investors like house flippers and apartment landlords generally own and manage their properties. On the other hand, a passive real estate investor usually has no part in the investment property's purchase, management, or sale. This type of investor may never set foot on the property attached to the passive investment in real estate.

All responsibilities of establishing, maintaining, and relinquishing passive real estate investments belong to the real estate companies and developers. This arrangement is why a passive real estate investor must have confidence in the passive real estate investment firm or platform.

How to invest in real estate for passive income

Fortunately, today's financial markets provide several investment methods that offer passive investing in real estate. Most passive investments are available in one of these three categories.

• Real estate funds.
  Real estate funds are public-traded or private funds that deal in real estate assets, including securities and many property types. Unlike REITs, real estate funds are typically long-term investments. Since professionals manage real estate funds, these investment vehicles offer excellent opportunities for real estate passive investors. Fund managers do all the necessary research, financing, and purchasing of new properties to invest in.
• REITs.
  Real estate investment trusts (REITs) primarily invest in commercial properties. But they often invest in other types of real estate. By law, REITs must disperse 90% of their earnings to their shareholders each year as dividends. Like real estate funds, REITs make excellent passive real estate investments because they handle all the responsibilities of owning property, including collecting rent, paying bills, and enforcing tenant rules. You can invest in publicly traded REITs on the stock market or retirement accounts. However, since REITs are moderate-risk investments, their appreciation in value lags below real estate funds and other assets.
• Crowdfunding.
  Real estate crowdfunding is an investment vehicle that enables you to pool your resources with other investors to gain partial ownership in more prominent properties that would otherwise be out of your financial reach. Crowdfunding opportunities are primarily available online, allowing you to join multiple users in indirect mortgage investing countrywide. As such, crowdfunding deals are excellent passive real estate investments for all types of investors.

The key factors to consider when investing in passive real estate

One of the critical factors in passive real estate investing is control. Since you have no control over any aspect of the passive real estate deal, you must ensure you are confident enough in the real estate investment professionals to let them handle the business part.

Also, passive real estate investing doesn't come with the same tax benefits active investors get. But, on the other hand, you don't need extensive experience in real estate to reap the benefit of potentially higher-than-average returns of large-scale passive real estate investments.

Taxes active vs passive real estate investing

Real estate investment-related taxes are a complex subject. Let's start with IRS definitions of passive and active income.

1. Active income from real estate investment.
   Your income is active; if you meet one of 3 options, you are named by the IRS "real estate professional."
   
   1. You spend at least 750 hours per year working in the real estate industry.
   2. You own at least 5% of the real estate business.
   3. You are a real estate agent and paid only commission.
      
      If you meet one of a, b, or c, you are a "real estate professional," you can use losses from real estate investments to offset your income from other real estate business activities.
      
2. Pure Passive income from real estate investments.
   In other cases, different from  1.1, 1.2, 1.3. Income generated by real estate investments is treated by the IRS as regular income reported on the Schedule E form and carried to line 17 of the 1040 tax return.

NOTES.

1. Suppose you oversee your rental real estate but are not a real estate professional. In that case, your revenue qualifies as a different type of passive income, and you can claim a portion of any losses against active income. Consult your CPA for your specific case.
   
2. If you lose money on a real estate investment, you may still be able to reduce your taxes. You may offset a profit on another venture. IRS usually allows you to carry that loss forward to offset gains in the future.

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