Four Passive Investment Options in Real Estate

Four Passive Real Estate Investments

Passive investing is a great way to grow your wealth, especially if you do not have the time to be actively involved in the day to day operations of real estate investing. There are four main passive Investments in real estate that busy individuals are able to take advantage of. I give an over view of these four types in this post.

Syndications

A syndication is when a Lead Investor pools money from passive investors, also known as limited partners (LP’s), and buys a piece of real estate. The Lead investor, also known as the syndicator or General Partner (GP), uses the money raised to buy the property and then operates the property. Once the property is being operated at a profit, the passive investors receive profits in the form of distributions.

An example of this would be a syndicator getting a group of investors together to purchase an apartment complex. If the apartment complex is in great shape and is 100% occupied, then investors might expect to get distributions right away. If the property is vacant and needs rehab, investors should expect to receive distributions after the property is fixed up and leased out.  These distributions can be paid out in monthly, quarterly or other payment timelines depending on the type of property and the deal structure.

Syndications will typically be a single property purchase. They can be structured in a variety of ways, yet you typically will see them in a single LLC or a small partnership structure. It is not uncommon to see the syndication model being adapted these days. We are seeing the emergence of the fund structure for private real estate investments. The fund offers more flexibility for the lead investor and allows them to buy multiple properties and diversify the investments of the fund portfolio. There can be a single property fund, yet we typically are seeing them be at least two properties or more.

Private Lending

Lending money is a very old practice and something almost everyone is familiar with. You go to the bank, get a loan and hopefully make the payments until the item being loaned on is paid off or sold. What most people are not familiar with is the private side of things for real estate. This is when a private individual, or a private entity that isn’t a bank, loans money to a person or company for the purpose of buying real estate. You might see this in the form of a private mortgage or seller financing, yet there is a more common form of private lending that occurs all the time. Private rehab loans.

Private rehab loans, sometimes known as hard money loans, are when money is lent to investors for the purpose of fixing up a property. Then the investor either sells the property or rents it out. If they sell the property, then they pay off the loan and that is it. They move on to the next one. If they decide to hold the property as a rental, then they will typically refinance the property with a permanent loan and then pay off the private lender. This can be slightly more involved than investing in a syndication as you have to issue pay offs to title companies and other lenders. Do money draws, inspections and other activities, yet it is still very limited activities compared to operating a rental property yourself.

NNN Commercial Leases

In a NNN investment, also known as a triple net lease, the tenant is responsible for everything essentially. The owner provides the building and the tenant pays for all or most of the build out and is responsible for paying the rent, utilities, a portion of taxes, insurance, common area maintenance and also pays to repair/replace equipment such as an air conditioner. This is similar to a ground lease in which the tenant takes care of nearly every single thing and the owner gets a check.

This can involve a little bit of work, but that can be offset by hiring a management company. A management company can handle the leasing, management of common areas and the reporting of financials to the owner of their CPA.

Turnkey Rentals

Turnkey Rentals are not new, but they are becoming more common. In a turnkey rental there are companies that basically coordinate everything involved in taking a property and getting it rent ready and getting it rented out. They help coordinate everything from financing, to rehab as well as leasing and management. This allows an investor to buy into rental properties and have very limited involvement, and still receive monthly cashflow. This can be a great way for a hands off investor to participate in single family rentals. This type of investment does have some down sides in that it does not have the scale of other investments unless you buy a lot of properties. Also, if you do not get a good management company or contractor, you could be left looking for help and having to get more involved. It is much different than a syndication.

Are there risks?

As with any investment there are always risks and rewards. You minimize your risk by vetting the lead investors or companies you are having help you. I’m not sure you can ever eliminate all risk, yet you can minimize it to ensure you make a solid investment decision. You just have to decide how involved you want to be and choose wisely.

Best wishes on your investment journey.