I’m a lazy real estate investor. Sure, I own a home, but I don’t want to deal with fixing toilets or collecting rent. I’m guessing you don’t want to deal with that crap either (pun intended).
Lucky for us there are a couple options that will give us the returns and diversification of real estate without the need to actively manage property. We’ll call it passive real estate investing.
The first and easiest way to passively invest in by using REITs.
REITs or Real Estate Investment Trusts are one of my favorite ways to invest in real estate. They’re publicly traded companies that only invest in real estate. Legally REITs must distribute 90% of profits to shareholders in the form of dividends. The large corporate scale of REITs can lead to efficiencies and scale. Plus, you get to let some experienced suit in an office manage your property portfolio for you.
Let’s be honest most of us don’t want to deal with the headaches of managing construction, negotiating leases, hiring property managers, and schmoozing with bankers. All are needed if you’re going to build a large-scale corporate property.
The scale of a REIT can lead to built-in diversity. What happens when a tenet stops paying rent? Good news, your REIT has 300 other tenets, you’ll still get 99.6% of this month’s rent.
While most REITs invest in commercial buildings. There are a bunch that invest in all the other things that need physical property. Here are a few examples:
- Cell phone towers
- Data Centers
- Mortgages (flashbacks to 2010 anyone)
- Single Family Rentals
The REITs I Own
|REIT Name||Dividend Yield||Investment Type||Why I invested|
|Realty Income Corporation (O)||3.98%||Commercial Property||Pays a Monthly Dividend|
|American Finance Trust, Inc. (AFIN)||9.93%||Commercial Property||Newer, more leveraged|
|New Residential Investment Corp. (NRZ)||8.05%||Morgages||High Risk, High Growth|
|Alpine Income Property Trust, Inc. (PINE)||5.16%||Commercial Property||Steady Growth|
Non-Public Traded REITS
Publicly traded REITs have a private counterpart. These are higher risk and higher return options.
They work exactly like publicly traded REITs. They invest in real estate, sell shares, and provide dividends and appreciation back to the shareholders. They have one major drawback: liquidity.
Publicly traded REITs can be bought and sold anytime, private REITs cannot. Some of them charge fees for withdrawing early, or even have no defined process for getting money out. Yikes.
I use two private REIT: Fundrise, and Diversyfund.
Fundrise is one of the larger non-public REITs, and so far, has provided good returns. It’s averaging about 8.5% per year.
The biggest benefit of Fundrise to me is that it automatically invests in a diversified set of projects. Many smaller non-traded REITs only have a few houses or projects, which concentrates the risk of purchasing the REIT.
Diversyfund is newer to the market, but in theory can provide higher returns due to more focus. It’s also extremely risky, which is why I’ve only invested a few grand into this platform.
It works the same way as Fundrise, but it only as ten active projects right now. This is netting me about $20 a month in dividends on a $5,000 investment. That’s not bad, but I can’t take any of that money out. In fact, they don’t have a straightforward way to withdrawal at all.
If you’re not willing to take the risk or may need to access this money, don’t invest with them. You’ve been warned.
There are a bunch of these that I haven’t tested. Do some research and ask current investors if they’re happy before you give a private REIT any money.
Managed Real Estate
The last and most risky way to passively invest in real estate is to buy a local property and hire a property manager.
I don’t do this. It’s not truly passive, since you’ll still need to vet, and hire a management company, plus you’ll have additional tax complexities, and may need to deal with the legal process of evicting tenets. Plus, there’s additional political risk here since politicians are being pressured to cap rent increases and freeze rent payments in some situations (like a global pandemic).
Don’t invest locally if you plan to move, have poor credit, or don’t want to deal with tenants and properly management companies.
The upside to owning and managing real estate is that it’s an effective way to invest using credit. If the property can cash flow, it can provide better returns because it’s leveraged. It can also become a nightmare if you need to make repairs on the property and don’t have the money to do so.
It’s not actually a passive real estate investment, but it can be close.
There are many options for passive real estate investing. My favorite are public and private REITs, but with all investments there are risks.
Do you invest in REITs, or are you going to start soon? Let me know in the comments.