Passive investing in real estate is a great way to reap the benefits of owning property without all of the headaches that actively managing your properties can entail.  It can be a great option for those who have money to invest but don’t have the time or energy to actively own real estate.

There are three main types of passive investments: funds, syndications, and real estate investment trusts (REITs).  

Funds

A real estate fund is a type of passive investing that involves pooling different projects and raising funds from investors.  An easy way to view a fund is as separate investments into different syndications.  Because not every project will perform the same, funds are generally diversified to offset risk. 

One advantage of investing in a real estate fund over directly buying a rental property is that funds generally offer more diversification. Unlike a single property, funds can purchase a variety of asset classes over a wide geographic area. Funds are also not tied to a single investing strategy. Learn more about investment diversification in this video.

Pros and Cons of Funds

Funds are a type of passive investing that don’t require any work on the part of the investor. However, there are some tradeoffs to this form of investment.

Pros of Funds:

• This is a type of passive investing and doesn’t require the investor to do any of the work on the project.
• Because there are multiple projects, funds offer diversification.
• Since so many investors are contributing funds, General Partners are generally able to get better terms than an individual investor would get. 

Cons of Funds:

• You are committing your money over a period of time, and you typically don’t get it back until the project is complete.
• You usually need to be an accredited investor: either making $200K annually by yourself or be a married couple making $300K; or, you have more than $1MM to invest, not including your primary residence.

Ironton Capital is a real estate private equity firm that specializes in funds.  Learn more about their open funds.

Syndications

In a syndication, a General Partner (GP) is responsible for picking out a real estate project and doing all of the necessary work to complete the project.  These are big-scale projects, such as purchasing an apartment building and creating value-add. 

The majority of the cash for the project comes from Limited Partners (LPs).  They write the check but don’t have to guarantee the loan or manage the project. 

At the end of the project, everyone gets their capital back in addition to the proration of the profit.  Because they have less responsibility, LPs get paid less than the GP. Learn more about how passive investors get paid in both syndications and funds in this article.

Pros and Cons of Syndications

Syndications are a type of passive investing that don’t require any work on the part of the investor. However, there are some tradeoffs to this form of investment.

Pros of Syndications

• As an LP, you are not guaranteeing the loan, nor are you doing any of the work on the project.  You simply write a check, and if the project is successful, receive a share of the profits.
• Usually, GPs are incentivized to ensure the project runs smoothly and generates solid returns. 
• Because your money isn’t liquid, you will generally see greater returns to offset the risk.

Cons of Syndications

• It can be difficult to find a syndicator or know the right questions to ask. Find out what you need to know before investing.
• Your money is often committed for three to five years, and you typically can’t get it back until the project is complete.
• You usually need to be an accredited investor: either making $200K annually by yourself or be a married couple making $300K; or, you have more than $1MM to invest, not including your primary residence.

Review our Syndication Deal Analyses to learn more.

Real Estate Investment Trust

A Real Estate Investment Trust (REIT) is a company that owns and typically operates income-producing real estate or related assets. REITs allow individuals to invest in large-scale, income-producing real estate without having to purchase the real estate themselves. Instead, investors receive a share of the income produced by the property.

While REITs and funds may sound similar, it’s important to learn about the main differences between a REIT and a real estate fund.

REITs are the most common type of passive real estate investing. There are over 1000 REITs to choose from, and there’s one for every type of asset class: self-storage, office space, apartment buildings, and more. Learn about different kinds of REITs to see what fits your investing profile.

Financial services firm Morningstar found that optimal investment portfolios allocate between 4%-13% in REITs.

REIT Pros and Cons

Pros of REITs:

• Some powerful features of REITs are their liquidity, which allow investors to sell on short notice, and that investors usually don’t need to be accredited, just able to put cash into the trust.
• Over the past 20 years, the stock market, on average, has annually increased 8% per year. Meanwhile, REITs have gone up 13%.

Cons of REITs:

• Because REITs don’t require investors to be accredited, they tend to make less money compared to other passive investing options.
• Dividends of REITs are taxed as regular income.

What’s My Next Step?

Learn more about funds in this Ironton Capital webinar.

Want to see how to unlock your home’s equity so you can invest in funds, REITs, or syndications? Our Property Llama software will allow you to run different scenarios to figure out the best way to build your portfolio. Sign up for your free account to get started.