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Are Passive Real Estate Investments Better Than Becoming a Landlord?

Real Estate Technology with SparkRental

Much as I love rental property investing, it comes with a ton of headaches.

And that says nothing of the risks involved.

Here’s what you need to know about rental properties — and some more hands-off alternatives.

The Trouble with Rental Properties

From finding deals to financing them, managing properties to marketing them for sale, every phase of owning rental properties comes with work and risk.

To find good deals, you have to either scour for off-market properties, find a real estate agent, or become an agent yourself. The latter involves taking a real estate course and several exams, then getting hired by a broker, none of which is trivial. 

Then comes working with a lender to finance the property, unless you have hundreds of thousands of dollars sitting around in a drawer. 

Once bought, you have to manage the property. That includes advertising it for rent, screening tenants, signing lease contracts, collecting rents, doing frequent inspections, and of course maintenance and repairs. Oh, and evicting tenants who violate your lease terms. 

All of which gets harder every year, as more cities and states enact ever more tenant-friendly rules, rent control, eviction moratoriums, and other anti-landlord laws.

Sure, you can scale this model by investing in apartment buildings rather than single-family homes. But all the same challenges and risks remain, just on a larger scale.

Real Estate Investing with Fewer Headaches

For all the cons of becoming a landlord, real estate investments come with plenty of advantages. They diversify your portfolio from the stock market and provide stability. Real estate also produces ongoing cash flow well, along with protection against inflation. 

So how else can you invest in real estate, while reducing risks and labor?

Alternative Real Estate Investments

Rental properties aren’t the only way to invest in real estate. 

Some investors prefer mobile homes or mobile home parks. Sure, you still have to find good deals. But if you buy individual mobile homes, often you can afford to buy in cash and avoid financing headaches. Turnover rates are lower than traditional rental properties, reducing your management hassles. And if you buy entire mobile home parks, you don’t have to worry about repairs on the mobile homes themselves, as they’re owned by others. All you have to maintain is the communal areas.

My partner and I invest in raw land. We don’t have to hassle with tenants or repairs or maintenance. We simply find good deals and flip them. For that matter, we also don’t have to worry about tenant-friendly regulations. If we sell a piece of land on an installment contract and the buyer defaults, we don’t have to foreclose. They simply lose the rights to the land. 

Others prefer self-storage facilities. They similarly come with less maintenance, less regulation, easier evictions, and low turnover rates. You can buy these facilities already in operation, or you can build a new one with specialized storage building contractors

All create revenue and diversify your portfolio, without the headaches of becoming a traditional landlord. 

Publicly-Traded REITs

For all the advantages of the alternative real estate options above, they still come with labor. If you want truly hands-off investments, check out real estate investment trusts (REITs).

These companies either own real estate directly or they own loans secured by real estate. They trade on public stock exchanges, so you can buy and sell shares instantly through your brokerage account or IRA. 

The SEC requires that they pay out at least 90% of their profits each year in the form of dividends. So, public REITs tend to pay extremely high dividend yields. Check out these high-yield REITs as a starting point for your research. 

Crowdfunded REITs

Some REITs don’t trade on public stock exchanges. Instead, you buy and sell shares directly from the companies themselves.

For example, Fundrise offers a mix of equity and debt REITs, spread over dozens of commercial and residential properties around the country. Or look up Streitwise, which owns several massive office buildings. 

The SEC regulates these private crowdfunding companies differently, and they don’t have to pay out 90% of their profits in dividends. While that sometimes means lower dividend yields, it also leaves more flexibility for them to reinvest profits in building their portfolios. Read: more potential for share price growth. For instance, Diversyfund pays no dividend, but aggressively reinvests all profits to grow its share price. 

Like their publicly-traded counterparts, private REITs are completely passive investments. Just beware that most require you to leave your money invested for at least five years, or you risk an early withdrawal penalty.

Crowdfunded Loans

Not all real estate crowdfunding investments are structured as REITs. 

Some crowdfunding platforms let you invest in pooled loans secured by real estate. For example, Concreit pays a fixed 5.5% dividend and you can pull out your money at any time. And you can invest with as little as $1, to get comfortable before investing much cash. 

Other platforms let you pick and choose individual loans to fund. Groundfloor lets you invest as little as $10 toward any given loan, and each loan pays 6.5-14% interest. Because these are short-term hard money loans, you typically get your money back within 3-12 months. 

Crowdfunded Rental Properties

In another crowdfunding business model, you can buy fractional ownership in rental properties. The company finds the deals and hires out the property management, you just invest cash as a passive investor. 

You earn dividends based on the property’s rental income, and when the company eventually sells the property you get paid out proportionately. 

Check out Arrived Homes as a reputable example offering crowdfunded rental properties.

Private Notes

Know an experienced real estate investor? You can always offer to lend them money for their investments. 

I have some money invested with a couple in Ohio, who pays me 10% interest-only on my loan. With 30 days’ notice, either of us can request to close out the loan at any time. 

But you can structure these loans however you want. Everything is negotiable, as you write up a promissory note with a veteran real estate investor.

Final Thoughts

Personally, I invest in real estate as a replacement for bonds in my portfolio. It doesn’t come with higher risk if you know what you’re doing, and pays much higher returns. 

But not all of my real estate investments are rental properties. While I do own some, I also diversify with other, more passive real estate investments. 

Find your own comfort level, and invest accordingly. 

What’s your favorite way to invest in real estate?

Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello and Happy Friday.  Thanks for the great information in your blog to share with us here in the Rain.  Make it a great weekend!

May 06, 2022 07:40 AM