What Is Passive Investing?
Passive investing is a popular investment strategy that involves performing less buying and selling when compared to active investment strategies. The purpose of a passive investment is to hold on to an investment on a long-term basis. Over time, the investment should increase in value, which will allow it to bring in a high ROI. While there are many different types of passive investments that you can make, likely the most common option for passive investors is to place their money into real estate, which can include residential and commercial real estate properties.
When it comes to passive real estate investing, many investors place their money in properties that can be rented out. Along with the property increasing in value over the course of the investment, it’s also possible to obtain income by collecting rent from tenants. Unlike active real estate investments, you won’t be acting as a landlord when you purchase a property. Instead, these investments can be made via real estate funds, real estate investment trusts (REITs), online crowdfunding, and syndication.
When you want to leave your W2 job to start making passive real estate investments, there are two basic methods – direct investing and indirect investing. Direct investing means that you will purchase a portion of a property or the entire property before the place is rented out to tenants. At this point, someone else will be brought in to manage the property, which allows you to handle the investment as a passive investment. There are many reputable property management companies that will take care of collecting monthly rent payments, screening prospective tenants, and performing everyday maintenance on the property that you’ve invested your money in.
As for indirect investing, this occurs when individuals invest their money into a real estate investment trust or another kind of mutual fund that relates to real estate. This type of investment is known as an indirect investment because the property doesn’t need to be managed on a day-to-day basis in order for you to obtain returns on the original investment. Along with returns, you can also gain dividends from funds.
Benefits of Making Passive Investments
The passive form of investing has a number of benefits to it, the primary of which is that you can use this kind of investing to replace the income that you received from your W2 job. While active investments can also provide you with high returns, passive investing is a way to accrue returns without needing to directly manage the investments that you make. Instead, you can travel the world or spend more time with your family.
It’s also important to understand that you don’t need to stop working altogether. In many cases, passive income won’t completely replace the wages that you earned at your main W2 job. At the start, it’s possible that your investments will bring in returns that amount to 25-30 percent of your previous W2 wages, which means that having a side job may still be necessary. Some of the additional benefits that come with making passive investments include:
- The ability to minimize taxes by reducing the amount of buying and selling that occurs
- Lower expenses compared to active investing
- Holding your investments will help you improve your discipline, which could pay dividends for future investment strategies.
Popular Passive Investment Options
As touched upon previously, the main techniques that are used by passive investors who are making investments in real estate include real estate funds, apartment syndication, online crowdfunding, and real estate investment trusts. Before you leave your W2 job, it’s highly recommended that you identify which investment techniques are right for you and your portfolio.
Real Estate Funds
Real estate funds are similar to mutual funds in that they can be passively or actively managed. These funds will usually be invested in real estate operating companies and REITs. A small number of real estate funds invest their money directly into the properties. Short-term income is rare with a real estate fund. Income is usually obtained by allowing the fund to appreciate in value over an extended period of time. The three separate types of real estate funds include:
- Private real estate investment funds – These funds are professionally managed and focus on investing in real estate properties. You can only invest in one of these funds if you are a high-net-worth investor who is accredited and who is able to make a large investment.
- Real estate mutual funds – As mentioned previously, these funds can be passively or actively managed and can operate as an open-end fund or closed-end fund.
- Real estate exchange-traded funds – These funds invest in shares of REITs and real estate corporations. They can also be traded on major stock exchanges.
An apartment syndication is a kind of investment that involves pooling money together with other investors to purchase and eventually manage an apartment building. A syndicator will raise money from various investors before buying apartment buildings that they believe will generate decent returns. The syndicator is also responsible for managing the investment, which means that you can sit back and enjoy the returns generated from the investment without needing to worry about the particulars of collecting rent or maintaining the building.
Online crowdfunding has become very popular among passive investors who want to invest in commercial real estate. There are many reputable crowdfunding sites available that you can join before investing your money. The money that you invest will then be pooled together with the money from other passive investors to purchase properties.
You can invest in multiple properties without taking on the hassles that can occur when financing, owning, and managing the property. Keep in mind that most crowdfunding platforms have minimum investment requirements that you must meet before you can continue. These requirements can be anywhere from $500-$25,000.
Real Estate Investment Trusts
Real estate investment trusts are highly appealing to passive investors who want to bring in a high return. There are many different REITs that you can select from, which extend to residential REITs and office REITs. When looking specifically at the FTSE Nareit REIT index, the average annual return from 2010-2020 was around 9.5 percent, which indicates that real estate investment trusts are among the best-performing passive investments that you can make.
The REIT that you place your money into can invest in properties or real estate debt. If the trust invests in a property, you can gain returns from management fees and rental income. By investing in real estate debt, income is generated from the interest on the loan.
Tips for Leaving Your W2 Job to Engage in Passive Real Estate Investing
If you believe that passive real estate investing is right for you and that the benefits far outweigh the risks, it’s important that you know how to leave your W2 job by engaging in this form of investing. The first and most important step is to get your finances in order. Financial freedom is difficult to obtain if you still have an ample amount of debt that must be paid off. Try to make steady payments on your credit card debt and any other debt that you owe to significantly reduce or eliminate your current debt, after which you should try to build your emergency funds. Once you’re in a good financial position, it will be easier to move from your W2 job to passive real estate investing.
As mentioned earlier, there are four basic types of passive investments that you can make. In the beginning, try to focus on just one type of investment before growing your portfolio. Passive investments in real estate tend to generate average returns of 6-8 percent per year along with additional income once you sell the property after 5-10 years. The best aspect of making passive investments is that you won’t need to hire numerous team members to manage the properties that you invest in.
If you join a real estate investment fund or a crowdfunding platform, all of the finer details will be handled by someone else. If you join a crowdfunding platform, consider making a smaller investment before delving into larger ones, which should allow you to learn more about the process before you invest a large sum of your money. With these tips in mind, passive real estate investing should be relatively simple.
Why You Should Seek Financial Independence
If you’re no longer satisfied with your job, it’s never been easier to seek financial independence by making passive investments. When performed correctly, you can live off of your passive income and have more time to do the things in life that really interest you. Gaining financial independence through passive real estate investing gives you the opportunity to take more risks in your career, retire early, or spend more time with your family. You’ll also have the freedom to work and live on your own terms, which isn’t feasible with a 9-to-5 job.
Passive real estate investing is a great and proven way to replace some or all of the income that you lose by leaving your W2 job. While you might not earn as much as you did before, you’ll have much more freedom to live your life the way that you want to. Even though making passive investments in real estate isn’t easy, there are more options at your disposal than ever before. If you perform extensive research on an investment opportunity before investing your money, you should be confident that you’re making the right decision.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.