Passive Real Estate Investing: Giving You the Freedom to Live Abundantly!
How to Create Passive Income?
First, what is passive investing? It is an ideal way to earn money and an essential factor in achieving financial freedom and building wealth. This income source is a great way to help investors generate additional cash flow. Passive income also gives investors extra security and helps them bridge the gap if they suddenly become unemployed. Before going any further, let’s get started by talking about what passive income is and how to earn passive income for those unfamiliar with the concept.
What Is a Passive Income?
Passive income is any income made without ongoing/active participation. It refers to a somewhat automated income stream. What makes this income form passive is that investors are not directly managing the investment. There are many passive income sources.
As with active income, passive income is usually taxable, but it is often treated differently by the Internal Revenue Service (IRS). IRS offers tax advantages to passively earned income (it’s generally taxed at much lower rates).
What Is Passive Income Not?
The word passive can be somewhat deceptive. Many think that to earn passive income, you’re getting money for free. But there is work involved in generating passive income; people just provide it upfront.
Passive income methods need an upfront investment and a lot of nurturing in the beginning. Only once the investment/business is established investors not often have to materially participate to make money.
How Do I Generate Passive Income
So, how to get passive income? Passive income can be produced in many ways. All viable methods of passive income require at least one of the following two prerequisites:
An upfront monetary investment. This type of passive income requires investors to invest money upfront to generate passive income later. Some common examples include dividend stocks, peer lending, automatic investments in the stock market, lending clubs, business investments, and rental properties.
An upfront time investment. Instead of money, investors will need to put in sweat equity to make investment happen. Some common examples include selling an ebook online, network marketing, affiliate marketing, etc. Furthermore, investors can create an online course or an app as a smart method to start earning passive income.
Passive Real Estate Investment
Passive investment in this field requires little hassle and experience while offering a significant amount of liquidity and diversification. Investors provide their money to a party that specializes in doing all the work from there on out. Put simply, passive investment is investing without substantial active participation or hands-on effort from the investor.
Because the level of involvement and required activity varies based on the investment type, it can be said that the term passive income is often used loosely, covering a range of investments from rental properties to earnings made from investment portfolios.
The key difference between passive and active investing is based on the amount of continuing work involved to support the investment. Active real estate investing includes investing in properties where investors participate in the development, construction, renovation, or management of the properties.
Benefits of Passive Real Estate Investing
Here are a few notable benefits of passive real estate investing:
- It lets investors put their money to work in ways they wouldn’t be able to otherwise.
- It does not often require substantial money.
- It involves a shorter time commitment than active investing.
- Investors don’t necessarily need to be an expert in the field they’re investing in. They just need a basic understanding of investment analysis.
Options in Passive Real Estate Investing
Whenever people ponder making money through passive real estate investing, the first thing that likely comes to their mind is rental activity. However, there are several other passive investment options. Some examples include hard money lending, note investments, and investing in industrial complexes, single-family units, duplexes, triplexes, apartment buildings, etc.
Some of the most common passive investment strategies in real estate that are available and produce long-term benefits include crowdfunding, real estate investment trusts (REITs), and real estate syndication, all of which can generate high returns if investors make smart decisions. Below is a general description of these three major passive investment strategies.
A Real Estate Investment Trust (REITs)
REITs are associations, corporations, or trusts that invest in income-producing real estate. They are companies that pool investor capital to invest in large deals. They provide the option of investing in real estate without the requirement of purchasing/maintaining an actual property.
REITs have a special legal structure. They pay little or no corporate income tax if they transfer 90% of their revenues to shareholders/investors. They typically offer higher dividends than many stocks. REITs are generally lower in risk, wider in diversification & potential appreciation.
If investors intend to invest in REITs, it is possible to buy shares directly in them. This can be accomplished just like any other type of public stock listed on a major stock exchange. They can also use a broker, financial planner, or some other professional advisor to help them analyze REITs vis a vis their financial objectives as well as access other private REITs not available on a publicly-traded exchange.
Crowdfunding, which is another way to generate passive income, occurs when investors join forces to purchase commercial properties, single-family home portfolios, and apartment complexes. Once investors select a property that matches their requirements, their funds are pooled with other investors, and the deal is finalized. Investors then begin observing their investment performance and collect the passive income that may accumulate from it.
Real Estate Syndication
Syndication is a partnership between several investors. Real estate syndication deals can be a practical option for passive investors to create a varied and comprehensive investment portfolio with continuous and reliable cash flow streams.
A real estate syndication occurs when groups of investors combine resources, skills, finances, and capital to purchase/manage properties that would otherwise be difficult or impossible to obtain on their own.
What Are the Parties Involved In Real Estate Syndication?
There are usually two key roles in property syndication: syndicator and investor. The syndicator is also known as the sponsor, operator, active investor, and general partner (GP). The GP is responsible for managing the day-to-day operations of a property. As the syndication owner, they have unlimited liability and are accountable for executing the business plan.
General partners locate the asset, conduct the underwriting and due diligence, secure equity investors, obtain debt financing, take all steps necessary to complete the acquisition, and oversee the ongoing property management through disposition. General partners often invest their own money, too.
The other party is the investor, also known as a limited partner (LP), passive income investor, or equity investor. In syndication, the LP is a passive investor who provides a portion of the capital necessary to purchase a property.
In return for their investment, limited partners receive an equity share in the syndication in addition to cash flow distributions and profits. Their liability is limited to their share of ownership in the project. These are skills, amount of available capital, abilities, and capacities that determine which role an individual is best suited for.
How Is Real Estate Syndication Legally Structured?
Like many investments, syndication deals can be risky and complicated. Equity investors join a limited liability company (LLC) or a limited partnership to reduce complications.
The financial management for both limited partners and general partners plus the detailed structure and operation of the syndication is defined and determined in what is referred to as a private placement memorandum (PPM).
PPM is a legal document required by the Securities and Exchange Commission (SEC) outlining the risks, objectives, and terms of making a particular investment. This document is prepared by an attorney that specializes in syndications and private placements. The rules and regulations protect both the limited partners and sponsor if the deal goes sideways.
Why Is Syndicated Passive Real Investing Great for Investors?
There are some pretty standard advantages for passive real estate syndication investing, including:
- Tax advantages (syndication investments offer many tax exemptions. They are superior to just about any other investment vehicle in this aspect).
- No tenant or management hassles (the GP syndicator takes care of all tenant and maintenance issues).
- Liability protection (they are structured so that the limited partners are protected from external liability).
- No banks to deal with (an experienced syndication management team will be the one dealing with a real estate debt lender).
- Scalability (in terms of scaling, syndication surpasses other real estate deals).
- It provides the opportunity to connect with high-quality real estate syndication operators.
- It helps investors grow wealth and develop financial freedom without interrupting their career or lifestyle.
- The flexibility offered to investors (due to the flexibility offered to syndication investors, there are variations on the degree of passivity. The degree of passive or active involvement is not just left to chance. It is established upfront before any money exchanges hands. The level of involvement ranges from an absolutely passive investor to being 100% actively involved in the day-to-day management and acquisition.)
How Does Syndication Work?
Both passive and active investors play a part in real estate syndication. As a manager, the sponsor invests the sweat equity, does all the work, provides the expertise, and makes all management decisions. They receive dividends and a portion of the final pay-off for their efforts.
On the other hand, passive investors inject most of the financial equity with their capital investment. Limited partners often receive preferred status and thus are the first to receive profit distributions and returns on investment.
Active investors are largely responsible for investing about 5-20% of the total required equity capital. Passive investors put in between 80-95% of the total. The more the sponsor invests in the deal, the better it is for the investor.
Although this description is simplified for clarity, it provides an overview of syndication. It illustrates the various roles between passive and active investors.
A passive income stream developed through syndication is an amazingly realistic avenue to grow investors’ wealth. It also helps investors attain financial and time freedom while continuing in the profession.
What Is the Difference between Real Estate Syndication & Crowdfunding?
Crowdfunding is a money/capital gathering method, and syndication refers to the funding relationship between the fund and its funders. In other words, crowdfunding is a type of cooperation between parties in investment deals.
Syndication is an equity-based, long-term collaboration that includes several investors. Crowdfunding is a loan and equity-based fund-raising method (involving a very temporary relationship).
What Is the Difference Between Syndication & REITs?
When individuals invest in REITs, they buy shares in a company, just as when they buy stocks. When individuals invest in a group investment or syndication, they invest directly in a specific property. In other words, they will own the entity (usually an LLC) that holds the asset together with other limited investor partners and general partners. Hence, they have direct ownership.
When people invest in real estate syndication, they invest directly in a real piece of property. When people invest in a REIT, they invest in the company and not directly in property, so the tax benefits are a bit less exciting.
So, What's the Best Method for Passive Investing in Real Estate?
Syndication is an unbelievably effective method to raise large amounts of capital. But each investment will always have its unique pros and cons; therefore, it is essential to understand the terminology, the options available, and the risks to find a deal that best fits your goals and investing style. One place to find up-to-the-minute opportunities for passive real estate investments is through Steed Talker. They can help you make money while you sleep.
One of Steed Talker’s main objectives is to create a world where all creatures, great and small, flourish abundantly. Steed Talker Capital, first and foremost, is avidly concerned for the total well-being of all those with whom they have a relationship. The well-being of their management teams, equity partners, and tenants who live in multifamily housing are of paramount importance.
The whole point of passive investing is to let the investment do the work while the investors pursue other endeavors. If you want to know where to learn more about passive investing and real estate syndication investing, the Steed Talker due diligence team can help you learn how to invest in passive investing to increase your monthly cash flow.
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About the Author - Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax inspires us to break open our minds’ secrets to discover individual and universal well-being. Through passive real estate investments, he helps enlightened investors create time freedom to live abundantly in all life’s areas.