Some people buy stocks to invest in. Others invest in mutual funds. But the best passive investment for most Americans is real estate.
Benefit of investing in real estate
For those of us who are not taking a year off from work or retiring and seeking passive investments, Campusdoc says that real estate offers an opportunity to generate rental income with relatively low maintenance and risk. Sure, you’ll need to tie up some capital to purchase property, but it doesn’t take much money if you plan wisely and find the right deals. You can also borrow up to 80% of the total value of the home you are purchasing so that your down payment is as small as possible (some mortgage lenders will now offer 100% financing).
Another benefit of investing in real estate is that it’s easy to diversify your portfolio. For example, you can buy condos in one market and single family homes in another. Just be sure that the two properties are not too similar or you will be subject to significant risk. For example, if both investment properties are located in the same neighborhood and there is a downturn in that neighborhood, both properties will likely suffer regardless of whether or not they are occupied. This is due to the negative spillover effect that occurs with investment properties.
The concept of diversification works well in real estate, but when it comes to the best way to invest in real estate there are a couple schools of thought. Some investors favor passive real estate investments while others are more aggressive and like to be actively involved in their investments.
Passive real estate investing
Passive real estate investing refers to acquiring properties for long term appreciation and income generation without being directly involved in the property management, renovations or other aspects associated with owning rental properties. This is sometimes referred to as buying rental properties “as-is” because you can buy a property without having to correct existing problems.
The drawback to passive real estate investing is that you are usually limited to properties located in neighborhoods where the demand for rental properties exceeds supply. In other words, if other people have already decided to purchase their own homes without being forced out by skyrocketing prices, then they will be unwilling to rent their units. There is also a risk of losing your money or having your investment property go into foreclosure. However, many of the investment properties in successful neighborhoods have done well over the past five years due to healthy demand, confidence (although some now feel more cautious than others), and a positive national economy.
There are currently approximately 500 real estate companies providing financial services for investors who want to invest in real estate through individual stock purchases. One of the major advantages these companies offer is that investors can buy a single share of an entire apartment building or subdivision instead of purchasing a portion of the project themselves. The downside is that there are several additional fees and commissions with some loan products (and you also don’t have much control over your investments) but you can often get better interest rates and terms when compared to unsecured loans or bank mortgages.
The typical passive investor does not have any experience in real estate investing, so they take their time when researching investment properties and rely upon experts for advice. For example, I’m working with a few investors who have bought two properties in my neighborhood. They are both looking to purchase residential lots rather than investment properties because they believe that the residential market will eventually recover. They may make money in the long term but they are certainly not passive investors.