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INVESTING 101 EDUCATION

Passive Real Estate Investment Strategies

True passive real estate investments are the ones where you supply the funding, and you sit back and reap the rewards. A passive investment experience doesn’t require anything else from you. You shouldn’t be juggling phone calls, scheduling contractors or installing new window screens in your spare time. That’s called a job. When you’re looking for a real estate investment opportunity that doesn’t require you to have a second job, use the following strategies.

Don’t Chase Cash Flow

True passive investment requires a broad view of the risks and benefits of the available opportunity. A lot of factors go into investment; even more so with passive investment. If you’re single-mindedly chasing down cash flow, it’s highly unlikely you’ll have a passive experience. High returns almost always equate to higher risks, and those higher risks entail a lot more owner involvement. And there’s nothing passive about that.

Buy Close to Median Value

Invest in properties that are close to the median value to achieve the most passive investment experience possible. If you deviate too far below the median value, you’re going to be raking the bottom of the barrel as far as property classes go. You’ll be looking at C and D class properties that are going to be a lot of work. They might not cost you upfront, but they will cost you dearly regarding time, headache, vacancy rate, theft, legal battles and worse. C and D class properties will never give you a passive investment experience.

When you buy close to the median value, you’ll acquire A and B class properties in good neighborhoods that give you consistent, reliable returns and passive experience. You won’t lie awake at night waiting for the other shoe to drop. You won’t worry about how much damage your tenant is causing in your property. You might not see heavy cash flow, at least in the beginning, but you’ll reap the benefits from the six ways that real estate pays you.

Choose Your Property Manager Wisely

Property managers come in all shapes and sizes. There are property managers that give you a truly passive investment experience, property managers who cause you almost as many headaches as troublesome tenants and property managers who will take advantage of you every chance they get. There’s an interesting correlation between the class of investment property you own and the property manager who’s willing to take it on. Top quality property managers generally won’t touch C and D class properties. They know about the risks involved. They know how much work is involved.

When you make the smart decision to invest in A or B class properties, your property manager options will automatically improve. Now you can look for a quality manager who is on board with the concept of passive investing. Look for a property manager whom you can trust to care for your property like it was their own.

Avoid C and D Class Properties

C and D class properties might look great on a spreadsheet. Look at that cash flow. What a great return on investment! Look at that price. What a steal! Unfortunately, it’s unlikely you’ll ever realize those cash flow numbers you see on the spreadsheet. Your renovation expenses, repair bills, replacement costs, high insurance premiums and long periods of vacancy will quickly gobble up any extra cash you might see each month. It’s much more likely that you’ll see negative cash flow because those expenses will overflow into your cash reserves.

When you buy C and D properties, you can kiss passive goodbye. C and D class properties will always cost less than higher-quality properties up front. But they will always nail you to the wall. You’ll be stuck with bad tenants that harass you or your property manager with complaints and endless repair bills. You may even get into legal hot water over pest infestations, illegal tenant activities or neighbor disputes. In short, if you’re looking for passive investment experience, don’t even consider C and D class properties.

Analyze The Market

Market conditions play a feature role in the outcome of any property investment. Historically, you can look at various regions and see how the surrounding markets affected the real estate conditions. One example is Detroit, where the economy heavily relied on the automobile manufacturing presence. When that was gone, Detroit spiraled into a decline from which it has still not recovered. Of course, other factors were at work in the Detroit market, but the auto industry played a big part.

When looking for profitable passive income investment properties, analyze the market carefully. Population growth is a reliable indicator of increasing property values. Increase in jobs is another reliable indicator. However, using Detroit as an example again, it’s important to have diverse job growth. There should be—not one industry—but many different industries present. This ensures that, during an economic downturn, the entire market won’t be devastated should that single industry get washed out.

Take Advantage of the Open Window

Another important strategy is to take advantage of the open window. In any market, there’s a limited timeframe in which to make a good investment where you can get in early enough. You should try to get in on the ground floor, but that’s not always possible. However, it is possible to wait too long in making your decision. Do that, and you could miss your window of opportunity. Give due consideration to your investment options, but don’t wait too long to pull the trigger.

Get Self-Directed

If you have an IRA or a 401K, the best way to get started quickly in passive income investment is to get your retirement account self-directed. Although your account custodian won’t enjoy the transition, this is something that you are legally permitted to do. The only reason your custodian will try to dissuade you is that they don’t make a commission on self-directed retirement accounts. The fact is, it’s your money. When you self-direct your IRA or 401K, you can get into a passive real estate investment that will benefit you – not your custodian.

Be a Private Money Lender

One of the most accessible and most passive real estate investments you can make is becoming a private money lender. As a private money lender, you are the bank. You lend money to companies or individuals who build or develop a property. In this situation, you give money and get a monthly payout on your investment. There’s nothing more you need to do than writing a check. When you invest with AREI as a private money lender, you get a deed of trust. This ensures that in the unlikely event that the borrower defaults, you can take steps to secure the property against your loan. Most private money lenders opt to roll over their investment time and again because of the handsome returns and safety of this passive investment strategy.

Invest in Vacation Rentals

Vacation rentals are another terrific option as a passive investment strategy. Not only do you have rental property in a situation where tourists expect to pay more; you also own a property that you and your family can enjoy when you’re not renting it out.

There are some factors to consider when choosing a vacation rental investment to ensure that it works out that way you want. But once you’ve made sure those things are in place, this kind of investment can be a solid winner.

At AREI, we work hard to make sure our investors have a passive experience. As investors ourselves, we understand that it’s essential to own A and B class properties that attract quality tenants. We offer several different options for passive real estate investments, including single-family home rentals, private money lending and vacation rentals with fractional ownership. To learn more about your passive real estate investment options with AREI, contact us today.

 

A previous version of this post appeared on areiusa.com.