Direct Passive Real Estate Investing
In this case , an investor will purchase a property , which is then rented out to a tenant . This can be done in the form of shortterm or longterm rentals . In order to simplify the process , many investors will hire a property management company to do timeconsuming duties like maintenance , rent collection , or any other situations that may arise . This allows the investor to have very little active responsibility in their investment , making it a passive investment .
Indirect Passive Real Estate investing
Suppose you want something that requires even less involvement than being a landlord and renting out a property to a tenant . In that case , you can invest in an indirect passive real estate investment by investing in a real estate investment trust ( REIT ). You will have no daytoday tasks related to this form of investment and do not need to have very much real estate knowledge to be successful . You will still collect income in the form of returns and dividends .
Different Types of REITs
Real estate investment trusts are made up of corporations , trusts , or associations . These groups invest in large incomeproducing real estate like commercial buildings , hotels , data centers , or apartment complexes . Investing in a REIT is usually a lowrisk investment and is traded like a stock .
There are three types of REITs you can invest in :
1 . Exchangetraded : Registered with the SEC and listed on exchanges like the NYSE .
2 . Nontraded : Registered with the SEC , but do not trade publicly . These tend to be more stable since they do not fluctuate with the market .
3 . Private : Not registered with the SEC or traded on exchanges . They raise funds through private investors .
A wellmanaged REIT lessens risk by including large groups of properties rather than individual properties . One good thing about them from an investment standpoint is that they provide annual dividend income as well as longterm appreciation . You are usually able to withdraw money from the REIT when you need it , but will be subject to paying taxes on your returns .
There are a couple of downsides to investing in REITs . They are required to distribute 90 % of their profits annually , which means they are not able to reinvest funds annually , which can prevent longterm growth . You also don ’ t have a tangible asset and cannot control any part of the decisions made related to your investment .
Tax Liens
Another passive real estate option is investing in tax liens . According to the National Tax Lien Association , $ 14 billion in property taxes go unpaid each year . When a homeowner falls behind on their property taxes , the county or municipality where the property is located will issue a tax lien against the property , which the tax assessor ’ s office usually issues .
These tax liens can be auctioned off to investors . If you win a tax lien auction , you will earn interest until the homeowner pays off the outstanding taxes . You receive your share and accrued interest when the homeowner sends the county a tax payment .
Interest rates on a tax lien can be as high as 12 %, which would give you a very nice return on investment . In very rare cases , you may even be able to foreclose on and acquire the property for an incredibly low price .
Tax lien investing can be confusing and may be more work than a passive real estate investor is willing to commit to . Depending on the state you purchase the tax lien from , you may be required to notify the homeowner frequently in an attempt to collect the debt . This is certainly not for everyone .
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