There are several finance experts who would say that real estate could not be purely categorized as passive investment. One main reason is real estate investment requires a lot of effort especially if it is direct investing. However, there's a way also wherein passive investing is possible in real estate.
Peer Finance 101 says "Passive income is technically an income you receive on a regular basis that involves little effort on your part." This means also that you receive income on a regular basis monthly, quarterly or even yearly, but you are not actively involved in managing the business or even "contribute work in the investment."
However, in real estate investment, one can either directly purchase a property or invest through "indirect means." To explain further, "Direct purchase involves a larger up-front cost but generally higher potential returns, while indirect investment can be made through real estate investment trusts (REITs) or tax liens but does not involve the immediate or direct ownership of the property."
So, how to turn real estate investment to passive investing? Seeking Alpha says that there are 4 reasons passive investing makes sense in real estate. "According to the IRS, there are only two sources for passive income: rental activity or a business in which the taxpayer does not materially participate." Making profit on a limited or full "disposition of a passive activity generally is also passive income."
Based on the article, it is a wise means to generate income through passive investment. The investor simply makes money from property that he or she doesn't "materially participate."
So, why this approach in real estate investment works? First reason is Access. Without a doubt, investors are attracted to "the accessibility of a huge range of properties." Technology and crowdfunding are paving the way for foreign investors to get handsome deals that fits them.
Second reason is the appreciation value of properties. Given that the property is well-managed, Investors don't have to exert effort for the possibility of earning more. "Passive real estate investment can be an effective hedge against inflation."
Third reason is higher returns. "In an equity-structured investment, passive real estate allows tax-deferred cash returns that let you keep more of your earnings."
Then the last reason why real estate investment is a good passive income is the relatively simple exit. Investor can choose to sell his or her passive assets, which there are a handful of options to choose from. One can choose the better option which is of course more beneficial for him or her, and can give the investor a maximum profit.
