4 Passive Real Estate Investing Strategies

Passive Real Estate Investing Strategies

1. Syndications

A syndicate in real estate investing is a group of investors that pool their resources and expertise to buy real estate properties as investments. The investment is organized by one partner, who also signs up the others to take part.

The Sponsor, sometimes referred to as the Syndicator, is the member who ties everything together. The purchase or construction must be completed and income must be generated by the syndicator. The Sponsor oversees all operational aspects of the business, including income distribution.

Members of the syndicate are passive investors. When income is shared, they get a better position in return for their money. Nonetheless, the partnership’s business can only be handled by the manager(s) of the syndicate.

Real Estate Market

The region in which you decide to join a Syndicate will depend on the investing strategy you want. Review the prior sections of this guide on the active real estate investment techniques to get more information about local market-related variables crucial for common investment approaches.

Sponsor/Syndicator

You must investigate the Sponsor’s integrity as a passive investor who relies on the Syndicator with your money. They should be an experienced investor.

No cash may be put into the syndication by the sponsor. Nonetheless, you want them to invest money in the venture. To ensure that the project is lucrative, the Sponsor is contributing their time and expertise. A Sponsor’s payment may involve ownership in addition to an initial payment, depending on the conditions.

Ownership Interest 

The stockholders together control the entire Syndication. Everyone who invests money in the business should anticipate owning more of it than members who don’t.

Ask for priority payout when income is divided while you are contributing money to the project; this will boost your outcomes. Actual investors are the first to get a predetermined portion of their invested funds when profits are realized. All members receive the remaining profits after the preferred return has been delivered.

If the assets of the syndication are sold for a profit, the owners split the proceeds. An investor’s returns are significantly increased by including this in addition to ongoing income from an income-producing property.

2. Mortgage Note Investing 

When an investor buys an existing mortgage from a lender, they do so with both the debt and the note that secures it. The investor can now collect recurring payments from the borrower as the new lender. If the borrower doesn’t make payments on time, they also have the power to foreclose on the house.

Many property owners are unaware that when they obtain a mortgage, the note doesn’t always remain with the original lender. Lenders frequently offer the loan and related contracts for sale to other organizations or private investors. To get it off their books, they typically do so at a discount, which presents possibilities to astute investors.

You acquire the same legal standing as any other ordinary lender when you buy a mortgage note, which entitles you to monthly payments from the borrower but not to ownership of the collateral. Yet, it also implies that you are not in charge of maintaining and managing the property. So, investing in mortgage notes is a terrific option to get passive income without having to deal with all the duties that come with owning a typical investment property.

How To Make Money on Real Estate Notes

A. Buy and Hold Performing Note 

Mortgage notes can be divided into two fundamental categories: performing and non-performing. A performing note indicates that the buyer has made all required payments, whereas a non-performing note indicates that the borrower has fallen behind on payments. Purchasing loans that are currently performing and collecting the payments as passive income is the simplest approach to make money buying mortgage notes. As long as the buyer keeps making payments, you will eventually return your initial investment if you can repurchase the debt at a discount. Following then, without doing much work on your part, you can collect 100% profit up to the loan term’s end.

B. Rehab the Note

If you want to make even more money, there are more complex tactics you may try, such as rehabbing the note. Buying non-performing loans, negotiating conditions with the original borrower, and then selling the note to a different investor are all steps in the process of “rehabbing” mortgage notes. You can accomplish this by negotiating new terms with the lender so they can resume making payments.

Let’s say they got a mortgage with a 15-year term but are now unable to pay. You might be able to persuade them to switch to a 30-year loan, which would enable you to lower the monthly payment to a level they could manage. After they begin making payments once more, you can then sell the mortgage note to another investor at a profit.

C. Flip The Note 

Another tactic you might think about is flipping notes. You just purchase discounted notes from a lender and resell them to other investors at a profit. To accomplish this, it is customary to buy notes in bulk from a lender before selling each note to other investors for the full retail value. Being a middleman and selling notes is a relatively low-risk approach to make money. Finding high-quality mortgage notes with enough value to draw in additional investors, however, is the challenging part. So, in order for this method to be successful, you must thoroughly examine the underlying mortgages and locate a lender ready to sell high-quality loans at a discount.

D. Take Ownership of the Real Estate

Take ownership of the physical house and manage it like any other investment property is an alternative method. You can achieve this by buying non-performing notes, making a cash offer to purchase the home, or, if the owner continues to default on payments, starting the formal eviction procedure. This procedure is a little more difficult and does necessitate that you take on the extra duties of renovating, renting out, and selling the house. Nonetheless, it can be a clever strategy for locating investment real estate at a big discount.

3. REIT

Real estate investment funds, or REITs, are essentially mutual funds with a focus on the real estate sector. The firms that the fund invests in own the investment assets, not the fund itself. More investors can now afford to invest in real estate thanks to these funds. Unlike funds, REITs are intended to provide dividends to their shareholders. The projected rise in share value is what makes a fund valuable to an investor.

You can locate a fund that concentrates on a certain sector of the real estate industry, such as multifamily, but you are not permitted to recommend the fund’s investment properties or markets. As an investor, it is up to you to decide which fund to trust with your real estate holdings.

4. Real Estate Investment Funds

In essence, real estate investment funds are mutual funds with a focus on real estate ventures, including REITs. The companies in which the fund invests are the actual owners of the investment assets, not the fund itself. More investors are able to purchase real estate thanks to these funds. Funds do not often provide dividends to their owners, whereas REITs are supposed to. The expected increase in the value of the shares is what makes a fund valuable to an investor.

You can discover a fund that specializes in a particular real estate venture, such as multifamily, but you cannot recommend the fund’s investment assets or markets. It is up to you as an investor to decide which fund to trust with your real estate investments.