The majority of physicians work between 40 and 60 hours per week, with a full quarter working anywhere between 61 and 80 hours per week, according to an AMA Insurance Physician Work/Life profile. Add in continuing education requirements, living life, and family time and most doctors do not have the opportunity or desire to pore over charts, read market news, and dedicate themselves wholeheartedly to growing their retirement savings through active investing.
When most people think about passive investing, they think mutual funds, bonds, maybe precious metals. They do not typically think about real estate, which tends to conjure up images of dedicated home flippers and high-powered property agents and brokers. Despite this perception, there are numerous ways that investors at all capital levels can use real estate to generate passive returns.
Passive Real Estate Investing Defined
In its simplest terms, passive real estate investing refers to any capital investment in a real estate asset, as long as the investor bears no responsibility for directly managing the property. For example, someone who buys, renovates, and resells residential buildings would be considered a direct real estate investor. On the other hand, someone who invests in an income-generating real estate asset with no hands-on management is a passive investor.
Types of Passive Real Estate Investments
Passive real estate investments come in many forms. Investors can purchase equity shares, aka stock, in real estate services or related businesses. Common examples include publicly-traded developers, agent or broker based companies, or residential or commercial construction firms. Private equity real estate assets consist of pooled public and private property investments. Their process generally involves acquiring and financing properties, as well as direct or indirect ownership of properties through the use of a pooled vehicle.
REITs or real estate investment trusts are another popular passive real estate investment. These are companies that own and/or operate large-scale income-generating real estate ventures using pooled investor capital. REITs invest in many different property types, from hospitals to multifamily apartment buildings, to shopping centers, and other income-producing investment properties.
Another popular option for passively generated real estate income is crowdfunding investments. In 2012, Congress passed the Jumpstart Our Business Startups Act, or JOBS Act, which set forth a regulatory framework for online crowdfunding investments. Essentially, crowdfunding platforms allow accredited investors to make direct capital investments in real estate transactions. The deal operates similarly to other debt or equity-based investments and allows investors access to all of the perks offered by passive real estate, like steady cash flow, appreciation, and tax advantages.
Benefits Offered by Passive Real Estate Investments
More free time.
Few endeavors can drain your time as effectively as a rental property. As a working physician, your time is probably in short supply, and it is not likely that you want to spend what little free time you do have keeping appointments with maintenance and repair specialists, collecting delinquent rent, or signing a lease with a new tenant. Active investors are required to be on call day and night, while passive investors have no obligations aside from providing capital and collecting returns.
Pass-through Potential and other tax advantages.
Other forms of passive income, such as stock dividends or interest payments are typically taxed based on the investor's highest tax bracket. Real estate investments allow investors to pass-through depreciation expenses to help offset income on federal tax returns. Equity-structured real estate investments also allow for tax-deferred cash returns that allow investors to leverage or hold on to more of their profits. Depending on the type of real estate investment, there are many other tax benefits available, including Opportunity Zone tax deferral and reduction, low-income housing tax credit, and a wide range of state and local tax advantages.
Benefit from a team of finance and real estate professionals that have your back.
With the rise of digital trading platforms and online financial services, investors are now more empowered to determine the course and direction of their retirement savings. However, a wise person once said: "Just because you can, doesn't mean you should." Passive investments in real estate assets give investors the ability to benefit from the classroom education and real-world experience offered by fund managers and other finance professionals that help drive growth in your investment.
No lender headaches.
Among the more onerous tasks you need to perform when directly investing in real estate is dealing with banks and other lenders to finance your acquisitions, renovations, and ongoing expenses for your property portfolio. Lent-capital can be a powerful tool for expanding a real estate portfolio, but the process of obtaining that capital is no walk in the park, especially for someone unacquainted with commercial real estate finance. As a passive investor, the firm you choose to manage your money takes care of the heavy lifting, including finding lender financing.
Passive Real Estate Investment Risks
Like any other investment, passive real estate assets hold varying levels of risk. During recessionary periods, many forms of commercial real estate suffer from lower rents, more vacancies, and many other effects of a slowing economy. Some property types, like multifamily and self-storage properties, have some counter-cyclical resistance built-in, but for the most part real estate profitability lives and dies with the broader economy.
Prudent investors will add commercial real estate investments to their portfolio based on their personal risk profile. Financial advisors recommend that no single asset or asset class should make up a substantial portion of your retirement savings- the more money one has invested in a commercial real estate asset, the more exposure they have to risk from that sector.
Commercial real estate is an excellent way to diversify out of traditional equities, ETFs, and mutual funds while still retaining growth and capital preservation qualities. As an investment vehicle, commercial real estate can offer investors regular cash flow, potential appreciation gains, and a wide variety of property types and investment avenues that fit investor risk and return profiles. Passive real estate adds on to those benefits with professional-level management and the ability to grow your wealth while you sleep.