Things to Know About Passive Real Estate Equity Investment

Investing in real estate is a profitable deal; no wonder many people choose to invest in properties. It promises a steady cash flow, offers long-term security, has tax advantages, protects against inflation, and is a source of passive income. 

Real estate investment is of various types, including residential, commercial, industrial, and raw land. Although commercial properties provide the highest cash flow, residential ones also hold the potential for higher returns.

But there’s another investing you should know about: passive real estate equity investment. It is a kind of investment strategy where you invest in a residential property as a limited partner (LP) without playing an active role in its maintenance or regular upkeep.

Here are more things you must know about this investment strategy.

An introduction to passive investing 

Passive investment is of various types, like remote ownership, crowdfunding opportunities, and real estate investment trusts (REITs). But, regardless of which of these you choose, the advantages are shared by them all.

One of the advantages is having the option to invest in large assets that you would be unable to individually. No wonder various experts predict passive investment to overtake active ones in the coming years, particularly in a bear market (one which sees a steady decrease in share prices).

What are real estate syndications?

When a group of investors invests their money together to buy an asset they would be unable to themselves, it’s known as real estate syndication. It allows you to invest in the capacity of a limited partner (LP) alongside syndicators like equity firms.

The role of the equity firm is to find cash-flowing multifamily properties and collect funds through outside investors interested in investing, forcing appreciation, and managing the asset. 

Forced appreciation refers to a process where the owner increases the property’s value through various methods like increasing rent, generating cash flow, and efficiently managing property-related expenses.

How many parties are involved?

Several parties are involved in these investment strategies. These include you (as the passive investor), lenders, certified public accountants (CPA), brokers, attorneys, property managers, and the syndicator (which is usually the equity firm that manages the asset).

While the lender or the bank contributes between 70% and 75% of the funds, you and the syndicator contribute 25% to 30%. However, the exact percentage might vary depending on the property in question.

Types of property available for investment

Generally, passive real estate investment is available for Class B and C multifamily properties. Multifamily properties are apartments or townhomes that accommodate more than a single family, in contrast to a single-family home which houses a single family.

Class B properties refer to houses built in the last 15 to 25 years, contain limited amenities and facilities, have an average vacancy rate, enjoy a good location, and might have some pre-existing issues that need to be addressed. 

Class C properties are a notch lower than Class B properties. These are between 30 to 40 years old and require upgrading in several areas to keep them in good condition. The rents are pretty moderate, the vacancies are higher, and the collection rate is reasonable. They usually have various deferred issues.

Which property should you invest in?

Depending on your long-term goals, there are advantages to investing in both these properties. Investing in Class B properties comes with lower risk as they are located in good areas with high demand for rentals. 

Class C properties carry some risk because of their location, need for several repairs, and lower rents because of a demographic with low income. However, you get various opportunities for increasing their value and fixing a high asset price while exiting a deal.  
You should consider passive real estate equity investment because of its various advantages, from availing multiple tax benefits to enjoying a steady cash flow every month. Most of all, you can invest in large properties you wouldn’t do yourself.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.