4 Reasons Passive Investing Makes Sense In Real Estate

Includes: IYR
by: The SeedFeed Team

REIT The variety of options for investing in real estate has expanded considerably in recent years with the popularity of investment via crowdfunding. This is making it easier for small investors to become involved in the market and to explore the possibilities of passive investment. The strength of the commercial market in recent years makes this type of investment a good idea, for a number of reasons.

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. Gain on a partial or entire disposition of a passive activity generally is also passive income.

While not as entirely restful as it sounds, passive investing in real estate can be a smart way to generate income with little regular effort. It's basically income derived from a property in which the investor does not "materially participate." For many investors, this approach makes sense, given the performance of passive assets compared with active investment options in the last few years.


One reason why passive real estate investment is currently so attractive is the accessibility of a huge range of properties. The use of technology and crowdfunding are putting deals from across the country in front of prospective investors, increasing their options. With access to these tools, it's easier for investors to find the deal that suits them best.


A carefully selected property that is well managed will most likely only appreciate in value, without any effort to that end from the investor. This is not necessarily the case with other, more active, investments. Passive real estate investment can be an effective hedge against inflation.

Higher returns

Compared with other investment income, like stock dividends or interest payments, passive real estate investments generate better returns on investment. There are also tax benefits to consider. In an equity-structured investment, passive real estate allows tax-deferred cash returns that let you keep more of your earnings.

Relatively simple exit

When the time comes to sell a passive asset, there are several options for how to proceed. This gives you the freedom to choose the option that's most advantageous and helps you maximize your profit.

Passive investments can't be left entirely on autopilot. U.S. News recommends rebalancing your passive portfolio occasionally and also checking in with the property management company.

Passive investing can also include some work on the front end. Finding the best properties for passive investment involves understanding something about the local market and property history, as well as forecasts for the area. Passive investors can benefit from market advice at this stage, and extensive property information is available online for deals all over the country.

Relying on such platforms has the benefit of exposing investors to a huge range of potential properties, while also presenting them with the relevant third-party information on market trends. When professional insights and information are taken into account, investors can find properties that provide steady income and are part of a very sound investment strategy.