Low-effort real estate investments explained

Low-effort real estate investments present an excellent opportunity to build wealth over time without owning and managing investment properties. If finding tenants and handling maintenance issues is not for you – keep reading to find out how to enter the world of passive real estate investing as a busy professional. 

Luckily, the rise of investment vehicles like real estate investment trusts (REITs) and real estate crowdfunding platforms as well as online real estate platforms has opened up new opportunities. These innovative options provide exposure to real estate with a low-effort, passive approach. Instead of being actively involved, you essentially outsource the day-to-day management and operations of real estate investment trusts to professionals.

In this article, we’ll explore some of the most popular low-effort real estate investments. We’ll look at how they work, pros and cons, examples, and tips for getting started. Whether you’re a new investor or just looking to diversify your portfolio, these low-effort real estate investments alternatives are worth considering.

1. Real Estate Investment Trusts (REITs)

REITs provide a way to invest in real estate similar to stocks. A REIT is a company that owns, operates, or finances income-producing properties. Some focus on specific sectors like apartments, office buildings, healthcare facilities, and more.

You simply purchase shares of a REIT on a major stock exchange. The REIT managers handle property selection, management, leasing, maintenance, and everything else. As a shareholder, you earn a portion of the rental income without any of the landlord’s responsibilities. Most REITs also pay regular dividends.

For hands-off real estate exposure, REITs offer:

• Easy access: REITs are purchased just like stocks through an online brokerage account, providing easy access for investors.
• Low investment minimums: Shares of publicly traded REITs can often be purchased for a few dollars each, allowing investors to get started with a modest initial investment.
• Diversification: REITs own hundreds of properties spread across different real estate sectors and geographic regions, providing built-in diversification.
• Liquidity: Unlike owning physical property, REIT shares can be sold readily on stock exchanges, providing greater liquidity.
• Passive income: REITs pay out regular dividends to investors based on the income generated from the underlying rental properties.
• Professional management: REITs employ professional real estate managers to handle acquisition, leasing, maintenance, enhancements, compliance, and other operational aspects of the properties.

As with any investment, there are some downsides to note:

• No control: REIT shareholders do not have direct control or input into the selection, purchase, or management of the underlying properties.
• Vulnerable to market swings: Like direct property ownership, REIT values can fluctuate based on overall real estate market cycles and changing property values.
• Fees: REITs have operating expenses and management fees which reduce the earnings available for distribution to shareholders as dividends.
• Interest rate sensitivity: Since REITs use leverage and debt financing, their costs and returns can be impacted by changes in interest rates.
• Tax inefficiency: REIT dividends are taxed at an investor’s ordinary income tax rate (in the US) rather than the lower capital gains rates for profits on property sales.

Still, for hassle-free real estate investing, REITs offer a compelling option. Leading public REIT examples include Equity Residential (EQR) in apartments, Crown Castle (CCI) for cell towers, and Prologis (PLD) for logistics facilities.

2. Real estate crowdfunding

Crowdfunding has opened up real estate investing to more people than ever before. These online platforms allow you to pool money with other investors to fund properties and real estate projects. Each investor owns a share of the asset proportional to how much they contributed.

The crowdfunding company handles the entire process: property selection, vetting, financing, management, and eventual sale. You sit back and earn returns based on the project performance. Many platforms also focus on commercial real estate like self-storage, medical offices, etc. in addition to apartment buildings or multifamily.

Compared to REITs, the real estate companies’ crowdfunding offers:

• Low investment minimums: Real estate crowdfunding platforms allow investors to get started with minimal capital, often as little as a $100 minimum investment.
• Prefunding review: Platforms conduct due diligence on properties before listing them for fundraising, so investors know deals have been vetted.
• Direct ownership: Investors typically own actual fractional interests in the properties and deals listed on crowdfunding platforms.
• Higher returns possible: Crowdfunded deals allow investors to benefit from appreciation upside in addition to rental income.
• Online accessibility: Everything from browsing deals to funding investments occurs seamlessly online through the crowdfunding platform’s website.

There are trade-offs to consider as well:

• Illiquidity: Crowdfunding investments are typically illiquid, with no way to cash out until the property is sold or the investment term ends.
• Limited oversight: Investors depend on the platform’s vetting of deals and have limited oversight after investing.
• Higher risk: Crowdfunded deals lack the diversification of a REIT, concentrating risk into individual assets.
• Failed raise risk: If enough investors don’t commit, the project isn’t funded and money is returned with no investment made.
• Partner risk: Having many co-investors means actions by others can impact your investment for better or worse.

By taking the right precautions, crowdfunding can offer solid passive, real estate fund exposure.

3. Investing in real estate syndications

Real estate syndications represent another form of passive real estate investing that has gained popularity. With syndications, a group of passive investors pool their funds to purchase larger commercial properties.

The sponsor is an experienced real estate investor that identifies and vets the property deals. They also handle securing financing, overseeing renovations, managing the asset, and eventual sale. The passive investors contribute the majority of the equity capital needed to purchase the property.

As a passive investor in a real estate syndication, typical benefits include:

• Fractional ownership: Syndications allow investors to own a portion of a large commercial property that would otherwise be unattainable.
• Higher returns: Unlike REITs, syndications offer profit participation if the property appreciates in value.
• Tax advantages: Investors can benefit from depreciation deductions possibilities to defer taxes.
• Low minimums: Compared to direct ownership, syndications allow investing in commercial real estate with smaller minimums.
• Diversification: Investing in multiple syndications provides geographic and asset class diversification.

There are certain risks with syndications to weigh as well:

• Illiquidity: Syndication investments are illiquid, with funds tied up for 5-10 years or more until the asset is sold.
• Accreditation: To invest, accreditation proving high net worth is typically required, limiting the investor pool.
• Key person risk: The success of a syndication heavily relies on the skills and experience of the sponsor leading it.

Overall, syndications offer passive real estate investing at scale for qualified investors. With the right sponsor, they can enhance portfolio diversification and returns.

4. Hiring a property manager

If you want low-effort real estate investment and already own a rental property, consider hiring a property management company. These firms specialize in managing single-family rentals, apartments, and commercial properties on behalf of landlords.

You retain ownership of your properties while the property manager handles everything from marketing, tenant screening, maintenance requests, rent collection, compliance, and more. In exchange for overseeing the day-to-day and dealing directly with tenants, they charge a percentage of collected rent.

The main benefits of hiring a property manager include:

• 100% hands-off: With a property manager, landlords have no day-to-day responsibilities like maintenance, rent collection, etc.
• Quality tenants: Property managers professionally screen applicants resulting in higher quality tenants.
• Professional maintenance: Repairs and maintenance are performed correctly by licensed professionals.
• Consistent collections: Property managers enforce strict payment policies to ensure regular, on-time rent collection.
• Oversight: Property managers oversee all budgets, taxes, lease filings, and paperwork for properties.
• Peace of mind: Outsourcing to a property manager provides freedom from the stresses and headaches of DIY rental ownership.

Downsides to consider:

• Added cost: Property management fees are an extra expense paid out of rental income, reducing overall investor returns.
• Risk factors: While reduced, risks like vacancies, maintenance costs, and non-paying tenants still exist with a property manager.
• Less control: The property manager makes day-to-day decisions instead of the owner having full control and oversight.
• Management risk: There is always the risk of poor management, dishonesty, or incompetence leading to issues. Proper vetting is essential.

Leading other property management companies operate across many states as franchises, while there typically are also smaller local firms available.

Advantages of low effort real estate investments

Let’s look at some of the typical advantages of low-effort estate investments: 

Lower investment minimums expand access

In the past, the high cost of individual property investments limited real estate investing to high-net-worth individuals and institutions. Minimum investments of hundreds of thousands or millions of dollars restricted access for regular investors. Passive vehicles like REITs and real estate crowdfunding platforms lower the barriers to entry.

For example, you can invest in a publicly traded REIT for the price of a single share. Top REITs like American Tower or Crown Castle trade for $100-200 per share. Real estate crowdfunding minimums often start from $100.

This makes real estate investing possible for those without six figures to invest. Of course, higher investment amounts allow greater diversification and upside. But lower minimums let nearly anyone participate.

Democratization allows more people to benefit from real estate returns. Appreciation and rents that were only available to the wealthy are now opened up to all investors. Anyone can supplement their real estate income either through quarterly REIT dividends or monthly crowdfunding distributions.

Diversification reduces risk

Savvy investors know not to put all their eggs in one basket. Proper diversification means spreading investments across:

• Asset classes: stocks, bonds, real estate, alternatives.
• Sectors: healthcare, retail, industrial, multifamily.
• Geographic locations: both in your home country and abroad.

Directly owning investment property makes diversification difficult. The costs of purchasing multiple properties in different markets is prohibitive for most individual investors.

Low-effort real estate investments provide built-in diversification. REITs own hundreds of properties across multiple sectors, cities, regions, and countries. Real estate crowdfunding platforms also provide access to varied assets.

This diversification reduces risk through exposure to multiple markets. If one property or location underperforms, gains in others offset the losses. Geographic and sector diversification also protects against localized economic downturns.

Passive options offer liquidity

The illiquid nature of direct real estate investments locks up capital. Selling a property can take months. If you invest through your retirement account, illiquidity can come with huge tax penalties.

Passive real estate investing offers greater liquidity in most cases. REIT shares trade daily on stock exchanges so you can sell anytime. Leading crowdfunding platforms often offer redemption plans to cash out each quarter or annually.

Greater liquidity gives you flexibility. You can rebalance or cash out of a poorly performing investment faster. Sudden financial needs are easier to address without your capital locked up.

Of course, some passive real estate investments still come with liquidity restrictions. Private REITs and certain crowdfunded projects may only allow investors to cash out after a few years for example. But in general, a passive investment in real estate provides more flexibility than direct ownership.

Professional management as a key benefit

Identifying promising properties and managing them successfully requires real estate expertise. From locating hidden value opportunities to navigating complex lease agreements, it’s no easy task. Utilizing professional management is a major benefit of passive real estate investing.

Public REITs invest billions into top talent across real estate acquisitions, development, operations, finance, real estate agents, and more. Real estate crowdfunding platforms also employ experienced teams for vetting deals and overseeing operations.

As a passive real estate investor only, you gain the advantage of proven real estate pros acting on your behalf. The supply of quality real estate investments is vast. Gaining access to the best opportunities requires boots on the ground across major markets.

Passive formats let you piggyback off real estate experts’ knowledge and experience. Management teams handle sourcing, diligence, operations, and maximizing returns. This lifts the burden from your shoulders.

Strong track records drive performance

Industry skeptics often question whether everyday investors could consistently achieve returns through passive real estate investing. The performance track record of operators and RETIs helps put those concerns to rest.

Data shows that top-tier sponsors and investment platforms have delivered consistent returns over time:

• Public REITs: Nareit reports average annual returns of 11.39% for equity REITs in the period from 1972 – 2022. 
• Crowdfunding: Leading platforms have track records of operators that showcase individual returns. 

These returns stem from experience driving performance. The best REIT and crowdfunding sponsors have institutional-quality track records. For passive investors, this makes historical performance a strong indicator of future expectations.

Of course, past performance never guarantees future returns. But proven track records give credence to the role passive real estate investing can play in an investment portfolio.

Understand the tradeoffs of passive investing

Passive real estate investing offers convenience and accessibility in exchange for direct control and involvement. While attractive for many investors, passive investing has inherent limitations to consider.

Less control over investment decisions

With rental properties, you choose when to buy or sell, which upgrades to make, and how to optimize operations. Passive vehicles restrict this control and input.

Public REITs are fully self-managed. Investors have no direct influence over acquisitions, financing, enhancements, or dispositions. Crowdfunded projects often provide periodic voting rights for major decisions, but individual investors rarely have full control.

Accepting this limited control and placing decision-making in managers’ hands is an inherent tradeoff. The benefit is avoiding the day-to-day responsibilities that come with control. But for proactive investors, fully passive options can feel restrictive.

Potentially lower returns than active management

Generating higher returns often requires a hands-on approach. With direct ownership owning rental properties, investors can implement strategies like updating units, raising rents to market rates, and holding out for maximum sale prices.

Low-effort real estate investments mean relying on an external sponsor or manager to make these value-added decisions. Their more conservative approach generally results in solid but not spectacular returns for investors.

Top-tier sponsors do aim to provide strong returns. But they likely won’t reach the same maximum upside as active, entrepreneurial individual investors pursuing aggressive strategies. This potential opportunity cost is worth accounting for.

Less ability to customize to your preferences

Owning your own rental property or portfolio of units allows customizing and managing rental properties to match your priorities. You control factors like location, amenities, tenant policies, and more.

With passive real estate investing, you invest according to the sponsor or mutual fund’s strategy rather than your own preferences. The properties in a REIT’s portfolio won’t align perfectly with what you would select yourself.

If a personalized touch is important, passive options involve some sacrifice. But most investors are willing to give up customization for greater convenience, diversification, and professional management.

Need to trust in third-party sponsors

Even with rigorous due diligence, passive real estate investors must trust external sponsors to some degree. You depend on their expertise and decision-making to generate returns.

Scandals like alleged fraud at some REITs demonstrate sponsor risk is real. Thankfully, the most reputable platforms maintain high standards and track records over time. Still, you are ultimately reliant on their integrity and discipline.

Conducting thorough sponsor vetting before an active real estate investing, is critical to minimize adverse selection. Top-tier sponsors make low-effort real estate investing viable through prudent management.

Longer time horizons to meet exit goals

Unlike stocks which you can sell anytime,  low-effort real estate investments often come with multi-year time horizons. REITs are relatively liquid. However, private funds and crowdfunded projects commonly lock up capital for many years.

Your exit timing is subject to the sponsor’s investment thesis and projected holding period. Sudden liquidity needs could force you to take a loss compared to waiting for full-cycle returns.

Accepting longer timelines to achieve target returns is standard for passive and active real estate investments. Patience and sticking to your long-term plan pays off.

Key takeaways

While low-effort real estate investment offers many perks, it inherently requires giving up some control, customization, and liquidity compared to owning properties directly. Returns may lag behind active management strategies in some cases.

Thorough vetting of sponsors helps reduce adverse selection risk and builds trust. Despite tradeoffs, the benefits often outweigh the drawbacks for investors who lack the time or experience to invest directly.

Understanding these limitations allows for setting realistic expectations. Low-effort real estate investments can play an important portfolio role under the right conditions.