Being a passive real estate investor allows you to reap the rewards of real estate investing, without the headache of actively managing the investment.
When most people think of real estate investing, they automatically think "tenants and toilets", and imagine getting phone calls at 3:00am. However, real estate investing doesn't have to be difficult.
Being a passive real estate investor allows you to grow your capital, obtain passive income, and diversify your portfolio without your active participation. And if one day you plan to become an active investor, starting out as a passive investor will help you learn the ropes.
Appreciation and Principal Pay Down
As the tenants pay down the mortgage on a property every month, a portion of this payment goes to paying down the principle of the loan, thus increasing the investment group's equity in the property.
Also, as the active management team is working to increase the property's income and decrease expenses through capital improvements and efficient management, the value of the building is appreciating. Which once again, increases the group's equity in the property.
And because you’re a limited partner (passive investor) and hold an equity stake in the property, as the group's equity appreciates, your equity in the investment appreciates as well.
Cash Flow aka Passive Income
If you are a limited partner in a property that's a business plan is to hold the property for cash flow, you will get periodic distributions of income. Since you are a passive investor and have no active participation in the property, this is therefore passive income.
As a limited partner, the gains and losses of the partnership are passed down proportionately to you. As you may already know, depreciation is a non-cash expense and can be quite high on commercial properties.
Sometimes the depreciation expense is so large that it creates a paper loss on the property. The loss is then passed along to the limited investor in whats known as a passive loss. Passive losses can offset current passive gains on other passive activities, or be carried into the future and offset against future passive gains. This is actually one way the wealthy end up paying little or no taxes.
The Bottom Line
If you are busy running your own business, happy with your full-time job, enjoying retirement but seeking diversity, or simply have extra cash to put to work then making a passive investment in real estate is something to consider.
Being a passive investor, will allow you to participate in the benefits of real estate investing, without the headaches of being actively involved. The active partners generally provide webinars, monthly or quarterly reports on the status of your investment, and in some cases direct lines of contact with them.