Real estate investments have the proven ability to deliver powerful benefits to investors, including consistent income, long-term capital appreciation, and portfolio diversification. To capture these benefits, real estate investors can choose from a vast range of strategies. Many market participants start by dividing the real estate investment universe into two major categories: Active and passive investments.
At Trion Properties, investors in our diversified multifamily funds are considered passive investors—so here we’ll take a closer look at the definition of passive real estate investing. We’ll also explore models for investing passively and review key questions to ask when considering a passive investment in a multifamily real estate fund.
What is passive real estate investing?
Passive real estate investing is a hands-off strategy in which investors are only responsible for providing capital that other professionals manage on their behalf. As a passive investor, you choose to put money into a real estate investment—and your involvement generally stops there. You’re not involved in buying, managing or selling the assets; you’re compensating other people to shoulder these ongoing responsibilities. In the eyes of many investors, a key advantage of passive investing is the opportunity to leverage the experience of professional sponsors and operators.
Active real estate investing, on the other hand, is a do-it-yourself approach requiring investors to handle the responsibilities associated with the success of the investment. For example, if you purchase a single-family home as a rental property and are the landlord who manages the repairs and collects rent from tenants, then you are an active real estate investor.
In practice, the differentiations between active and passive run along a spectrum. For example, if you own a rental property but engage a property management firm, your investment slides a bit toward the passive side, although it is still predominately active given your responsibility for overseeing the property manager.
Models for passive real estate investment
The most common passive real estate investment vehicles include:
- Private real estate funds – These vehicles pool together money from investors to deploy across real estate projects in alignment with the goals of the fund. As an individual investor, you’re considered a limited partner (LP). LPs deliver capital, while the general partner (GP) takes responsibility for finding and managing deals to generate an attractive return. Most LPs in private real estate funds are accredited investors or institutional investors.
As a private equity investment company, Trion Properties falls into this category. Our multifamily real estate investment strategy is focused on acquiring opportunistic properties in need of moderate to heavy rehab, with a mid- to long-term investment horizon.
- Crowdfunding – Crowdfunding allows a developer or deal sponsor who has identified an attractive investment to raise the necessary capital from individual investors in exchange for financial interests in the project. Most crowdfunding deals are focused on a specific property.
- REITs and real estate mutual funds – These professionally-managed funds are typically traded publicly and can hold a variety of investments, such as stocks and bonds of real estate companies and direct investments in properties.
Considering a passive investment in multifamily real estate? 3 key questions to ask
Achieving success as a passive real estate investor might not require donning a hard hat to check on renovations or scheduling the plumber—but it certainly does require effort to identify the right investment. In other words, successful passive investing demands careful vetting of funds and sponsors.
As with all types of investments, it’s wise to begin by considering your personal risk tolerance alongside your liquidity and diversification needs. If you believe a passive investment in a multifamily real estate fund may be the right fit, we recommend considering the following points when determining where to place your hard-earned dollars:
- What is the investment strategy? Savvy investors look for a clearly articulated strategy that plays to the GP’s strengths and areas of expertise. Disciplined execution of said strategy is equally important.
- What is the manager’s track record? Consider the historical risk-return profile, especially during challenging phases of the economic cycle.
- How can you monitor your investment? Trust is paramount in passive investing, much of which is derived from transparent reporting. Successful passive investors place a high value on receiving regular communications featuring key metrics and qualitative updates.
If you’re interested in learning more about Trion Properties and passive real estate investing in multifamily funds, we invite you to reach out.