Picture this: Your bank account is growing steadily, but you’re doing very little to make it happen. In fact, your money is doing all the work, along with a talented investment sponsor. Sound good? Read on. We’d like to introduce you to passive investing.
Definition of Passive Investing
At its most basic level, passive investing is investing to generate an income stream that reliably provides value with minimal work. It’s a way of making money without necessarily having extensive investment knowledge, education, or skill. The phrase “put your money to work for you” might come to mind.
Passive investing can take on many forms, but the premise is always the same: the invested funds ideally grow in value or create a profit without active management or work on the investors part. There is no checking the news to spot stories that could impact your investment or frantic buying and selling as major events take place. With passive investment, you choose the venture, go about your life, and remove your money when the time is right or when the project concludes.
Why Pursue Passive Investing?
Passive investors have many motivations. They may need extra income or want to build a savings/retirement plan. Often, it’s a way of building a better future for their family while still fulfilling existing obligations, like working a full-time job. All passive investors have one important thing in common: they’re looking for a way to build wealth with minimal time investment.
In order to be comfortable with this type of investing, you must be willing to give up some level of day-to-day control over the actual investment itself. The sponsor manages the details of the deal and is the person who will be hands-on with the project. If you’re the type of person who prefers to be extremely involved in your investments, passive investing might not be the ideal fit for you.
To become a successful passive investor, it helps to have a bit of knowledge about investing, financial planning, and/or real estate, but these are not a requirement. The sponsor brings the intellectual capital needed to launch and maintain the project. For many people, this is enormously attractive and makes passive investment the best fit for them.
Benefits of Passive Investing
Here are just a few of the benefits of passive investing:
- No Effort or Time. Passive investing fits right into the lifestyle of busy people who need extra income without extra effort. Perhaps the best part is that it does not require constant research and monitoring that comes with active investing. Most people do not have time to add a second full-time job researching industries and predicting markets. With passive investing, there is no need to do so.
- Supplement Income & Build Savings. Passive investing can cover your monthly bills, allowing you to start working part-time and/or be a stay-at-home parent. It also builds your savings, which could allow you to start a new business or further your education.
- Save for Bigger Expenses. For parents, passive investing could provide an opportunity to create a college tuition fund for your child, cover their medical bills, or take the whole family on a dream vacation. You could even support an aging parent and pay for them to enjoy life in a beautiful retirement community.
- Low Capital Entry. Passive investing doesn’t come with a price tag that’s out of reach. Although some investments might require you to put up a large amount of money, like $500,000, you can usually join real estate syndication (a lucrative type of passive investing) for a minimum investment of $50,000.
Types of Passive Investing
There is more than one way to start generating passive income. Here are some of the most common vehicles for passive investing. Explore these options and determine which might be best for you:
Real estate is a lucrative channel for passive investing that usually involves either working to create new development projects or pursuing a redevelopment strategy of adding value to distressed properties.
Managing new development projects is typically a more time-intensive route that involves more risk, compared to redevelopment. By contrast, distressed property investment is a type of redevelopment that builds investor value through the inherent value of existing properties, plus economic shifts, property upgrades, and new marketing techniques.
Investing in a real estate syndication allows investors to participate in redevelopment projects with much lower capital than if they were to invest on their own—and without the need to do the actual redevelopment work themselves. Real estate syndication brings the power of group buying to the world of real estate investing. In a syndication, a group of investors pool their resources together through a sponsor who manages the actual work involved in the redevelopment project. This is a popular form of passive investing, because you can essentially sit back and wait for returns while your sponsor and your money do the work for you.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
Many people are already engaging in passive investing without knowing it. Index funds are one of the most commonly used investment tools. You can think of index funds as a curated collection of stocks intended to provide broad market exposure and mimic the overall growth of the market. They are premised on the concept that the overall market will always outperform a single stock over time.
Index funds often make appearances in retirement investments because their real attraction is that they can accumulate significant, long-term gains. They have lower overhead, because they are not actively managed. Instead, each index fund is a set collection of securities.
Investors can purchase stock in publicly traded companies with the hope that those companies will produce a profit that is directed back to investors in the form of dividend payments. Some stocks, known as dividend aristocrats, have a long track record of consistently paying dividends and increasing the amounts of dividends.
This method of passive investing requires up-front research to select the investment. Then the investor is subject to the whims of the market and that company’s ability to perform regardless of the bumps in the road.
Cons of Passive Investing
At this point, passive investment may seem like a win-win. For many people, it is the solution to their financial problems, but it does come with some potential drawbacks.
- Market Performance. Passive investing is expected to perform at the same rate as the market. Of course, no returns are guaranteed, and the type of passive investing you choose will influence the possible returns or losses. Any investment carries risk. While we cannot guarantee anything, real estate—and in particular, multifamily real estate syndication—has proven to be among the safest investments available.
- Lack of Flexibility. Some investors dislike the lack of flexibility that they have with passive investing. Passive investing brings transparency in that you know exactly what you are purchasing. But the flip side of that is that the investor may not have as great of an ability to snag a deal or other stock that they find intriguing while their assets are involved in their passive investment.
- Time to Return. Passive investing really shines when you give your investments a period of years to perform. It requires patience and a bit of nerve, because it can be tempting to pull your money to mitigate further loss when your investment is down. Selling low can be the downfall of passive investing, however, if you either do not have the patience or financial means to let your money sit undisturbed until you can cash out at a profit.
Tips for Getting Started with Passive Investing
Let’s take a look at some concrete steps that anyone can take to begin passive investing:
Time or Money?
First, decide whether your upfront investment will be in the form of time, money, or both. When investing with money, you purchase some type of product, whether it is a real estate investment, index fund, or something else. Realistically, these things all require some time investment as well to make an educated decision and get the ball rolling.
Some people nearly exclusively invest time to create passive income. These investors may create a product or service that does not require active management once produced but does provide income in return. As an example, think of digital art or a recorded or written product that is only made once but sold repeatedly.
Starting Small is Still Starting
Don’t forget that you can start small. Passive investing is more than just the stock market or business deals. Placing money in an interest-earning certificate of deposit is passive investing, and so is opening a 401(k) or a savings account. A series of small investments can add up and perhaps even help you feel more comfortable taking bigger investment steps.
If you’re interested in passive investing through real estate, consider an opportunity like investing in a real estate syndicate, which can allow you to join your assets with a group of other individual investors. This can allow you to participate in larger investing opportunities that would not be accessible to you if you were to invest alone.
Weigh Your Risk Tolerance Versus Your Goals
For those who are very risk averse, investing can be so stressful that any profits can feel as hard-earned as from a day job. Every investor needs to carefully consider the consequences if their investments perform poorly.
Passive investing can be a palatable option for those who find monitoring the market to be too troubling, because you sock away money that you do not immediately need and simply monitor your investment without the need for active management.
Start Passive Investing with Real Estate Today
To learn more about passive investing, download our free Guide to Passively Investing in Commercial Real Estate below:
You can also listen to the Real Estate Syndication Show podcast, which is full of helpful information about passive investing. And when you’re ready to start your personal investment journey, contact Life Bridge Capital to discuss forming a passive income partnership.