According to the 'experts,' there are multiple avenues to begin 'passively' investing in real estate, including broadening the scope of your portfolio. However, many of these so-called passive methods are anything but, and require an extensive investment of your time—and money—to genuinely begin earning income.
Then, you have other recommended means of real estate investing that aren't passive at all—and represent considerable risk to you, the investor. If your goal is secure income without an extensive workload or penalizing taxation, then an UPREIT is still the right choice for you.
At The Peak Group, we recognize that there's a lot of misinformation concerning how to begin investing in a way that benefits your long-term financial freedom. With that in mind, we're going to break apart some of these alternative real estate investing methods piece-by-piece. With this in-depth breakdown, real estate investors can see what we mean when we say that turning to REIT investing is the best option if you want to earn reliable, tax-deferred, and hands-off income.
Fix-And-Flip Investing in real estate
If you want a full-time, time-intensive career in real estate and don't mind working hard and fast (and with all the negative tax implications that accompany this mentality), then flipping a property might be for you! However, flipping a property is not for the faint of heart—or the inexperienced. This version of real estate investing can quickly flop without the right market and property.
- This method requires ready access to capital to make the improvements you'll need to to a home for a profit.
- You'll also need connections to wholesalers or a skilled Realtor who can clue you in on potential property picks before they hit the mainstream market.
- If you're looking for flips on Zillow, you're already behind on the game!
We're in the middle of an artificial seller's market due to COVID-19 real estate shortages right now, so you've got an opportunity to turn a property for a profit—assuming you can finish in time to catch the wave.
With this kind of market, you're going to want skilled contractors already on-call to handle the renovations needed to turn your stake into a gold mine. For this reason and those above, we don't recommend flipping as an option for investors looking to develop long-term wealth through passive real estate investing. There's nothing 'passive' about this method.
Buy-And-Hold real estate Investing
Now, this strategy actually has the potential to earn you passive income—but only if you choose from two potential routes:
- Investing with the help of a property management partner who can manage your investments for you.
- Investing in a turnkey property that already has repairs and a managed renter thrown into the mix.
For either option, if you want this kind of investing strategy to yield true, hands-off income, you're going to want to outsource the management of the property to someone else to keep it from quickly becoming your full-time career.
Few would-be investors actually understand the depth of work involved in managing a rental property on their own. While this option will certainly shelter you from some of the short-term-holding tax implications you'd face through a fix-and-flip property, given that you'll be holding onto the property for quite some time, it's still not the best option for your portfolio long term.
The reality is that, even with the benefits of tangible assets like property that you hold personally, you'll have to face a hefty tax burden down the road when you decide to sell a richly-appreciated portfolio. This makes traditional buy-and-hold methods still less favorable to the investor compared to an UPREIT if you're trying to pursue truly passive real estate investing.
Working With an UPREIT
Here's where the benefits of an UPREIT structure really start to make sense, given the traditional examples listed above:
- The barrier to entry compared to traditional investing is considerably less: $25,000 to get started compared to the purchase of an entire property or the capital needed for a fix-and-flip investment.
- Properties are professionally managed by the operating partnership of the UPREIT, allowing your income potential to be completely hands-off beyond acquiring more operating units. Plus, the value is still based on tangible, successful assets held by the UPREIT—so your investment is not only diverse but secure.
- Buy-in operating units can be enjoyed on a tax-deferred basis until they are converted into cash assets, which makes acquiring wealth in this form easier to parse should you need to convert operating units later to fuel your lifestyle. This also prevents the 'House Rich, Cash Poor' label attached to traditional investing.
- Returns within an UPREIT are higher than what solo investors can achieve on their own. This kind of income potential makes investing in an UPREIT far more desirable than other forms of passive real estate investing!
Of course, the many benefits of an UPREIT structure for investors are too numerous to list here.
Take the Next Step Towards Financial Freedom With the Peak Group!
If you want to learn more about the potential returns you could be seeing with an UPREIT, it's time to get in touch with the investing experts at The Peak Group.
If you want to learn more about the advantages of avoiding a traditional portfolio or converting your portfolio into operating units, then start by downloading our free guide: Let Freedom Ring!
Posted by The Peak Group on September 3, 2020