By: Mark Moore
As more individuals seek the potential for stable income streams, the appeal of earning possible returns from real estate without the daily grind of active management grows. Unlike active property management, which often involves hands-on responsibilities, time commitments, and the 3 T’s of tenants, toilets, and trash, passive real estate investments offer a headache-free path toward real estate ownership.
You can enjoy the potential benefits of real estate ownership while minimizing risk through diversification by spreading investments across various asset classes and geographic locations. The good news is that you don’t need to rely on high debt amounts to invest in passive real estate as well, and you can access these types of investments with as little as $100,000 when investing via a 1031 exchange and $25,000 when participating as a direct cash investor.
Professionally managed options are available with little or no leverage, allowing investors to choose the DST financing scenario that fits with their 1031 exchange needs. Dwight Kay, the founder and CEO of Kay Properties, explores the advantages of passive real estate investments and how they can help you defer capital gains taxes and receive the potential for income and appreciation.
Understanding Passive Real Estate Investments
Passive real estate investments offer a way for individuals to invest in property without taking on the heavy lifting of managing it themselves. Instead of being involved in everyday decisions, passive investors invest in real estate offerings and let professional asset management teams handle the day-to-day affairs of running the property. This type of investment is appealing to those who want to potentially benefit from real estate and tax deferral using a 1031 exchange without dedicating substantial time or effort to the management of that real estate.
“Passive real estate investments are strategies where individuals invest money into real estate without directly managing the properties on a day-to-day basis,” says Dwight Kay. “This allows investors to earn potential returns while minimizing their workload and interaction with repairs, maintenance projects, and tenants.”
These companies that own, operate, or finance income-producing real estate, are called Sponsor firms. The sponsor handles day-to-day operations and management of the property, while investors provide the capital needed to purchase the property.
Investing passively in real estate can also provide diversification across different types of real estate and various geographic locations. It is always important to remember though that diversification does not guarantee returns and does not protect against losses. For instance, investors can choose to avoid higher-risk asset classes such as hotels or senior living facilities, which can be more volatile in times of economic duress. Instead, they can take part in potentially more stable assets like apartment buildings or industrial distribution facilities.
Notes Dwight Kay, “Many passive investment options are professionally managed by a fully integrated team of real estate professionals. This means that investors have the potential to earn returns without worrying about the daily challenges of property and asset management.”
Benefit Potential of Passive Real Estate Investments
Investing in Delaware Statutory Trust real estate can be a smart way to defer taxes via a 1031 exchange and create more leisure time. Passive real estate investments allow you to enjoy the possible benefits of owning properties without the daily hustle of active, hands-on management.
When you invest passively into a DST through a 1031 exchange or a direct cash investment, you can earn regular income potential through properties without having to deal with tenants, maintenance issues, or property upkeep as the DST sponsor company is the one handling all of these daily items.
Many passive investments provide the potential for monthly or quarterly distributions. This monthly cash flow potential can help cover expenses or support your lifestyle. Since you aren’t involved in day-to-day activities, you can focus on other essential aspects of your life, like your career, family, travel, etc.
Because Delaware Statutory Trust removes the responsibility of active management and provides investors with monthly income potential, investors can create more time to do the things they want to do in life. The gift of time is considered by many to be the most valuable asset available to anyone. More leisure time allows investors to get more involved with their heirs or pursue new activities like traveling, learning new hobbies, improving their health, or even focusing on a new career.
Passive real estate investments are managed by sponsor companies that often have a team of professionals on staff to operate the buildings. The DST sponsor company handles tenant relationships, repairs, and financial reporting, allowing investors to focus on other endeavors.
You can invest in multifamily properties, commercial buildings, or even mixed-use developments. Each asset class can perform differently depending on market conditions.
Investing in properties located in different regions can potentially protect you from economic downturns in one area. With passive investing, you can own a part of larger properties without needing to buy them outright.
Strategies for Passive Real Estate Investing
Passive real estate investing can be a solution to 1031 exchange investors without the stress of being a hands-on landlord. When it comes to passive real estate investing, selecting the right vehicle is essential. There are several options available, each with its own pros and cons.
One of the biggest pitfalls in passive real estate investing is getting involved in high-risk properties. Some asset classes carry more volatility than others, and it’s essential to steer clear of these if you want to lower your risk potential. The hospitality industry can be unpredictable due to changing travel patterns and economic downturns. Senior living facility properties also contain heightened risk and require specialized management and face risks associated with changing regulations and market demand.
By choosing to avoid these higher-risk asset classes, such as hotels and senior care, you can create a potentially more stable 1031 exchange investment portfolio. At Kay Properties, we have helped thousands of our clients throughout the United States purchase over 9,000 1031 exchange investments, so our experience is a valuable asset that we provide to our new clients. Remember, slow, steady, and experienced guidance are all critical to a passive real estate investment strategy.
The Potential Advantages of Passive Real Estate Investments
When considering the advantages of passive real estate investments, it’s crucial to understand how they can affect your financial future. By choosing a more hands-free management approach, you can enjoy the potential advantages of real estate without the stress of daily management. One of the biggest potential benefits of passive real estate investments using Delaware Statutory Trusts when investing via a 1031 exchange is the ability to create greater diversification for your portfolio.
By spreading your 1031 exchange funds across different types of properties, you minimize the risk potential associated with any single property. Investing in residential, commercial, and industrial properties as a diversified asset class strategy is something investors are using as a tool to lower their risk potential. All investors need to remember that diversification does not guarantee returns and does not protect against loss.
About Kay Properties
Kay Properties helps investors choose 1031 exchange investments that help them focus on what they truly love in life, whether that be their children, grandkids, travel, hobbies, or other endeavors (NO MORE 3 T’s – Tenants, Toilets, and Trash!). We have helped 1031 exchange investors for nearly two decades exchange into over 9,100 – 1031 exchange investments. Please visit www.kpi1031.com for access to our team’s experience, educational library, and our full 1031 exchange investment menu.
Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions, or appreciation, as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment. Please speak with your attorney and CPA before considering an investment. All offerings discussed, if any, are Regulation D, Rule 506c offerings. Past performance is not a guarantee of future results. Securities are offered through FNEX Capital, member FINRA and SIPC.
Published by: Holy Minoza
