Passive real estate investing is defined as an investment, or the acquisition of something with the expectation of generating income, in real estate that requires no investment of your time to operate or manage the asset. Investors invest a sum of money into an income generating asset that is backed by a note and a first position lien on a property.
Passive contrast to active investors, who are investing both equity and time into a real estate investment in order to generate a return. Among active real estate investors, there are newbies, part-timers, full-timers, and high-volume investors.
New investors with little to no industry-related experience, but want to get into real estate investing, we call “newbies.” Typically, these active real estate investors are riskier when it comes to executing the projects they undertake simply because they have less experience. Some investors can be considered “part-timers,” who use flipping as a side hustle, meaning it is not their main source of income.
Many active real estate investors are considered “full-timers,” as they use real estate investing as their main source of income. They have a legitimate business set up with full-time employees and a network of contractors with multiple teams that they typically use, and they typically execute similar types of projects. Finally, “high-volume” flippers are the highest tier of real estate investors. They work on a larger scale than full-timers and have repeatable systems and processes, allowing them to work at a higher velocity.
Regardless of what type of investor they are, there are multiple types of projects they may complete. One example is wholesaling. Sometimes the borrower never takes ownership of the asset, but instead they simply assign the contract to someone else. There are other cases where a borrower may close on a property with the intention of doing little or no work to it, and then sell it to another investor at a higher price point than they paid.
The next type is a fix-and-flip. A fix-and-flip is when a developer acquires a piece of real estate with an existing dwelling on it with the intention of rehabilitating the home, and therefore, increasing the market value before they eventually sell it for a profit.
To complete fix-and-flips, investors need funding via fix-and-flip loans. Fix-and-flip loans are typically short-term loans that include acquisition and construction components to them.
The fix-to-rent method is similar to fix-and-flip, but rather, the investor rents the property to tenants upon completion rather than selling it. The build-to-rent method is when a developer acquires a piece of real estate with the intention of constructing a new home on it, and therefore, increasing the market value before tenanting the property to hold long term for monthly cash flow.
Lastly, the build-to-sell method is when a developer acquires a piece of real estate with the intention of constructing a new home on it, and therefore, increasing the market value before eventually selling it for a profit.