Many investors are deterred by real estate because they do not have the time or desire to become landlords and property managers, both of whom are actually careers in themselves. If the investor is a rehabilitator or wholesaler, the property becomes a business rather than an investment. Many successful real estate investors are actually real estate operators in the real estate industry. Fortunately, there are other ways for passive investors to enjoy many of the safe and inflation-protected benefits of real estate investments without effort.
Active participation in real estate investments has many advantages. Intermediary fees charged by syndicators, brokers, property managers, and asset managers can be eliminated, potentially leading to higher returns. In addition, as an investor, you make all the decisions; for better or worse, the responsibility for the end result is yours. In addition, the active direct investor can make the decision to sell whenever he wants (assuming that there is a market for his property at a price sufficient to pay off all liens and encumbrances).
Passive investments in real estate are the other side of the coin and offer many advantages of their own. Real estate or mortgage assets are selected by professional real estate investors who have invested, analyzed and managed full time. Often these professionals can negotiate lower prices than you alone can. In addition, when a number of funds from a single investor are pooled, the passive investor can own a proportion of real estate that is much larger, safer, more profitable and better asset class than the active investor who works with much less capital.
Most properties are purchased with a Pfandbrief for a large part of the purchase price. While the use of leverage has many advantages, the individual investor would most likely have to personally guarantee the grade and thus jeopardize his other assets.
As a passive investor, the limited partner or owner of shares in a Real Estate Investment Trust would have no liability risk over the amount of the original investment. The direct, active investor would probably not be able to diversify his real estate portfolio.
With only 2, 3 or 4 properties, the investor’s capital can easily be damaged or wiped out by an isolated problem on only one of his properties. The passive investor would probably own a small stake in a large diversified real estate portfolio and thus significantly reduce the risk through diversification. For portfolios of 20, 30 or more properties, the problems of one or two persons will not significantly affect the performance of the overall portfolio.