Two Ways to Passively Invest in Real Estate and Earn a High Return

First, before we begin discussing the two ways to passively invest in real estate and get a high return on the money you do invest, I want to acknowledge that should you need to step in and protect your investment, it may become an active investment for you (or the team you might hire). Also, the selection of the investment up front should be an active process. However, excluding those two possible active roles, I would consider this a passive real estate investing strategy. With that full disclosure, let's continue with our discussion of the two ways to passively invest.

First, you could become a private lender.

Private lenders usually lend money secured by a particular property. They earn a return on the money they invest. Payment arrangements can range from monthly payments, to quarterly payments, to yearly payments and even to lump sum payments when the property is sold. You may receive interest only payments for these payments with the entire principal amount to be paid at the end of the investment period. Or, the agreement might include interest and some of the principal so that over time the entire balance of the loan is paid off like more conventional, amortized loans.

Typically when you become a lender on the property you are receiving a set amount of interest on the money you loan and not part of the profit produced in the deal. Using an oversimplified example excluding all discussion of transaction costs, if the loan lasted one year and you had loaned $100,000 at 8% per year you might earn $8,000 on that investment.

Second, you could become an equity partner.

Instead of lending money secured by the property, you may want to find a professional real estate investor and come to an agreement on how to partner on the deal. You may be providing the money and/or credit to buy the property and the real estate investor would be responsible for the activity part of the arrangement.

With this type of investment you may, in some cases, receive interest on the money you have put into the deal as well as part of the profits. Or, you may just receive part of the profit from the deal.

Again giving an oversimplified example excluding transaction and other costs, if you loaned $100,000 in exchange for half of the profit on the deal and the deal took a year from start to finish, but the profit on the deal, after all expenses, was $30,000, you might make $15,000 on the deal and the real estate investor would receive $15,000 as well.

Structuring win-win deals like this is fun and can be extremely rewarding if done correctly. There are almost limitless possible ways to structure them depending on the needs of the people involved. Some lenders might want monthly income. Others may want to maximize capital growth. Some real estate investors might need living expenses while investing the time to manage the project; others might have alternative sources for that. Part of what makes the process of structuring these enjoyable is finding solutions that truly are win-win for all involved.