A passive real estate investment is one in which you place your investment into a real property, usually residential but sometimes commercial, which will be renovated and then either rented or resold for a greater price than originally paid at the purchase. But, you do not have to lift a finger, except to invest your money; that the passive part!
The active investor performs the renovations, locates renters or, if the property is designated for resale, the property manager locates and works with the buyers, as well as handles everything about maintenance of the property. Of course, the property does generate a profit for the active investor as well, sometimes a substantial profit, but your profit is 5 - 8% simply rolls in without any hands on work. Of course, the terms of how your 5 - 8% is earned will be clearly defined in the legal documentation supporting the investing agreement.
Your investment capital is safe and secure because you own all or, if you enter int what is known as a 'tenants-in-common' relationship with other investors to buy a larger property (I'll talk more about this later), part of a residential or commercial property's first mortgage. The fact that you own the first mortgage ensures that, should the property be destroyed in a fire or disaster, the insurance covers the capital loss because it pays the first mortgage holder first.
In the next post, we'll look at some math.
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