3 Ways to Invest in Real Estate Without Becoming a Landlord

Real estate can be an attractive investment, but not everyone wants the responsibility of being a landlord. Between tenant calls, maintenance issues, vacancies, and rent collection, owning rental property can quickly become a second job. 

Fortunately, there are several options to gain exposure to real estate while reducing or even eliminating many of the day-to-day management responsibilities. Whether you’re looking for a completely passive approach or simply want to outsource the work, here are three ways to invest in real estate without becoming a landlord. 

What is Passive Real Estate Investing? 

Passive real estate allows investors to gain exposure to the asset and diversify their portfolios without taking on the full responsibilities of property management. Rather than handling tasks like tenant screening, maintenance requests, rent collection, and day-to-day operations, property owners use investment structures that reduce or outsource those responsibilities. 

Common examples of passive real estate investing include: 

• Turnkey rental properties 
• Real Estate Investment Trusts (REITs) 
• Outsourcing management responsibilities 

Depending on your goals, these approaches may provide exposure to potential rental income and property appreciation while requiring less direct involvement than traditional landlord ownership. 

Turnkey Real Estate Investing 

Turnkey properties are real estate investments that are purchased, renovated, and occupied by tenants before you purchase them.  

In many cases, they can begin generating rental income shortly after acquisition because the property is already operational. Typically, a turnkey provider relies on local real estate professionals to identify investment opportunities and handle other management tasks. 

Investing in turnkey properties can save significant time and effort because you don’t need to spend months finding properties, managing contractors, or screening tenants yourself. The property management company generally handles the day-to-day operations after purchase, including maintenance requests, rent collection, and tenant communication. 

However, turnkey investing does not eliminate the need for due diligence.  

Investors should still carefully evaluate the property, local market, financial projections, and the reputation of the turnkey provider. And, because much of the work has already been completed for you, turnkey properties may also carry a premium price compared to sourcing and renovating a property yourself. 

Passive Real Estate Investing with REITs 

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. Rather than purchasing a property directly, investors purchase shares in the company. 

REITs may own a variety of property types, including apartment communities, office buildings, healthcare facilities, and shopping centers. 

There are two primary categories of REITs that investors can choose between: 

1. Equity REITs, which generate income primarily through rents collected from owned properties. 

2. Mortgage REITs (mREITs), which generate income primarily through interest earned on mortgages and mortgage-related investments. 

Many REITs distribute regular dividends to shareholders and can be purchased through brokerage accounts, making them one of the easiest ways to gain exposure to real estate. 

It’s also important to consider that while this is one of the most hands-off ways to invest in real estate, you also end up giving up the most control because you don’t directly own it. You also can’t influence property-level decisions, leverage individual assets, or directly manage operations. 

Owning Rental Property Without Managing Tenants 

There are two primary ways to own real estate while minimizing management responsibilities. 

Option A: Hire a Property Management Company 

With this approach, you purchase and own the property, but a professional management company handles much of the day-to-day work. 

Services often include: 

• Marketing vacancies 
• Tenant screening 
• Rent collection 
• Maintenance coordination 
• Lease renewals 
• Evictions when necessary 

Management fees commonly range from approximately 8% to 12% of collected rent, although fees vary by market and service level. Your cash flow will likely also be reduced due to management fees. 

This option allows you to maintain ownership and control while significantly reducing your workload, but you do have to research market conditions, investment opportunities, and management companies on your own.  

Option B: Use a Master Lease 

A master lease is different from traditional property management. 

Instead of hiring a management company as your agent, you lease the entire property to another business or operator. That operator becomes your tenant and is responsible for managing the occupants, collecting rents, and handling many of the property’s daily operational responsibilities. 

As the property owner, you typically receive a predetermined lease payment from the master tenant regardless of occupancy fluctuations. While this generally means that you have steady cashflow whether there is a tenant or not, if rent increases, you might not see that additional income. 

You still have to research potential investment opportunities and do your due diligence when creating the master lease contract. But you also have more direct control over the property and flexibility in choosing the lessee. 

Additionally, If the master tenant fails to meet their obligations or experiences financial difficulties, your income stream could be impacted until a replacement operator is found. 

How are Real Estate Investments Taxed Inside an SDIRA? 

When real estate is owned outside of a retirement account, investors may be able to reduce taxable income through deductions such as depreciation, mortgage interest, repairs, insurance, property taxes, and property management expenses. 

However, inside a self-directed IRA, the tax benefits work differently.  

Rather than relying on annual deductions, the primary advantage is that rental income and gains generally remain within the retirement account, where they can continue growing tax advantaged. Rental income and gains are generally tax-deferred or tax-free depending on whether you have a Traditional or Roth IRA. 

Financing such as non-recourse loans can also change tax obligations inside an SDIRA. In those cases, a portion of the rental income and gains may be subject to rules Unrelated Business Income Tax (UBIT). When calculating potential UBIT liability, operating expenses and depreciation may be considered, making leveraged real estate investments different from properties purchased entirely with IRA funds. 

Adding Real Estate to Your Retirement Portfolio 

Real estate investing does not have to involve late-night maintenance calls, difficult tenants, or managing contractors. 

Turnkey properties, REITs, and direct ownership with outsourced management can each provide a passive approach to real estate while reducing your operational responsibilities. But the right option for you depends on overall goals, desired level of involvement, risk tolerance, and investment timeline.  

If you want to learn more about how real estate can help you build long-term retirement wealth, download our free guide.

Equity Trust Company is a directed custodian and does not provide tax, legal, or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.