Real estate offers a number of benefits, including the chance to earn a side income. But for others, it’s also an opportunity to grow their money and build long-term wealth – sometimes, without even having to spend much of their own time or energy.
How is this possible? Simple: through passive investing.
One of the great things about real estate is that it allows you to grow your income on your own terms. You can be as hands-on or hands-off as you’d like. This versatility means that there really is something for everyone, and for those who are looking to generate passive income, there are a number of different opportunities that are available, including rental property, REITs, and more.
So how do you get started with passive income? Is it better than hands-on investing? Is passive income right for you? In this article, we’ll uncover what types of passive real estate investing opportunities are available and show you how you can get started.
Looking to get started in real estate investing? Check out these 11 tips for stress-free investing.
What Is Passive Real Estate Investing?
With traditional real estate investing, you need to put in the work to see your desired results. You have to be proactive with your investment. Most of the time, it requires you to be hands-on with the day-to-day operations of your investment, which, for most prospective investors, is impossible.
But what if you could enjoy all these benefits without getting your hands dirty? What if you can invest in real estate without taking responsibility for the management and maintenance of the investment property?
With passive investing, you can enjoy all these benefits without taking an overly active role like conventional real estate investors. Passive real estate investing allows you to have an ownership stake in an investment property without getting involved in the day-to-day management and maintenance operation of the asset. This investment strategy provides you with the opportunity to generate income without active participation.
The great thing about passive real estate investing is that you have options. You can invest in a range of different real estate products as long as they’re able to be set up to operate with minimal input from you. This includes everything from REITs to rental property.
As a passive real estate investor, you only have to make an upfront capital investment, receive your stake in the investment, and get paid your percentage of the ROI generated. With passive investing, you’re making your money work for you. You put your money into the venture without having to put in too much of your time in.
However, while you may not be required to provide a substantial hands-on effort in the investment operations, as a passive investor, you will still need to be proactive about your investment decisions. You have to evaluate investments, review the investment’s performance, and ensure your money is being invested in the right project.
Passive Income With Real Estate: Know Your Options
If you think passive real estate investing sounds like a good way to make your money work for you, here are some ways to start earning passive income through real estate
- Real Estate Investment Trusts (REITs)
REITs are companies that own, operate, and maintain income-producing real estate properties like apartment complexes, hotels, healthcare facilities, self-storage, and cell towers. These companies pool capital from different investors and invest in different real estate properties. REITs are modeled after mutual funds and are often traded on major security exchanges in the United States. They offer ordinary investors affordable ways to invest in properties they may not be able to afford personally.
To invest in REITs, you only need to buy a share of the company like you’re buying stock and, with this, you’ve added the company to your investment portfolio.
For a company to be an REIT, 75% of its total assets must be in real estate, 75% of its gross income must also come from real estate, and it must pay out at least 90% of its generated income to investors. This offers you a stable income source and diversifies your portfolio to minimize the risk involved in real estate investing.
While you receive a stable monthly income with REITs, note that buying into REITs does offer some level of risk. This includes market risks and leverage risks. If the market experiences a downturn, the REIT’s shares could go down in value as well. And if you use borrowed money to invest in an REIT, these risks are only amplified as the potential losses would be greater as well. Finally, depending on the REIT that you invest in, your ROI may be lower since you won’t have access to tax benefits like you do with traditional real estate investing.
- Buy-and-Hold Rental Property
Another way to generate passive income through real estate is by buying a rental property and hiring a property management firm to handle the daily operation of it. With this strategy, you do the active work upfront (i.e., analyze an investment property, work with a mortgage lender, and negotiate with the seller) before you hand it over to a property manager. With buy-and-hold, you’re in it for the long-term, which means that you’ll want to invest in a market that’s likely to experience good appreciation so that the value of your investment will (ideally) go up over time. You’ll also be able to generate cash flow each month once the property’s rented.
This strategy lets you own a real estate property while a third-party handles the day-to-day projects of rent collection, finding tenants, maintaining the property, and so on. Unlike with REITs, with rental property you own the property, giving you a tangible asset. You’ll also benefit from recurring rental income, property appreciation, tax benefits, and leverage – the chance to use the bank’s money to grow your investment.
While you enjoy the benefits of owning a real estate property, you’ll want to make sure you go into it prepared. You’ll need to have a solid understanding of the market, a keen awareness of price movement, and a reputable property manager on your side.
See also: Create Wealth With Buy and Hold
- Turnkey Rentals
Turnkey rentals are just like buy-and-hold, only investors look for properties that are already rented out, ready to go. This strategy helps to make rental property investments seamless and straightforward, eliminating most of the work for you. By going with a turnkey company that also offers property management services, you’ll be able to outsource just about every aspect of property investing. And once your portfolio starts to grow, you can outsource portfolio management as well if you’d like for 100% passive income.
The only risks with turnkey are ensuring that you invest in a market that offers the cash flow and appreciation that you’re looking for. You’ll also want to run the numbers to ensure that you will be generating returns that are in line with your strategy.
- Equity Crowdfunding
Equity crowdfunding is a way of raising funds for real estate investment projects by allowing investors to pool their money together. It’s a relatively new method of raising money for an investment property without working with a financial institution. It uses social media (Facebook, LinkedIn, Twitter, etc.) or crowdfunding platforms to raise funds. This strategy lets you pool your money with other investors to buy an investment property, which you may not be able to afford on your own.
Crowdfunding offers you exposure to real estate with no need for maintenance and personal upkeep and also lets you get started with a minimum upfront fee. For example, some crowdfunding platforms let you become a shareholder in a property with as little as $5,000 and some others even let you invest with a minimum of $500.
Apart from offering everyday investors access to take part in highly sophisticated investments without risk, real estate crowdfunding can promise a good return on your investment because it doesn’t attract investment fees. You will also be able to diversify your portfolio geographically, which helps minimize risk. Still, this strategy has its own risks as well. Investors should take care not to bank on a certain level of return, and it’s advisable that you never invest more than you can afford to lose.
What Are the Benefits of Passive Real Estate Investing?
Passive real estate investing can be a great way to grow your wealth long-term. Since you don’t need to be actively involved with the projects, you can invest in as many as you’d like, or have the funds to. One of the best things about passive real estate investing is that you are not limited by your lack of time.
Here are some more benefits of this strategy:
- Low Commitment and Stress-Free
Unlike traditional real estate investing, passive real estate investing frees up a lot of your time. This investment strategy lets you pass time-consuming tasks (like tenant acquisition, rent collection, repair, maintenance, etc.) to the experts, so you have more time to focus on other things. Passing the daily activities to property managers or investing in an REIT also removes much of the stress involved in real estate investing.
- Risk Diversification
Passively investing in real estate also lets you diversify your investment portfolio. You can invest in multiple properties, for instance, or multiple REITs. You could further diversify your portfolio and invest in rentals, REITs, and other investments.
This strategy also reduces your exposure to risk as well. Since you’ll be able to outsource to property managers and won’t have to do the hard work yourself, you’ll have more time to focus on growing and diversifying your portfolio, investing in property in multiple markets, instead of keeping everything in just one location. This allows you to spread the risk so that you can help to insulate yourself against any temporary fluctuations in the local housing market.
Want to diversify your investment portfolio but aren’t sure where to start? Check out tips for diversifying your real estate portfolio.
- Increased Buying Power and More Investment Opportunities
With real estate, you can access leverage to grow your returns faster than you’d be able to if you were paying all-cash for everything. Likewise, buying into an REIT or pooling funds with other investors to finance a project provides you with the ability to buy properties you couldn’t ordinarily afford on your own.
- Predictable and Reliable Cash Flow
Passive real estate investing offers reliable cash flow. You’ll be able to count on consistent income, no matter the state of the economy.
For example, if you buy into a REIT, you’ll be paid a predictable dividend, which is normally not affected by the state of the real estate market. And with rentals, you’re in a great position as well. You’ll be able to count on cash flow even during times of economic uncertainty.
What Are the Cons of Passive Real Estate Investments?
Here are some potential downsides to passive real estate investing.
- Less Control of Your Investment
While passive investing reduces your time commitment, your control over your investment reduces significantly as well. If you buy into REITs or pool funds with other investors to crowdfund for a project, you’re only a financial partner; you don’t have sole control over the policies, renovation, investment selection, marketing strategies, or where your funds are spent.
Hiring a property management company to manage your rental property also means you put your investment in someone else’s hands. While this can spell out freedom for many investors, and taking a hands-off approach allows them to focus on other things, it’s not for everyone. If you like to be hands-on with your investments, then passive investing probably isn’t for you.
- Potentially Lower Return on Investment
Passive investing lets you invest alongside professionals. You can pool funds with professional real estate investors or hire someone to manage your property for you. While this helps minimize your risk exposure and reduces time commitment and stress, you’ll want to factor in the additional costs of this management as well. While this can take a cut out of your returns, you’ll also want to keep in mind that in some cases, outsourcing could help you to maximize your returns as well. When you consider that a property manager will be able to help employ their expertise in rental management and can help you to secure a qualified tenant, help you to charge the best price possible for rent, and help with lease enforcement – all of which can help to save you from potential losses and help to boost your returns. Their experience counts for something and many landlords see their returns increase, rather than decrease, when they enlist a reputable property manager.
- Less Experience Gained
When you actively invest in real estate, you learn to be a marketer, business owner, landlord, and property manager. You’ll also analyze projects, make important decisions, work with different contractors, and learn the intricacies of real estate deal-making. But when you passively invest, you let someone else handle the daily activities, which means that you’ll forgo learning how to do it yourself. Is this a problem? It depends. If you’d like to handle it yourself one day, then it makes sense to learn as you go (and grow), but if you’re planning to continue to outsource, then it’s much less of a problem. It depends what your long-term goals are.
Is Passive Real Estate Investing the Right Choice for Me?
Let’s check out some questions you need to ask yourself before starting with this strategy.
- What level of control do you want?
Investing in real estate offers you the ability to make independent investment decisions. You can buy when you want, accept the tenant you like, and sell whenever you like. While some investors prefer to make investment decisions like this, others are happy to outsource the day-to-day work to someone else.
- What is your experience level?
Experience is a significant factor when it comes to success in real estate investing. A fix-and-flip investor, for example, needs to analyze a property carefully to ensure it generates the expected ROI. Also, long-term investors need to consider the economic conditions, the location of investment, the projected cash flow and appreciation, and more to make better investment decisions. When investing for passive income, you’ll still need to consider the big picture and conduct due diligence to ensure that the investment is sound, but it can be a good chance to outsource many of the day-to-day areas where you may have less experience – such as tenant sourcing and screening, lease enforcement, evictions, and more.
- How much time do you have?
Active real estate investing means you take on full responsibility for the property. You may need to wake up in the middle of the night to fix a damaged faucet or even have to sacrifice your time with your loved ones to attend to angry tenants. If you don’t have the time to make such commitments or prefer to keep your weekends free, then you’ll want to consider passive real estate investing.
Whether you choose to be a passive or an active investor, nothing changes the fact that real estate can be a profitable venture – and has long been used by investors as a means for hedging against inflation and even growing their wealth. No matter the strategy you want to go with, always make sure you’ve done your research up front so that you can know that you’ve found the best investment opportunity for you – one that will give you the returns that you’re looking for. Consider your investment goals, available funds including financing options, time availability, and risk tolerance. Then get started putting your money to work for you.
Are you looking to invest in real estate? Read our post on tips and strategies for new real estate investors. You can also contact us if you need a 24/7 hassle-free property management service.
Note: The information contained in this article is intended to inform and to guide. It is not meant to substitute for research or advice from a professional. As always, it’s important to consult with a housing market expert before you make any investments, and make sure you conduct due diligence into the national housing market and local market conditions before you buy.
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