Passive income is a great way to attain financial stability without actively working for it. If you plan to generate passive income via real estate investment, first ask yourself, would you prefer being an active investor or a passive one? Let’s say, you are not willing to actively involve yourself in real estate activities like paperwork handling, dealing with tenets, staying up to date with renovations, hiring property managers, networking, and so on. Then for you, we have compiled a list of ways to help you generate passive income via real estate. Each option has its preliminary budget and time commitment requirements.
Passive Income via Real Estate – What is Passive Income?
Real estate passive income allows you to earn revenue without any extensive, daily involvement in real estate activities. The level and nature of the required activity will vary, depending on the type of investment you make. As you generate passive income via real estate, you will be able to generate savings, set up your retirement plans, help yourself with college funds, and get rid of all your debts.
Get rid of a certain misconception here – “you don’t have to do any work.” Because we are talking about passive involvement here. This means, you do not have to spend your whole day on it, but the investment surely demands your attention from time to time.
The key to making a successful start is by collecting all the necessary information –thorough research on local markets and trends. Once you have established your investment, build a proper real estate investment strategy. Start by identifying and narrowing the property listings from where you want to generate passive income. With proper execution, real estate passive income will make your life much easier. And essentially, you will find yourself earning more money than a 9-5 job. Furthermore, depending on the type of investments you make, you will be able to create a diversified portfolio. If you don’t have investment to start business in real estate, many jobs are available in real estate trusts. These are best paying jobs also.
Publicly Traded REITs – Real Estate Investment Trusts
Real Estate Investment Funds are one of the easiest and quickest ways to generate real estate passive income with a little effort. REITs are publicly or privately traded and allow an individual to own a share in income-producing real estate. Publicly traded REITs are highly liquid and you can exist at any time, as compared to the long haul of private REITs. The upfront cost is quite low and the returns (dividends) are relatively much higher.
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REIT is the most passive you can get in real estate while making money regularly through dividends. All you have to do is stay up to date with research, the rest of the management is handled by the platform. You will have a lot of investment options in every property sector and market. Overall, REITs offer a great hedge if the market crashes as they have a low correlation to the stock market. In case of any financial troubles, the dividends will be reduced or paused temporarily.
Exchange Traded Funds
Another easy way to generate passive income via real estate is through exchange-traded funds. ETFs are a bit different from REITs. An ETF invests in companies that further buy properties. So, you get a chance to diversify by buying shares in different real estate properties. It is the task of your fund manager to pick suitable REITs for your investments. Consequently, you get selective, filtered options and it gets easy to determine where you want to invest.
Just like REITs, with ETFs too, your dividend income will get taxed at the capital gain tax rate as an investment income. But still, an ETF is a more tax-efficient option as compared to mutual funds or stocks.
Mutual Funds
Mutual funds work by investing in a company that runs the REITs, making it a great way of generating real estate passive income. You can buy mutual funds whenever you want, along with other investors. All you have to do is decide how much you are willing to invest, the rest is taken care of by the fund manager. Being directly tied to the real estate market the ups and downs go accordingly.
Mutual funds offer more convenience and diversification. However, you have to be cautious if the fund’s expense ratio is more than 1.50%. However, they are easily subjected to market fluctuations, affecting their returns. An investor might also have to face tax inefficiency during capital gains payouts.
Create Cash Flow with Rentals
Rentals are becoming increasingly popular day by day. There are several options for renting real estate property, depending on which type of property you own. From commercial to residential properties, the nature of rentals can be:
- Long-term Rentals – where you lease a property for a few months or even years. For this, you will have to find a reliable tenant, and it’s better to invest in a commercial property.
- Short-term Rentals – lease a property for a month or even for a few weeks. Here, your priority should be investing in residential areas or a service like Airbnb.
Single/Multi-Family Units
Single-family rentals are a great way to take a start in real estate by renting a condo or a single home to a tenant. You get to have more control and can take better care of your property as well. To generate a relatively stable passive income for a long time, go with multi-family rentals. And make sure to hire a property manager to avoid a 2 a.m call for plumbing fixed. In case you wish to go with multi-family units or apartments, remember that you will have a lot of duties to handle. It won’t be that much “passive”.
House Hacking with Duplexes/Triplexes
Duplexes and triplexes have two or four units where you can live in one unit and rent out the others to college students or families. This form of house hacking will generate a stable cash flow. With multiple units, there will also be a lesser risk of potential vacancies. Again, the option is not entirely passive.
Vacation Property
Vacation rentals are tourist magnets and such a lucrative way to generate passive income via real estate. Before buying, do your research on seasonal vacancies and tourist trends. The costs you will have to deal with include management costs, home-ownership expenses, and housekeeping services. One way to reduce these costs is by buying property in a place that you and your family love to visit. That way, you won’t have to worry about slow seasons.
The revenue generated will be huge because there are several candidates available every season. Vacation rentals are more beneficial than short-term rentals, you can charge more for one-night stays. Lastly, the responsibilities you have to deal with will include cancellation handling, constant scheduling, and housekeeping.
Use Storage Units
Another popular demand in populated areas of the U.S is storage unit facilities. The revenue you generate here will depend on how many units you own. Provide 24-hour access to your customers and a variety of sizes. To avoid security issues, you have to deal with insurance, security, and management costs.
Crowdfunding – A New Option to Generate Passive Income
A relatively new and popular way to generate real estate passive income is crowdfunding. Crowdfunding makes use of social media. You, as an investor, will have an opportunity to invest small amounts in different properties and become a shareholder. You don’t need a lot of money for crowdfunding. So you can spread your investments and achieve greater diversity. However, a small risk that comes with investment in crowdfunding is that you will be handing your money to a somewhat unknown company.
Performing Mortgage Notes
A promising way of earning passive income via real estate is by performing mortgage notes. It is an advanced method, least talked about, but quite beneficial. Notes and mortgages are two different contracts used by lenders to loan/borrow money for real estate purchases. While in the mortgage, the property is used as collateral for the lender’s security, in a promissory note, the debt’s repayment is outlined already. Now the buyer must pay the lender interest and principal every month in the form of a single payment. Additionally, the buyer also has to pay taxes, maintenance, and insurance.
A lender’s responsibility here is to collect monthly payments, keep a record of these payments, and maintain a debt balance within this repayment period. That is all the work you have to do, so it is passive to a huge extent. Now you, as an investor, will get a steady cash flow for the rest of the term.
Important Questions to Ask Yourself before Investing
You must have a lot of questions boiling in your head by now – How much should I invest, where to invest, where to find tenets… These are all the right questions that you should be asking yourself before you make an investment. We have prepared brief answers to your queries.
How much will you be investing?
Your investment budget will determine where you can invest and what will be your safety options. If you’ve set up a low budget, go with ETFs or REITs. But if you can spare thousands of dollars for investment, it is advisable to buy residential or commercial property for rental purposes.
Level of Involvement – How much control do you want?
The key difference in different types of passive income-generating options is the level of control you want and the amount of time you can invest. Commitment level varies in every option. As a realtor, if you buy a property and want complete control of it, long-term rentals are a great option. Even if it requires a property manager. Otherwise, for minimum involvement, invest in REITs and Mutual Funds. They are also a great option for diversity in portfolios.
What is your goal for investment profitability?
Some passive income options tend to be more profitable than others. Some will generate quick profits, while others tend to take months or years. Analyze the profitability you want out of this real estate investment. Consider your retirement strategy, financial plans, and available savings before investing.
How shall I find my first investment?
As someone who is about to step into the real estate market, it is better to work with other realtors first and improve your knowledge of the market. An alternate way to find profitable investment properties is by doing thorough research on different investment groups.
How do I attract clients for my property?
The best way to attract clients for your real estate property is through social media. Boost your posts and use targeted ads on Facebook and Instagram for your rentals and crowdfunding. An investor, either active or passive, must have an optimized and consistent social media presence. For your ease, Postredi will help you schedule your posts and keep a detailed list of your leads that you can later follow up on.
Common Mistakes you Must Avoid
While the above methods are very helpful in generating real estate passive income, there are some pitfalls you have to avoid:
- Picking an investment option that is less passive and you cannot give it proper time and attention.
- No diversity in your portfolio.
- Not researching thoroughly the risks involved in an investment beforehand.
- Standard deviations in rental income or stock prices.
- Not maintaining the real estate property properly.
- Ignoring the screening of tenets.
- Taking too much debt at a time for investment with no backup plans.
- Failed financial management for any potential expenses.
Bottom Line
An ideal retirement plan is to sit back, relax, and get a monthly cash flow. With passive income from real estate business, you can actively grow your savings. And who knows, maybe you might end up becoming a full-time active investor too.
Ending on a final note: Every investment comes with certain risks. So, before finalizing your investment option, weigh the risks and advantages carefully.
