INTRODUCTION:
The fantasy of having steady, passive income is a strong enticement to a lot of would-be investors. Although the term passive income is typically thought of as rent checks falling into the hands of a person lying on the beach, the truth is that the majority of investments do not involve no effort. Nevertheless, real estate is one of the most formidable tools of generating sustainable wealth with different levels of participation.
The real estate passive income is not a work-free affair, rather a scalable work affair. It is all about creating systems and making decisions that will liberate your time once set up. This guide will address the 10 best ideas of passive income in real estate, including the ones which are indeed completely hands-off and the ones which can be passive as soon as the groundwork has been laid.
1: Invest in Real Estate Investment Trusts (REITs).
Best: The ultimate novice who wants to have genuine passivity and liquidity.
A Real Estate Investment Trust (REIT) is a business enterprise that owns, manages or finances income generating properties. REITs are modeled with mutual funds and are a combination of funds collected by a large number of investors to buy a collection of real estate. This permits you to possess a slice of big-box commercial real-estate, such as skyscrapers, shopping malls or hospitals, without needing to purchase a complete building.
How it is Passive: After purchasing stocks of a REIT via a brokerage account (similar to stocks) the day-to-day running is all done by the company. They handle maintenance, tenants and property management. By law, REITs must pay at least 90 percent of their taxable income as dividends to shareholders to offer a regular flow of passive income.
Advantages: Liquidity is high (easy to buy/sell), there is low cost of entry, it is professionally managed, and it has a diversified portfolio.
Cons: dividends are taxed as ordinary income and subject to market volatility, you have no control over what is held in the underlying asset.
2: Learn about Real Estate Crowdfunding Platforms.
Best: Accredited and non-accredited investors seeking to invest directly in the project.
Crowdfunding real estate has made the investment in property a democratic process. Fundrise, CrowdStreet, and RealtyMogul all enable you to invest in individual real estate developments or in a Diversified Portfolio of Deals with only a relatively small investment of funds.
How it works Passive: You choose a project or a fund depending on your investment objectives (e.g. residential development, commercial property). The team of the platform does all the purchase, management and subsequent sale of the asset. You get your proceeds through rental distributions and possible proceeds on sale.
Advantages: Larger, institutionally typical, deals can be accessed, minimum investment lower than direct ownership, and diversified.
Disadvantages: Your cash is generally tied up over a few years (illiquid), there is platform risk (which is based on due diligence of the company), and it is usually restricted to accredited investors in order to get the best deals.
3: Acquire Turnkey Rental Property.
Best when: Investors want to be the owners of the company but do not want to operate daily.
A turnkey property is a complete renovation home with a tenant but is sold by a special company. They locate the property, rehabilitate it, locate a qualified tenant and they usually offer a property management service. You just buy the property and begin to exercise rent.
How it is Passive: The turnkey provider installs the whole cash-flowing system. You then outsource their suggested or a third-party property management to take care of the maintenance, rent collection and tenant affairs, which makes it very passive.
Pros: Instant cash flow, you do not have to worry about rehab headaches, you can predict it the first day.
Cons: Reduced cash-on-cash returns (fees are imbedded), due diligence on the turnkey provider is imperative, you remain a single asset.
4: Invest in Real Estate Syndications.
Best use: Accredited investors that have large capital and seek high returns.
A syndication is a partnership in which a sponsor (the expert) identifies a big real estate transaction then performs due diligence and raises funds among passive investors (the limited partners) to buy it collectively. This is typical in big apartment complex, commercial buildings or even new developments.
How it is Passive: You are the source of capital as a limited partner, but you are not actively involved in the operations. The sponsor controls the asset and the share of profits is divided in accordance with the operating agreement, that is, the investors usually get most of the profits once a preferred dividend has been paid.
Advantages: Could offer high returns, could also get access to multi-million dollar deals, all hands-off position.
Disadvantages: Minimum investments are required (usually 50,000 or more) and are tied up over a 5-year period, can only accredited investors, and this type of investment is highly reliant on the ability of the sponsor.
5: House Hacking: Live Free And Earn Equity.
Best: People who have never invested in stocks before and are ready to live in a different way as a way of achieving wealth quicker.
House hacking is a practice of buying a multiple unit house, (duplex, triplex etc.), residing in one of the units, and renting out the remaining. The rental revenue on the other units will be used to cover either all or the majority of your mortgage and expenses such that you can live at no or a greatly lowered expense.
How it works Passively: Once the initial set-up of getting tenants is done, it is a semi-passive venture. Although you are on-site to address minor problems, you can still employ a property manager so that you can have a hands-off experience but that means that you cut in your cash flow.
Advantages: Gives you an opportunity to own a primary residence (reduced down payment), your mortgage is paid by renters, it is a learning experience.
Disadvantages: you have to live close to your tenants, there is some management work involved not completely passive at first.
6: The kind of risk involved is that of becoming a Private Money Lender.
Best: Investors having capital and require fixed returns without dealing with management of property.
In case you are not willing to handle bodily property, then be the bank. The business is a type of lending money in a short-term manner to real estate investors (usually house flippers) that require money very fast to work on a project. You serve as the financiale and get interests on the loan.
Its Passivity: You do due diligence of the borrower and the feasibility of the project. After securing the property (first lien position) you just need to sit back and collect the monthly interest payments until the loan is re-paying at the expiry of the term.
Advantages: Guaranteed, stable returns, collateralized with real estate, no landlord responsibilities.
Disadvantages: Capital is tied until the loan matures, there is a risk of default on the borrower and this necessitates a good due diligence.
7: Invest in Real Estate Notes
Best use: Investors need to obtain predictable and mortgage-like returns.
Just like in the case of private lending, investing in notes requires the purchase of current mortgage debt. In case a homeowner obtains a mortgage, this mortgage is usually sold on the secondary market. It is possible to buy such notes and become the bearer of the mortgage payments of the homeowner.
How it is Passive: The payments are collected and administration is done by a servicer. You get a fixed payment of principal and interest. It is among the most passive ways of real estate investment.
Advantages: Extremely laissez-faire, supported by a physical resource, guaranteed revenue.
Disadvantages: It may be complicated to follow, in case of default by the home owner, you might be required to foreclose.
8: Use a Co-host (Airbnb/VRBO) on a Short-Term basis.
Best: Investors that have held property in tourist attraction locations.
Short-term rentals could result in a lot more revenue than long-term leases. They however are infamously manager-intensive. Passivity is the key to changing the co-host or the property manager, i.e. hiring a professional.
How it works Passively: All the logistics are done by a co-host: they make listings, communicate with guests, organize cleaning and maintenance, and replenish supplies. They charge a percentage of the income (usually 20-30%), yet you can make good profits without even having to work.
Advantages: The property can be used personally, and it can also have a high level of income, and it can be professionally managed.
Disadvantages: There are increased management fees, revenue may be seasonal, and it may be a subject to local laws.
9: Capital Raising Role (Real Estate Wholesaling)
Ideal situation: It is better suited to people who have good connections but not capital.
The traditional wholesaling is a dynamic business. But a less active strategy is to become a so-called bird dog or capital raiser of an active wholesaler or flipper. You go into your network or marketing and locate some deals off-market and then sell your finding fee to an investor on a flat basis.
How it is Passive: You are not part of the negotiating or contracting. You are merely the provider of the lead. It is capable of doing it on a part-time basis at a minimal overhead.
Advantages: There is no capital needed, fast cash, it could be completed using a phone and a computer.
Disadvantages: Unpredictable earnings, it takes hustle and connections, it is not an investment at all, it is more of a finder fee business.
10: Purchase Land and Lease It
Best on: Local land-use-learned patient investors.
The acquisition of raw land and sitting on it to appreciate is speculative and does not give any cash flow. Nonetheless, passive income generated by land through leasing is possible. Examples of use are agricultural leasing (to farmers), cell tower leasing, billboard leasing or leasing to a developer to use as parking or storage.
How it is Passive: After a long-term lease is agreed upon, the tenant utilizes the land and remits you a cheque at the end of each month. You almost do not need to maintain or manage it.
Advantages: The maintenance is extremely low, stable income (in case it is long-term), and the possibility of appreciation.
Disadvantages: It can be hard to find the suitable tenant, there can be less income than other strategies, not all the lands could be leased.
Summary:
The Real Estate Passive Income Starts Here with a Step.
The process of creating actual real estate passive income is not a race. The optimal idea is all about your financial position, risk-taking, capital at hand and the degree of participation you want to have.
1: To invest without a hands-off component, begin with REITs or even crowd funding.
2: To own directly without the inconvenience, consider turnkey properties or syndications.
3: To invest capital rather than time, it is time to think about private lending or note investing.
The trick is to begin educating yourself and act. Do proper due diligence, speak to financial and legal experts and start developing the portfolio that will help you to achieve the financial freedom that you want.
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About the Author:
A passionate blogger, entrepreneur, Haider Ali is committed to guide youngsters into exploring viable business ideas and contemporary earning opportunities. Haider connects with young professionals and students by focusing attention on the ease of use and practical real-life storytelling content to inspire them to make their initial overture into financial independence.
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