Every investor dreams of the day when they can sit back, frosty beverage in hand, and watch money roll into their bank account instead of having to work for it the old-fashioned way.
While this might sound too good to be true, this lifestyle is possible through passive real estate investing.
Keep reading to learn more about how passive real estate investing works so you can figure out if the opportunity makes sense for you.
What is Passive Real Estate Investing?
Ultimately, there are two main ways to make money in real estate.
The first approach, active investing, requires you to put in substantial effort on an ongoing basis. For example, an investor may buy a property and flip it for a net gain and then move on to the next one.
The other approach is called passive investing, which enables the investor to collect money without making much or any effort at all.
There are a few different ways to engage in passive real estate investing, which we’ll take a look at next.
Types of Passive Real Estate Investing
When it comes to passive real estate investing, there are a few different asset classes to consider.
1. Real estate investment trusts (REITs)
One of the easiest ways to get started with passive real estate investing is to invest in REITs by buying shares of companies that invest in commercial properties.
REITs, which are sort of like mutual funds for real estate, are bought and sold through brokerage firms like Schwab and TD Ameritrade. As such, they don’t require any excessive down payments, real estate agents, or anything like that.
In fact, you don’t even have to deal with tenants. It’s just a matter of signing up for a brokerage firm, selecting an investment, and letting time do the trick.
There are many types of REITs. For example, some deal primarily with residential properties, while others involve industry-specific investments like telecommunications infrastructure or healthcare facilities.
You can select from publicly-traded REITs (which trade on the stock market and online platforms), public non-traded REITs (which do not trade on securities exchanges but can be purchased on real estate crowdfunding platforms), and private REITs (which are not listed with the SEC).
How REITs produce passive income
REITs give investors passive income in the form of dividends. In order to retain their REIT status, these companies are required to dish out 90% of their profits in the form of dividends.
Put enough REITs in your real estate portfolio, and you can develop steady real estate income streams without any of the hassles or time commitments that typically come with being a landlord. And if you purchase REITs in your individual retirement account (IRA), you can defer taxes on your dividend income.
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2. Crowdfunding
This strategy involves using crowdfunding platforms like CrowdStreet, Fundrise, or RealtyMogul to discover and invest in commercial real estate opportunities.
When you work with a crowdfunding site, you sign up for the service and gain exposure to a portfolio of real estate options you can invest in.
This is a major change from the past when commercial properties were not accessible to unaccredited—or everyday—investors. Thanks to crowdfunding, just about anyone can sign up and invest in commercial opportunities.
How crowdfunding produces passive income
Crowdfunding platforms provide access to REITs that produce passive income. You can receive monthly or quarterly dividend payments depending on the platform that you sign up for. Some platforms also give investors access to direct properties.
Like all investment strategies, crowdfunding is risky. However, it can potentially lead to higher than average gains. No risk, no reward!
3. Buy rental properties directly
The other way to produce passive income through real estate is by investing in rental properties and hiring real estate agents and property management companies to rent and maintain them so you don’t have to do any work.
Rental properties may include residential, commercial, or industrial space.
How rental properties produce passive income
When you own a rental property, you make rental income every month.
How much you make depends on a few factors, including the location and quality of the property and the amount of maintenance required.
While you can definitely make money this way, the barrier to entry is much higher. Unless you’re flush with cash, you’ll need to convince mortgage lenders to help finance your investment.
At the same time, you won’t enjoy the same liquidity you get from REITs.
Ultimately, buying rental properties directly is riskier than the first two passive real estate strategies, but with greater risk comes greater reward (or greater loss). Make sure to complete your due diligence before buying your first rental property.
The Benefits of Passive Real Estate Investing
Now that you have a better understanding of some of the ways you can generate passive income in real estate let’s take a look at why more and more investors are moving in this direction.
Live an easier life
One of the hard parts about getting older is that you tend to slow down and lose some of the vigor you had in your youth. You may also get busier with family obligations or simply get tired of working after spending decades in a particular field.
Unlocking passive income streams is a way to ease off the gas as you get older so that you can make money without working quite as hard. Even better if you can dial it in while you’re younger.
Just imagine getting paid as you attend your kids’ soccer games, have dinner with your family, or watch your dog get the afternoon zoomies… instead of slaving away at the office for 10 hours a day.
When you really stop to think about it, passive real estate investing can change your life.
Collect income during retirement
Retirement may seem clear-cut at first. But the truth is that it can be tricky to navigate. It’s never easy to live on a fixed budget, and hidden costs can arise that can force even the most well-prepared to rethink their strategies (especially medical bills).
Passive real estate income can make retirement much more enjoyable by providing a steady cash flow. It’s a great way to supplement your pension (if you’re lucky enough to have one), Social Security income, and retirement fund distributions.
The trick is to start investing in real estate while you’re young so that you can pump excess gains into tax-friendly retirement funds and let them grow over time. If you do this over the course of many years, it could provide a great deal of cushioning for retirement.
Pay down debt
Being buried in debt and not seeing the light at the end of the tunnel is the worst.
By collecting passive income, you can put more money towards debt while investing the money that you make from your other work. Through this lens, passive real estate income can help get you out of debt much faster.
Achieve financial independence
Financial independence is the point at which you no longer have to work because you have to and can start doing things simply because you want to.
Only a small percentage of people attain financial independence. But the truth is that it doesn’t have to be like that. We want to work toward a world in which anyone can achieve financial independence by making the right choices.
It won’t come easy, and it may take time. But, with the right approach, it’s definitely possible.
Tips for Generating Passive Real Estate Investment Income
Chances are you’re champing at the bit to start bringing in passive real estate income. But hold your horses: there are some things to keep in mind before getting started.
Have a strategy
What works for other investors may not be best for you. Know your options and pick a strategy that makes sense for your personal needs.
You may be in a position to take on a turnkey rental property and bring in gains from monthly income. Or you may want more of a hands-off approach.
Since every investor is different, only you can decide what’s best for your personal needs.
Understand your risk tolerance
One of the most important things to do before you start passive real estate investing is to assess your overall portfolio and your risk tolerance. Check to see whether it makes sense to invest or whether you would be better served with less risk.
Pay down debt first
If you’re in credit card debt or you have serious student loans, you need to make inroads and lower your balances before moving forward with real estate investments or passive investing of any kind. Otherwise, high-interest balances could wind up negating whatever returns you bring in through investing.
Take a look at your overall debt load and how much you’re paying on a monthly basis. The lower you can get that number, the better your position will be.
Make sure you’re ready for a property
Owning a property can be a huge headache even if you aren’t actively managing it.
Think twice about picking up a rental property for passive income, especially if you already have a house and a mortgage. Make sure you’re in a position to manage a property and that you’re comfortable taking on that type of investment.
Frequently Asked Questions
Do single-family or multifamily homes produce more income for real estate investors?
Generally speaking, multifamily homes bring in more income because there are more tenants making payments on a monthly basis.
That said, there are also more costs associated with a multifamily home. Plus, the property may be more expensive due to size, location, and market demand.
Never automatically assume anything in real estate. Take everything on a case-by-case basis.
What is real estate syndication?
This type of real estate deal involves going in on an investment property with multiple investors—either accredited or unaccredited investors.
Real estate syndication may be used for a variety of real estate investments like apartment buildings, office buildings, or even multifamily houses.
The strategy here is to combine resources so you can be a passive investor instead of an active investor.
This can be a great way to make money as a real estate investor if you find the right deal. It can also be one of the best investment opportunities because of its lower risk. That said, it requires you do your due diligence to make sure all the investors are trustworthy.
Can you make money with real estate crowdfunding?
You can make a lot of money with real estate crowdfunding if you pick a platform that has low fees and a great selection of high-end properties. This can be a great way to achieve diversification in your portfolio.
That said, you can also lose money with real estate crowdfunding. Platforms do a great job of exposing customers to properties. But by doing so, they also expose them to risk.
Be smart when working with real estate companies offering crowdfunding services, and make sure you understand the real estate market before getting involved.
Do I need passive income?
The short answer is yes. You definitely need passive income. Whether it’s through real estate investing or another passive investment, who wouldn’t want money pouring in without working for it? Bueller???
Passive income is arguably the best way to make money because it frees you to do more things and bring in more cash. If you want to become financially independent, start looking for ways to produce passive income. Real estate, and a REIT in particular, is a great place to start.
The Bottom Line
Passive real estate is one of the top wealth-building categories for investors. That’s not discounting active real estate, which can be just as lucrative. But unless you’re comfortable dealing with tenants or flipping houses, the passive approach is usually much easier to manage.
Whether you want to invest in apartment complexes or office buildings, that’s your decision. If you’re interested in investing like this, there’s a world of opportunities to explore.
Who knows? In just a few short years, you might be able to unlock serious passive income streams from your real estate moves. Whatever you choose, I’m rooting for you.
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