Real Estate Investing for Passive Income
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The stock market has been the go-to avenue for investors looking to deploy their funds and generate some extra money. And for good reason! The market has an upwards bias, meaning even if stocks are flashing red now, they'll increase over the long term. On top of that, dividends add a dependable passive income stream for investors.
However, real estate investing can be very profitable if you know what you're doing and have the right tools. With careful research and planning, you can turn your investments into a major source of income that will help to pad your bottom line.
Related: Investing in Real Estate Vs. Stocks
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Real estate investing for passive income
Buy and hold properties
Buying and holding involve purchasing a property to hold it for an extended period of time. This is one of the most popular strategies for investing in real estate. When you purchase a property, you're responsible for all of its costs, including maintenance, taxes, etc. You're also responsible for any vacancies that may arise during this time.
Although it may take a significant amount of time to see any kind of return on your property, this can be a good option if you're interested in seeing a steady return on your investment. Another perk of this investment strategy is that you won't be subject to short-term fluctuations in the market. Your investment won't be affected if the market takes a downturn while you're holding your property.
On the other hand, this method also has several drawbacks. First, the cost of maintaining your property can add up quickly if you're not careful. If you can't afford to keep these properties occupied at all times, you'll lose money on vacant rentals. Second, finding tenants willing to rent from a private landlord can be difficult. This can make it difficult to find tenants who will stay long-term, increasing your vacancy rate and potentially costing you money in the long run.
Because of these disadvantages, you may want to look for an alternative strategy if you don't like being a landlord. Fortunately, several other options can help you achieve your financial goals without the hassle of managing rental properties.
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Wholesaling properties
Unlike buying a property and renting it out, wholesaling involves finding a property and then selling it directly to investors or other interested parties. Confusing? I know, but here's another way: As a wholesaler, your job is simply to sell the property for a profit. Think of yourself as a middleman; you don't purchase the property, you just have to sell it. Here's an example: you, as the wholesaler, agree to sell a property by a certain date, and the owner is looking to sell it for at least $275,000. As a wholesaler, you sell the property for $300,000, hand over $275,000 to whoever owns the property and go straight to the bank with your profit, in this case, $25,000.
However, these properties are often distressed off-market properties that the owners are looking to offload in a short amount of time. While wholesaling has a low barrier to entry in terms of initial investment, and you can make a quick buck in a short period, it comes with an unpredictable income pattern, and in most cases, the profit margins aren't that good.
Flipping properties
Another option for making money in real estate is through flipping This is mostly achieved through residential properties. This involves purchasing at a low price, fixing it up, and then selling it at a higher price to make a profit. This can be a great way to make money if you have some construction experience or the necessary equipment to make renovations on a property. However, this type of investing can be risky since there are no guarantees that the property will sell for a profit after you've fixed it up. For this reason, it's recommended that you invest carefully and only take on projects you feel confident can make you a profit.
Rent-to-own homes
This method of investing involves purchasing a home at its current market value and then renting it out to a tenant or a buyer. This allows the homeowner to make money from the property without making any repairs or improvements themselves. The tenant or buyer then pays a monthly rent payment that goes towards the purchase price of the home, and when the lease expires, they have the option to buy it from the owner for a set price.
This can be an excellent way to make money if you already own a home and want to make some extra money by renting it out. However, this can also be risky because there is no guarantee that the tenant will be able to make the final purchase of the property at the end of the lease term. For that reason, it's important to choose a good tenant with the financial means to make the purchase. You should also be prepared to offer them incentives for signing a longer lease or making a larger down payment if they agree to purchase it at the end.
Commercial real estate
Commercial properties include office buildings, strip malls, warehouses, and other large properties available for rent or purchase. This can be a great investment option if you have some experience with real estate and can manage a large building. It's also possible to invest in smaller commercial buildings such as single-tenant strip malls or storage facilities that can be rented to individuals or businesses. These types of properties typically require lower investment amounts and can be easier to manage than larger buildings. It's important to do adequate research on the property before you purchase it and familiarize yourself with all the expenses involved.
Vacation rentals
Another method of earning income through real estate is short-term vacation rentals. These are typically vacation homes used only during the summer when most people aren't traveling. Owners can rent these homes to vacationers to help pay for their bills and other expenses. This is a great way to generate income as long as the homeowner can find the right renters and can make sure that everything remains in working order during the rental period.
How much you make depends on the location of the home and the number of people staying there. In some cases, a homeowner can earn thousands of dollars a year by renting out their vacation home when they're not using it themselves. Another factor influencing money is how much you charge for the property and how often you rent it out.
REIT mutual funds
Real estate investment trusts (REITs) are a type of investment vehicle that are tied to the real estate market. They allow you to purchase shares of real estate companies without purchasing any physical property. These companies offer individuals the opportunity to invest in various real estate projects throughout the United States and Canada. By purchasing a share in a REIT, you'll become part of a large group of real estate investors who are collectively responsible for the company's day-to-day operations. Some REITs specialize in specific types of real estate, such as office buildings, hotels, shopping malls, single-family homes, apartments, and many others. Some are even willing to provide financing to development projects to help facilitate the growth of their real estate portfolio. This is an excellent way to earn a steady income without having to worry about the day-to-day management of your real estate investments.
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Real estate crowdfunding investing apps
Crowdfunding, as you probably guessed, is when a group of people come together to support a project by contributing their own money. Many businesses now turn to crowdfunding to raise funds for a product or a project, such as a smartwatch or a virtual reality headset.
Crowdfunding can be lumped into three categories:
- Rewards-based: Open a crowdfunding platform like Kickstarter and GoFundMe, and you'll find nearly all of the projects reward-based. In this type of crowdfunding, contributors give money for an incentive, usually a product.
- Equity-based: As the name suggests, this involves investing money in exchange for a stake in the business. CircleUp, EquityNet, and Fundable are some examples of equity-based crowdfunding sites.
- Debt-based: This works like a traditional loan made to a company. The lender (aka you) gets interest payments in return.
But some businesses have hacked the crowdfunding formula to lower real estate investing barriers.
- Fundrise: The real estate investment platform boasts over 330,000 active members, and its total asset transaction value stood at $7 billion on June 30. With Fundrise, you can begin investing in real estate with as little as $10. And if you're looking to reach deeper into your pockets, you can: Fundrise accepts investments of up to $100,000, but this option is exclusive to accredited investors.
- RealtyMogul: You can browse, conduct due diligence and invest in individual commercial properties and REITs through RealtyMogul. The minimum investment is $5,000, however. For accredited investors, investments start at $25,000 and go up to $50,000 over three to seven years. Accredited investors can deploy funds in individual properties, such as office, multifamily, retail and industrial.
- CrowdStreet: The company isn't currently entertaining mom-and-pop investors. But if you're an accredited investor, you can invest in CrowdStreet C-REIT fund, an investment portfolio of more than 20 investments for the low-low price of $25,000 at least. The holding period is five to seven years.
- PeerStreet: Automated real estate investing? Yes, please, and that's what you get at PeerStreet. The system can make investments on your behalf based on your given criteria. The company may only accredit investors, but the minimum investment is just $1,000. You can expect to pay 1% of net proceeds as an asset management fee to PeerStreet.
- Streitwise: This one is open to retail and accredited investors! You can invest at least $5,055 and continue to add money in increments of $500. The company doesn't charge fees other than a 2% cut from dividend payments.
- RealCrowd: Open only to accredited investors, you can invest as little as $25,000 or as much as $50,000. The company has over 250 investment options on its platform, and each listing mentions the internal rate of return and the equity multiple.
- Groundfloor: Like Fundrise, you can begin investing with Groundfloor for $10 in short-term, high-yield real estate debt investments. You can link your bank account with Groundfloor to start investing without hassle. The company's debt products have fetched over 10% returns in the past six years.
Related: Best Crowdfunding Investing Apps
Mistakes to avoid
Not having enough cash
They say "cash is king" for a reason! Having upfront cash on hand is one of the best ways to avoid any problems that might arise during your initial years of investing. This can be especially important if your property experiences a vacancy during the year, and you need to cover the costs of maintaining the property until you get a new tenant.
Being unprepared for expenses
To avoid financial difficulties, it's important to be prepared for unexpected expenses that will likely arise throughout your investment. This includes repairs and maintenance, taxes, insurance, and other common expenses associated with owning rental properties. In addition to having an emergency fund set aside for these expenses, it's a good idea to invest in a good property management company or a property management software that will help you track your expenses and ensure your cash flow is adequate to cover these costs each month.
Not collecting rent promptly
One of the most common mistakes new investors make is not collecting rental income promptly. Waiting too long to collect rent is one of the most common causes of financial problems for new investors. It's important to make sure that you are consistent with your collection practices and avoid giving tenants any reason for late payments by sending out notices reminding them when rent is due and following up with the tenant if you don't receive payment on time. If you want, you can also set penalties for late payments and respond appropriately to late payments.
Not being an active manager
Real estate investing can be a hands-on business, and many new investors assume that they can delegate most or all of the day-to-day management responsibilities to property managers or other third-party service providers. This mistake can lead to serious financial setbacks down the road. It's essential that you take an active role in managing your property and be available to answer any questions that arise during the process. If you do run into problems with a tenant who isn't paying their rent or neglecting to perform maintenance on the unit, it's important that you address the problem as soon as possible to avoid any further losses.
Underestimating the importance of good planning
The key to running a successful rental property lies in careful planning and preparation. You need to determine how much you can afford to spend on monthly expenses, how much you expect to earn from rent payments, and how much you'll need to set aside for repairs and maintenance. If you're just getting started as an investor, it's important to take an honest look at your financial resources and determine what you can reasonably afford to invest in an investment property.
Good planning is an essential aspect of successful real estate investing. You can't expect to get ahead if you're spending all of your time putting out fires and dealing with unexpected issues as they come up. An effective plan for managing your real estate investment will help you avoid pitfalls and keep your finances on track throughout your investment.
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Pros and cons
Pros
- Steady income: If you get it just right, real estate investing can be a source of steady big bucks. Even after considering maintenance costs, property taxes, and mortgage payments, you can still expect real estate investment to provide a steady cash flow.
- A hedge against inflation: What happens to stock market investors when the Fed hikes interest rates ? I'll spare you the Google search: they have to wrestle with bears. The real estate market, however, goes in the opposite direction during inflationary times. When inflation is high, real estate prices tend to go upward.
- Value appreciation: It's no secret that properties' value tends to appreciate depending on demand. And if you're handy and can fix a property yourself, you can dramatically increase your margins.
Cons
- The cost: This is arguably the biggest disadvantage. Numerous costs are associated with owning a property, from a leaky room to a broken heating system. And if you haven't done your homework, you may feel demotivated fairly quickly.
- Require a huge time investment: Speaking of homework, you'll need to put in a significant amount of time learning the ropes, such as information on the neighborhood, identifying any problems, and dealing with maintenance.
- The taxman: Money earned through real estate is subject to federal and state income taxes. And if you invest in a real estate mutual fund, you shouldn't expect depreciation tax benefits, which is available in other forms of real estate investing.
The bottom line
There are various options you can utilize if you're looking to make passive income from real estate, all of which require a long-term investment commitment. It can also be a method to build financial freedom. Regardless of how much you're looking to invest, you can be sure there's an investment for you somewhere. Are there risks involved? Anything with money involves risk. However, if you do your homework and invest time researching, you may be able to generate sizable returns and avoid common mistakes. All in all, real estate investing can be a great passive investment generating steady returns.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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