Passive real estate investing can earn income without requiring the typical duties of property ownership (i.e. regular maintenance & repairs, collecting rents, and dealing with renters) on the part of the investor.
Instead, these responsibilities are overseen by a management agency.
This makes it an ideal income source for those with full-time jobs.
Passive real estate investing is a hot subject right now in the world of investments, and success stories (and strategies) abound.
I will show you several ways to produce additional revenue streams to help you diversify your investment strategy.
7 Examples of Passive Real Estate Investing
Real estate can provide a comfortable income and generate wealth. But owning and personally managing real estate may not be the right type of investment for everyone.
Personal management can be a grueling for those who lack a very specific set of skills…like the ability to smile when you get a 3 am call that your renter’s septic tank has back flowed. (No, thank you!)
Passive investing can free you of the “daily grind” of management and allows you to own property without it owning you.
The four most common ways to passively invest in real estate, are:
- TurnKey Rentals
- Note Investing
- Hard Money Lending
- Tax Liens
Let’s look at each one individually:
1. TurnKey Rental Properties (Buy and Hold)
Purchasing turnkey properties offers the best aspects of both direct real estate ownership and hand-free (passive) income generation. Investors can locate, research, and buy rental properties that already have tenants in place as well as a property management company.
Purchases can be made anywhere in the country, and investors never even have to visit the property. For instance, the property management company deals with all of the day-to-day operations. Collecting rents, handling maintenance calls and renewing leases will all be handled for you.
Your only job is to collect a check each month that will be given to you by the property management company.
2. Investor Crowdfunding
Real estate crowdfunding is just like any other type of crowdfunding. A group of people (in this case, investors) each contribute towards the cost of the property, and they each get a percentage of the rental and sale profits.
This can be managed directly by the principal investor, or (more passively) through a real estate crowdfunding service.
Real estate crowdfunding is most often done online. Therefore, it offers an effortless way to invest in everything from single family homes to multi-million-dollar real estate projects, with very little effort. Most of these properties are professionally managed by property management companies.
A few of the most popular crowdfunding platforms are:
Investors can pick and choose from a wide variety of property types, in various locations.
This type of diversification is a vital safeguard for any passive real estate investing.
3. Real Estate Investment Trusts (REITs)
Real estate investment trusts operate on the same basic principles as crowdfunding, allowing investors to buy shares in larger properties that would normally be out of your price point
While crowdfunding is usually a single property deal, REIT portfolios are more like mutual funds. They include a “package” of similar properties, and you are investing in a share of all of them simultaneously.
However, not all REITs are the same. The three standard options include:
Private: These are trusts that are not registered with the SEC (Society of Exchange Counselors) and are not traded on exchanges.
Non-traded: REITs which are registered with the SEC but are not traded publicly.
Exchange-traded: Trusts which are both registered with the SEC and listed on public exchanges.
4. Syndications and Partnerships
Real estate has always been one of the safest ways to invest and build wealth.
Trying to do it all on your own can be frustrating and time consuming without the proper knowledge.
Inactive partnerships allow passive real estate investing by allowing any number of investors to partner with a “managing partner.”
The inactive investors (limited partners) provide the capital needed to purchase the property, or a portion of it and the managing partner is responsible for the day-to-day operations.
This is also known as “Syndication,” and has become a very popular topic among the investment community.
This allows both the general and limited partners to invest in larger properties that wouldn’t be feasible on their own.
5. Investing in Notes
When most people think about investing in real estate, they picture themselves owning a piece of property that produces an income.
When you invest in a note, YOU become the bank so that someone else can purchase a property.
You will earn interest and collect a check from the borrower every month. There are two main types of notes you can invest in:
Performing Notes: These are the easiest and most passive way to invest in a note. If a note is “performing” that means the borrower makes the payment every month and on time. This is an easy check for you each month. I would categorize these as a low risk, low reward investment.
Non-Performing Notes: This means that the buyer is late on their payments. Investing in non-performing notes can yield a greater return than a note that is performing. This is because their is more inherent risk and more work that needs to be done. They are less passive than notes that are performing.
6. Hard Money Lending
Similar to investing in notes, you will be acting as the lender here as well.
In contrast, to note investing, hard money terms are typically much shorter in length. This is because their interest rates are much higher. This means more income for you as the lender.
Hard money loans are perfect for borrowers who can’t attain conventional lending, or the property just doesn’t meet the qualifications of a typical loan.
Fix and flippers often use hard money loans to purchase distressed properties that won’t qualify for a conventional loan. After they rehab the property, the borrower will look to refinance as soon as possible into a loan product that has lower interest rates.
7. Tax Liens
Let’s say you own a property and for whatever reason, you decide to stop paying your tax bill.
When you become delinquent on your property taxes, a lien will be placed against your property. The government will then sell these lien certificates to able investors to recoup some of their losses.
Once an investor purchases the tax lien, all future tax payments are made to them by the homeowner. If they continue not to pay the property taxes, the investor who purchased the lien can foreclose on the home and take ownership.
If you choose to invest in tax liens, make sure you understand how your local auctions and foreclosures process works.
Active vs Passive Real Estate Investing
Having your properties managed by a third-party or investing in real estate crowdfunding frees you from responsibilities related to property management, but that freedom comes at a cost.
Annual returns on passive investments tend to be lower than active real estate investments.
Managing your rental properties yourself or buying and flipping houses will offer the best returns and the most control.
The deciding question is, “What is the value of your time?”
Someone with experience as a general contractor, may have the knowledge and skills to maintain their properties quickly, efficiently, and with minimal cost. Those without that kind of experience are going to spend a great deal of time researching how to do the legwork themselves or comparing local contractors to complete the work.
In essence, you are hiring yourself to do the job. If you can do it, that’s great! If not, you may find that your time is better spent to invest passively.
Spend that freed-up time on additional investments or projects that can more than make up the difference.
How much can passive real estate investing make?
There are three ways by which passive real estate investments provide returns: equity, tax benefits & savings, and cash flow.
Equity is the combination of appreciation and the amount of your mortgage that you’ve paid to date. (In other words, what percentage of the property you actually own, and it’s increase in value.)
As a “real asset”, real estate can be a good hedge against inflation. Historically, property appreciation in the US seldom falls below the annual inflation rate.
In addition to appreciation, you will be making regular payments that lower the principal (what you still owe) and interest you’re charged.
Tax Benefits related to real estate investing can be lucrative. The IRS allows property owners to claim depreciation on an investment property which can sometimes completely negate the income you report at tax time.
Make sure that you consult with a CPA that specializes in real estate investing to ensure you are taking advantage of all possible write offs.
Cash Flow is how much income you have left over each month after all expenses have been paid. This comes from the tenants paying rent each month.
Tips for Getting Started
Knowledge really is power, and a crucial first step in any business venture, including real estate. I recommend you have a solid understanding of real estate investments in general as well as the specific strategy you’re considering.
Knowledge will also help take you from being a “good” investor to becoming a great investor, and that knowledge will help provide a passive stream of income for you or your family.
It’s been said that a goal is simply a wish with a plan attached. And nowhere is this truer than in the ever-fluctuating world of real estate.
It’s not enough just to hope to become successful and wealthy by building passive income through real estate.
Have a Plan in Place
You need to have detailed short and long-term goals, preferably vetted by an investor with a history of success, along with reasonable, achievable steps laid out for reaching each goal. (A “Plan B” and “Plan C” are probably a good idea as well.)
If You Need to Get Rich Quick…Play the Lottery.
That’s a joke, of course, but at the same time, most “get rich quick” deals are mostly hot air and wishful thinking.
Speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable in the near future. Speculating can be a lot like gambling…you may get lucky hand or two, but play long enough, and the house always wins.
Make your investments with your long-term goals in mind.
Invest for the Right Reasons
Like everything in life, there will be booms, and there will be busts. But just because a specific location, property style, or type of investing is hot today, doesn’t mean it will still be hot in a week, or a month, or a year.
Pay attention to the local housing market, unemployment rates, job growth, local amenities, crime rates, school ratings, etc. This is your “process of elimination” plan, before you invest countless hours on research and money on a property.
Narrow the potential opportunities to just those that meet your goals and invest in the properties/deals with the most potential for success.
Diversify, Diversify, Diversify!
The more diversified your portfolio is, the safer your investments are from fluctuations in a single market. I recommend starting off in a single market class (single family homes, apartments, commercial properties, etc.,) and stick to that market until you have 3 to 5 income-generating investments.
Once you’ve achieved that goal, you’re ready to branch out into another market, investing in another 3 to 5 of those properties (ideally in another state or region).
Continue this 2-step process until you have a robustly diverse portfolio.
Make the Most of Your Investment Capital
One of the things that make real estate such a great investment opportunity is the fact that you can purchase properties with borrowed money (leverage).
In other words, long as the monthly income exceeds your loan payment and expenses, you make money without having to reach into your own pocket!
Many investors leverage their investment capital (net earned income) by using it to make payments on new loans for additional properties. So as long as your profits continue to exceed the loan payments, this can be an effective method for building a portfolio fast.
Real estate has created more wealth than any other investment opportunity in history.
Gone are the days where only the rich could afford to play. Now, with the opportunities available through REITs, crowdfunding, etc., practically anyone can invest and grow their wealth via real estate.
Passive income through real estate allows investors to wear fewer hats, and have more hours in their day to build their portfolio. You can increase wealth, and maybe even get in a round of golf now and then (while making money at the same time!)