Have you ever considered passive or active real estate investing? As it turns out, quite a few people have. According to a survey, since 2013, real estate has been the preferred choice for many American investors.
In the survey, 21% of Americans stated that they invested in mutual funds and stocks, while 31% named real estate their top investment choice. But you don’t need to be as hands-on with real estate as you think. There are several opportunities for you to create passive income through real estate.
What Does Passive Real Estate Investing Mean?
Passive real estate investing involves putting your capital into a real estate venture without any direct responsibility. Passive real estate investing allows you to make money without wasting significant time. Also, passive income is any stream of income that is somewhat automated.
Passive real estate investment is like investing in the stock market. You put in your money and remain uninvolved. Also, you get a return if your investment does well.
Passive Real Estate Investing vs. Active Real Estate Investing
When you think about investing in real estate, you might picture finding, purchasing, and managing a rental property for people to live in.
Active real estate investing means you are actively involved in acquiring, maintaining, and managing the rental property. However, passive real estate investing involves providing capital for the property with no direct involvement in the management. An example of passive real estate investing is real estate syndication.
Benefits of Passive Real Estate Investing
Most people think that passive income is the key to boosting real wealth. Generally, people aren’t going to find single jobs that pay multimillion-dollar salaries. The fact is that the average multimillionaire has about seven different streams of income. Since you can’t possibly work seven full-time jobs, earning passive income is the other alternative.
Aside from the obvious benefit of gaining more income, passive real estate investing allows you to be more involved with real estate as an investor.
Many people who consider investing in real estate don’t have the time or experience to manage a rental property alone. One of the best things about passive real estate investing is that it provides a pathway to the real estate world without diving in head-first.
How to Know If Passive Real Estate Investing is the Right Fit for You
Passive real estate investing is one of the ways you can make extra income. But how can you tell if it’s the right fit for you? Treat it as you would any important financial decision: by weighing the pros and cons.
The first question you should ask yourself is, how does real estate investing measure up against other investment ventures in terms of returns? Let’s consider the S&P 500 and S&P United States REIT Index. The S&P US REIT index is a stock market index that tracks publicly-traded REITs.
Furthermore, the S&P US REIT index performed a bit worse than the S&P 500 during the same ten-year period. During these ten years, S&P US REIT Index saw a return of 12.5%, while S&P 500 saw a return of 14% during the same period. However, investing in real estate investment trusts (REITs) isn’t the only pathway to investing in real estate. Many people buy individual rental properties as an alternative to investing in REITs.
The advantage of investing in REITs over other options is that once you purchase the property, it can generate a consistent monthly income stream.
How Can You Get Started With Passive Real Estate Investing?
When you’re about to take advantage of a new real estate investment strategy, it will help to ask yourself a few key questions.
What’s your main goal?
What do you aim to achieve with your real estate investment? Do you want to build a new monthly income stream? Or do you want to stash your money somewhere and watch it grow in the hopes of using it for retirement?
Before investing in real estate, ask yourself: how much money are you willing to spend? How much are you willing to lose?
- Consider the risks involved and pace yourself.
- Decide how much you can afford to lose after considering the risks. Set aside an upfront budget so you don’t overspend.
Where else have you invested your money?
To succeed in real estate investing, you have to learn diversification. There’s a popular saying: “Don’t put all your eggs in one basket.” It’s best if you don’t put all your income into one investment venture. Where else have you invested your money?
How Passive Do You Want Your Investment to Be?
Real estate investing falls into two categories: very hands-on (active) and hands-off (passive). You need to ask yourself whether you want to put a little work into your investment and be active or if you want your investment to be passive. It is also possible for you to land somewhere in the middle of the spectrum.
How Can You Create Real Estate Passive Income?
There are two main ways to make passive income through real estate investing: indirect and direct investing.
Direct Real Estate Investment
Direct real estate investment involves buying your property to either flip or rent out. You can choose two options to create passive income with direct real estate investment.
First, you can collaborate with someone who will act as the active investor in your joint business. You can also buy a property and hire a property management company to take over the main responsibilities. With these options, you’ll need to understand how to use real estate leverage if you don’t have much capital.
Indirect Real Estate Investment
An indirect real estate investment does not involve buying the rental property yourself. It is also an easier way to get into real estate investing. First, you can decide to invest in real estate investment trusts (REITs). They’re like mutual funds, but for real estate assets that you can buy and sell like you would other funds and stocks.
Investing in real estate crowdfunding is another way to build real estate passive income. Real estate crowdfunding is just like other forms of crowdfunding. It involves a real estate investor or a developer seeking money for a new real estate project. Real estate crowdfunding differs from other types of crowdfunding because you become a real estate investor who might get future investment returns.
What are the Risks Involved with Passive Real Estate Investing?
Passive real estate investing can be a profitable venture. However, you need to note that all types of investments involve some level of risk. Real estate is often treated as one of the more unstable investment classes because of its unique risks. Here are some things you need to consider before investing in real estate for passive income:
The Unpredictability of the Real Estate Market
The real estate market fluctuates over time, sometimes drastically. During the 2008 recession, many real estate investors believed wrongly that the real estate market would continue to rise. However, that didn’t happen. Many property values dropped significantly during this period.
There was also a huge real estate crisis in 2020. Due to the pandemic, many people were out of work and could not pay their mortgages or rent.
Cost Of Real Estate
Real estate can be quite expensive. If you decide to invest in individual rental properties, you are also responsible for any repairs it needs. Due to this, you could have months where you spend more money than you make. You also have to consider the cost of property taxes.
You’re Not in Charge of Your Property
Passively investing in real estate means you’re not involved in the hands-on management of the property. You’ll have to rely on someone else to manage the property and keep everything running smoothly. As a result, if you end up with a property management company or someone who does a poor job, you could lose a lot of money.
Illiquidity Nature
Real estate is very illiquid. With stocks, you can sell them off quickly to get cash to solve a financial emergency. But real estate doesn’t work like that. Even if there’s an emergency, you can’t decide to immediately sell a property and get money in return after a few days. Selling a rental property is a lengthy process. You can expect your real estate investment to be tied up for a while.
Passive Real Estate Investing Might Be Right for You
Remember that investing in real estate can be an exciting investment opportunity. But not everyone has the time or experience to manage a rental property alone. Also, passive real estate investing is a great opportunity for those who want to get started with real estate income without being active.
Passive real estate investing comes in different forms; all you have to do is conduct some research to find the one that’s right for you.