Want to learn how to make passive income from real estate? You’re in the right place.
Passive income can help you do things like:
- Create more financial security for yourself and your family
- Quit your job or work part-time (if you want to)
- Finally have time to pursue your hobbies and other passions
These are all things I’ve done myself since becoming a real estate investor and scaling my portfolio to seven figures.
Want to do the same? Read on.
What is passive real estate investing?
To understand what makes passive real estate investing so valuable, let’s first define what that even means.
Basically, passive investing is when you’re earning income from your real estate WITHOUT having to exchange your time for money.
So, once your investing strategy is in place, you will bring in a solid cash flow – even if you’re on vacation.
And that’s what makes passive investing so attractive: It can give you more freedom to organize your time as you see fit, without having to hustle 24/7.
Because even if you have a high-paying job, you still have to work a set number of hours per week, and your income potential has a ceiling.
Sure, you can get a raise, but it’s usually a small increase in your salary, which doesn’t build true financial security.
On the other end of the spectrum from passive investing is active investing, which is much more hands-on.
Here, you’re in charge of everything, from sending out “we will buy your house” direct mail campaigns to overseeing the work done by large construction crews.
If that seems like a lot to take on, though, outsourcing is a good middle ground: You get to choose how active you want to be and let others handle the bulk of the work.
But how can you get started in passive real estate investing? You’re about to find out.
How do you start passive real estate investing?
So, you’ve decided to give passive real estate investing a shot. Here are your options:
With the rental property investment model, you buy properties, do any necessary renovations, and then rent them out.
You can buy commercial buildings, storage units, or residential properties, depending on your interests.
For example, what I do is buy houses in college towns, maximize the number of bedrooms the property can have, and then rent by-the-room to college students.
This helps me maximize my returns – while also helping young adults get safe affordable housing in great neighborhoods.
Wondering how much cash you need to get started?
Typically, you’ll need a 15-25% down payment to get a mortgage, which can seem like a lot.
If you’d like to invest but can’t afford to buy a property yet, one option is to “house-hack.” House-hacking requires that you live at the house yourself and rent out the other bedrooms to housemates. If you live at the house, you only need a 3-3.5% downpayment.
Plus your tenants will pay down your mortgage so that you save up for a downpayment for the next rental.
What about the risks involved in a rental property investment?
Here are a few:
- Problem tenants – Some people are loud and messy and don’t pay their rent on time, so you need to make sure to screen them properly.
- Not a liquid asset – If you need cash in a pinch, rentals aren’t always easy to sell quickly.
- Unexpected expenses – A lot of things can break down at a house including pipes, appliances, and your HVAC, so make sure to set aside some emergency funds for when they come up.
If you’d would like a few more risks with rental property investment, you can watch my video here:
Ultimately, the most passive way to go here is to choose a remote ownership option, which means you own a property but let a property manager take care of everything for you.
Like the idea of having short-term guests instead of long-term tenants?
Then vacation rentals are an option. You can often charge higher rates per night, depending on the market you’re renting in and similar factors.
Like with anything, there are risks involved, like:
- Some areas have strict guidelines to limit vacation rentals
- High turnover means cashflow can be less predictable than for long-term rentals
- It can be harder to vet short-term guests to avoid drug use, wild parties, and so on
So, whether vacation rentals are right for you depends on a few factors, like what area you want to invest in and your budget since vacation homes in nice areas can be pricier.
If you want to invest in real estate without having to buy or manage a property yourself, a real estate investment trust (REIT) is an option.
Here’s how it works: The REIT handles the ownership and operation of real estate, and investors (like you) pool their capital and earn dividends from their investments.
REITs also have a low barrier to entry since you can start investing for as little as $1,000.
There are some downsides to this type of investment, though, like limited capital appreciation and potentially high fees.
Real estate syndications
With a real estate syndication, one or more people form a legal entity as the syndication’s manager(s) and then find investors (like you) to fund real estate deals.
The investors get to own a part of the real estate and collect a percentage of the profits.
This is somewhat similar to REITs, but there are some key differences, like how much money you need to get started:
In most cases, if you’re investing on your own, you’ll need a yearly income of at least $200,000 or a net worth of $1 million to be able to invest in syndications as an “accredited investor.”
Clearly, there are a few drawbacks to this type of investment, like the high barrier to entry and the illiquidity of assets. One more consideration is that syndications could fail which means you would lose your money. And sometimes they may do what you call a “capital call” which requires you to put in more money as an investor to keep the operation afloat or have to pay some form of penalty if you don’t.
The idea behind crowdfunding is simple:
By raising money from many different people, companies or even individuals can band together and fund a particular project together, even if it would otherwise be too expensive.
In real estate, you can help fund an investment property for just $500, so you don’t have to wait years before getting started.
What about the downsides?
Like with other types of real estate investing, it’s not a liquid investment, and there’s a high risk that investors won’t get any money back if the project fails.
With commercial real estate, you can choose to invest in anything from retail outlets to office space.
This type of investment can offer great returns, but one downside is that getting started isn’t cheap.
Case in point:
If you buy a commercial property, you’ll be looking at a downpayment of at least 20%.
This is a big upfront investment, especially since commercial properties can be much more expensive than other types of real estate investments.
Another thing to consider? Demand for certain commercial facilities can change, forcing a business to close or move elsewhere. We saw this happen a lot during the COVID pandemic.
There are also more laws and regulations to be aware of for this type of investment compared to residential properties.
Also known as P2P lending, the idea here is that individuals find private investors who are interested in funding their real estate projects, which can span from flipping a fixer-upper to buying an apartment complex to rent out.
In return, borrowers are obligated to pay back what they owe their investors (with interest).
P2P lending is attractive for newbie investors because you can get started for about $25.
There are risks associated with this type of investment, though, like transaction fees and borrowers who default on their loans.
A real estate investment fund is an entity that’s created to allow investors to pool their resources and buy investment properties together.
In this sense, it’s similar to REITs: In both cases, investors join forces to be able to invest in real estate projects that would otherwise be financially out of reach.
But, there are some differences between them to know about.
For example, with REITs, the real estate investment trust is required to distribute 90% of its earnings to investors for tax purposes.
This means that REITs can only reinvest a small percentage of earnings, which limits capital appreciation.
With real estate funds, though, that constraint doesn’t apply, so investors can earn through property appreciation versus dividend payments.
Plus, you can start investing in real estate funds for about $10,000, so it’s more attainable than some alternatives.
On the other hand, there are still downsides involved, like more complicated tax returns and potentially high management fees.
Alright, now that you’ve gotten an overview of some passive real estate investment options out there, what are the major pros and cons?
That’s what we’ll look at next.
What are the biggest benefits and risks of passive real estate investing?
As with anything, passive real estate investing isn’t one-size-fits-all. So, here are some general pros and cons to know about.
- No active work involved. This is arguably the most attractive thing about passive investing: You don’t have to exchange your time for money to earn a potentially high ROI. That said, some investment options do require work upfront. (And typically, your risk increases the less work you need to put in.)
- Budget-friendly options. As we looked at earlier, there are a lot of different ways to invest in real estate. So you don’t need to shell out hundreds of thousands of dollars just to get your foot in the door. Even if you invest in traditional rental properties, you don’t necessarily need to have a huge downpayment.
- You don’t need to be an expert to start. With some passive investments, someone else is doing the heavy lifting to manage your investment portfolio for you, which means there’s a lower barrier to entry.
- Lack of liquidity. Unlike other types of investments, such as stocks, investing in real estate doesn’t give you easy access to your money. For example, if you face an emergency and need to withdraw invested funds quickly, that might not be an option.
- Limited control over your investments. On one hand, investing passively means you’re not always responsible for managing your investments, which can be a huge plus. But on the flipside, it means you’re not the one who makes the investment decisions and you don’t get a say in how your money is being invested.
- Market fluctuations. With real estate, factors outside of your control (like natural disasters and economic downturns) can impact how valuable your investments are and cause you to lose money. However, you can choose investments that are less risky – for example, student housing is an investment opportunity that isn’t as affected by downturns or recessions compared to many other real estate investment opportunities.
So, now you know a few pros and cons to consider before investing in real estate. But what about pitfalls to steer clear of?
You’re about to find out what those are.
What mistakes should you avoid when investing in real estate for passive income?
Avoiding these mistakes can save you a lot of time and money, so don’t skip this part.
- Wanting to invest right away, without prior planning. Being too eager to get started can lead to costly mistakes. For example, I bought my first property without doing due diligence. The result? I had to pay five figures for unexpected repairs. So, do your research and understand what you’re getting yourself into based on the specific niche you’re interested in.
- Overestimating potential returns. Yes, it’s possible to get great returns through real estate. In fact, my own portfolio is worth seven figures. But expecting incredible results without checking if your expectations are reasonable is a mistake.
- Not having a plan if things go wrong. What would you do if your investment became a financial burden or you didn’t want to keep investing? What is your exit strategy? That’s something to think about before getting started.
I cover more mistakes to avoid in this video:
So, now you know how to make passive income from real estate. As you can see, there are a lot of options to explore.
Does it feel overwhelming to get started in real estate investing?
I help newbies get started in real estate investing so they can finally have more control over their lives and how they spend their time.
If that sounds like you, find out how you can work with me here.