How to Earn Passive Income From Real Estate Investing
March 21, 2022
Have you always wondered how to earn passive income from real estate investing? Maybe you're like most people and assume real estate investments are only for the rich and famous, or you assume you must hold onto real estate to earn money.
Neither is true. Today there are many ways to use passive real estate investing in your portfolio to set yourself up for a successful retirement or reach other financial goals. Here's what you must know about how to earn passive income from real estate investing.
What Does Passive Income in Real Estate Mean?
When you earn passive income in real estate, you earn money without actively doing anything. In some situations, you might have to do some work up front but then earn the income moving forward, and in others, you do nothing except invest your money and watch it grow.
As you create passive income, you must decide what level of involvement you want in the investment. For example, do you want to do a lot of work, such as is required in rental properties, or would you prefer a set-it-and-forget-it investment that allows you to invest in real estate properties without owning them outright?
Both are possible, and we've disclosed everything you must know.
Why Do You Need Passive Income?
Before we get into the types of passive income streams available in the real estate market, let's discuss why you might need passive income.
Almost everyone needs extra money beyond what they make from their job or business, but here are some of the most common reasons you might need to consider a passive income stream.
- Pay off debt
- Buy a new house
- Pay for a child's education
- Create an emergency fund
- Build your retirement accounts
- Take a dream vacation
These are just examples of reasons you might want to earn passive income from real estate investing. Now let's look at how to earn passive income from real estate investing.
Types of Passive Real Estate Income
There are many ways to earn passive income from real estate investing, but the most common methods are here.
Buying and Renting - Becoming a Landlord
Buying an investment property and renting it out is one of the most common ways to earn passive income in real estate. This method does require more work than other passive income real estate investments, but it's one that many people prefer.
When you buy investment properties, you become the landlord. This means you're responsible for almost all aspects of the home's operation, condition, and tenant management. The good news is you can hire a property manager if you work the fees into your budget, and you can have a more passive approach to this real estate investment opportunity.
Keep in mind, though, if you buy and rent out properties, you'll need to play an active role in selecting tenants, managing them, setting rental rates, and ensuring a positive cash flow. It's not a 100% passive investment in your investment portfolio, but it's an excellent way to add some diversification.
Run Short-Term Rental Properties
If managing rental properties feels like too much, consider renting out short-term rentals. However, before you do, make sure they're allowed in your city or county, as not all areas allow them.
Short-term rentals are a sound business strategy for those who want a more passive monthly cash flow with fewer demands from regular tenants. If you own a short-term rental, you choose when the property is available and what you charge.
The good news is you can usually charge much more rent overall because nightly rates are often more costly than regular monthly rent. You can earn income at the rate you want, but work less. If you list the property with Airbnb, they handle most of the administrative work, leaving only the property itself for you to maintain.
Rent Out a Room in Your Home
If you're a property owner with a room in your home that sits unused, consider renting it out to earn more monthly cash flow.
This can be one of the easier ways to earn passive income from real estate investing because it's in your home, an area you already maintain and handle daily. Of course, you must be okay with someone living in your property. It often works best when you have a finished basement or attic-level room that isn't on your main floor and gives your tenant their privacy while you maintain yours.
Your investment portfolio should always be diversified. Holding onto just stocks and bonds is risky and isn't a sound investment strategy. Instead, you should diversify the investments in your brokerage account to include things like mutual funds and REITs.
REITs or Real Estate Investment Trusts are the best way to invest in real estate without being actively involved. REITs made real estate investing possible for just about anyone because you don't have to be an accredited investor or have a lot of capital. You can build wealth investing in commercial real estate properties, and you might even earn dividends monthly or quarterly from them.
How to Earn Passive Income From Real Estate
Learning how to earn passive income from real estate means taking the necessary steps to educate yourself, budget, and learn where and what to buy so you make the most profitable real estate investments.
Learn & Invest
Before you buy residential properties to invest in, learn about the area. Which areas are most popular with renters? Which area has rent payments that will help you build wealth and give you tax advantages?
Once you find the area(s) you want to focus, search for the right investment property that you can manage and that will help you keep earning rental income. Work with a real estate agent familiar with the area and knows what renters in the area want.
Even if you hire a property management company to handle the rental, you'll want a property you know will attract the right tenants.
How Much to Spend
Knowing how much to spend on a rental property is important. You shouldn't spend all of your reserves or put yourself in over your head in mortgage debt, or you won't make any profits. Your cash flow is dependent on having a property you can afford to maintain and can collect enough rent payments to exceed your expenses.
Knowing how much rent you can charge depends on the market. Do your research and determine the fair market rent in the area to determine if there is enough profit in the home you're considering. You'll likely find that just because you spend more money on a home doesn't mean you'll have higher profits.
Do your research and find the property with the best cash flow.
Where to Buy
Did you know you don't have to invest in properties only in your area? This is a great way to have a passive income in real estate investments.
If you hire a property manager, you can invest outside your area, even outside of your state. This works well if you live in an area where home prices are high, you can invest in states where the prices are lower but the rental income is high.
What to Buy
When you invest in real estate, you can buy any home, whether a single-family home, townhome, condo, or multi-unit property.
The nice thing about buying multi-unit properties is getting multiple tenants in one unit. You only have to market for one property and can maintain one property, but you can earn 2 to 4 times as much rent depending on the number of units in the property.
If you buy townhomes or condos, make sure you know the association's bylaws. Not all associations allow you to rent out units, or they limit the number of units that can be rental properties.
Screening for Tenants
Just as important as finding the right rental properties is finding the right tenants. Screening tenants is a key part of the process. You can do it yourself, but if you want a more passive income method, you can hire a property management company to handle it for you.
If you outsource your property management, make sure you do your research and choose the company that has the best reviews and provides the best services for the cost. Remember, this will come off your earnings, so make sure the rental income you can charge will offset the service cost.
Questions to Ask Before Investing in a Passive Income Property
What Is the Area Like?
Just like when you buy a property to live in yourself, renters want to know what's in the area. Is it desirable for renters? Look at the walkability scores, school ratings, crime rates, and how many renters there are in the area.
Also, look at the area's future possibilities. For example, is there any new construction planned or rezoning of land that could affect the area's desirability?
What’s the Property’s Value?
Don't base the property's value on the sales price. Sellers can ask too much or too little for a property. It's one of the common property owner fails. Instead, use your own resources and find out a property's fair market value to see if it's worth investing in.
What Are the Property Taxes?
This is something many property investors overlook. When you determine how much cash flow you'll make renting out a property, you must look at all expenses, including the property taxes. In some areas, the taxes are so high that they could eat away at just about any profits you've earned.
What Matters More to You - Appreciation or Cash Flow?
Sometimes you have to choose between property appreciation and cash flow - you can't have both. So before you invest in a property, decide what's most important to you. Are you focused on capital gains or monthly cash flow?
If you worry more about how much money you'll make when you sell the property, then focus on an area's appreciation rate. But, if you worry more about your monthly cash flow, look at the average rent in the area and how much you can charge and/or make.
Mistakes to Avoid
Every investor makes mistakes, but understanding the most common investment property mistakes can help you avoid them and make the most of your investment strategy.
Not Screening Property Properly Before Investing
This is the biggest mistake most investors make, not taking enough time to vet a property thoroughly. Just walking through a property and determining if it's a 'nice home' isn't enough. Instead, consider the property's condition and invest in a property inspection to find out more information about the neighborhood values, average property tax rates, any future plans for zoning in the area, and the average appreciation rate in the area.
Not Enough Cash Flow
It's easy to get so excited about investing in real estate that you forget about the cash flow. Sit down and make sure the cash flow you'll earn is enough to make the investment worth it after considering all the expenses you'll incur maintaining the property.
Not Screening Tenants
Tenants are your bread and butter, but not choosing the right tenants can be one of the worst property owner fails.
If you aren't comfortable screening tenants, hire a third-party property manager to do it for you. Hire someone experienced in your area that knows the best way to screen tenants, so collecting rent promptly and keeping your home in good condition is possible.
Not Doing Your Research on Being a Landlord
Being a landlord can be a lot of fun, but you'll find yourself overwhelmed and frustrated if you don't do your research and know what to expect. As you learn how to earn passive income from real estate investing, you'll find that being a landlord is either something you love or hate. So find out where you stand before investing any money to make the most of your opportunities.
Not Establishing Clear Expectations of Tenants
Don't let your tenants push you around. Before you take in your first tenants, make a list of your expectations for the property. Put it in writing and make sure each potential client reads it.
This eliminates any confusion or misunderstanding. For example, make it known if you don't want to deal with pets on the property. The same is true of smoking, hosting parties, or changing the home. Establish the expectations early and follow up often.
Not Playing an Active Role in Tenant and Property Management
As much as you want a passive real estate investment, you must play an active role in choosing the right property management team and tenants. Work together with your property managers so they know your expectations for the property and tenants, so you are all on the same page.
When Should You Consider Investing in a Rental Property?
When you have enough money to cover your bills and can use extra money to invest to reach your other financial goals, consider investing in a rental property. Just make sure you have enough money saved for emergencies with the home since you are the landlord and can afford a property management company and/or have the time to manage the property yourself.
What Is Residual Income?
Residual income is the money left over after running any business, such as a real estate investment business, after paying all the expenses, such as insurance, real estate taxes, property management costs, utilities, and home maintenance.
What Is the Difference Between Active and Passive Investing?
Active investing is something you invest in and must give your time and energy to. You must actively work for your money, such as selling something or creating products. When you passively invest, you give some of your time and energy, but the investment continues making you money even when you aren't doing anything.
Can You Get Rich From Passive Investing?
You can get rich from any investment strategy, but a passive investment strategy is a great way to increase your wealth, especially if you diversify your efforts and have income coming in from many different streams.
What Is a Real Estate Passive Income Calculator?
A real estate passive income calculator helps determine if your investment is worth it. You'll look at the purchase price, renovation costs (if any), closing costs, and estimated rental income you can collect to see if the ROI is worth it.
Knowing how to earn passive income from real estate investing is a key to building wealth. Whether you're looking to decrease your debt balance, increase your retirement accounts, or save for other financial goals, diversifying with real estate investments can be one of the best ways to reach your goals. Click here to get started with Concreit!
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