How Small Investors Are Making Passive Income in Real Estate
May 21, 2022
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If you don't want to actively manage your real estate investment, there are many ways to earn passive income in real estate. Many people do not like the idea of managing rental properties and dealing with tenants, which is why knowing how to make passive income in real estate is essential.
Here's everything you must know about earning passive income through real estate.
What Is Passive Income?
Passive income is income you don't have to work for. Of course, you might have to put some work in initially to get it going, but then your money should grow without any effort on your part.
While there are many ways to earn money, one of the easiest is passive real estate investing. Like any investment, there's never a guarantee that passive investing will produce a return. Still, when you know the best passive income investments to consider, you increase your chances of a positive return.
Benefits of Passive Income Investments
- You can earn money without doing much. Once you choose your investment and invest your money, the rest is done for you.
- You can typically reinvest your dividends earned from passive income investments to make your money grow even faster.
- There are many ways to earn passive income streams across many risk levels that provide different cash flow levels.
- Anyone can make passive real estate income streams with the many ways to invest in real estate with low minimum investments required.
7 Ways to Make Passive Income in Real Estate
Real estate investing is a great way to diversify your portfolio. Contrary to popular belief, there are many ways to participate in passive real estate investing. You don't need to own property outright. You don't even have to own rental properties at all if you don't want to.
If you want to know how to make passive income with real estate, here are seven real estate investment opportunities to try.
Real estate investment trusts are one form of passive investing in real estate. You invest in commercial properties without physically owning them, yet you still earn the passive income from rental income and capital appreciation.
When you invest in real estate investment trusts, you invest in a real estate company that buys and manages commercial properties. It might be an apartment building, healthcare facility, retail store, or mall. The key is that they invest in commercial buildings that create passive income with the rent collected.
Some real estate companies also include commercial loans or debt investments in their portfolio. If that's the case, your dividends are based on interest payments versus rental income.
REITs must pay out at least 90% of their profits to shareholders, making you a real estate investor without owning physical real estate.
You can invest in real estate stocks through ETFs rather than individually. With ETFs, you can earn passive income through real estate without owning any properties. ETFs are baskets of securities in a specific industry, such as real estate. It's a great way to have a diversified portfolio without doing the work yourself.
Be mindful of the ETFs you choose, as some are actively managed while others are passively managed. Actively managed ETFs have higher fees and/or commissions, whereas passively managed securities are lower.
You can choose to reinvest the dividends earned from ETFs, supplying you with even more passive income real estate opportunities.
Real estate crowdfunding, as the name suggests, pools the funds of many real estate investors together to fund a project. Crowdfunding platforms do their due diligence on projects and typically don't accept every project that comes their way.
Typically, this passive income opportunity allows you to spread your money out across many investments to reduce your risk of a total loss. The opportunities usually offer options to invest in rental properties, such as condos or single-family homes, apartment complexes, or multi-family units. You can also choose from investments in commercial establishments or debt investments, where you act as the lender versus the investor helping a developer by property.
It is important to know the risks involved in each investment and create a diversified portfolio to generate passive income.
Fractional Real Estate
Fractional real estate investing occurs when you invest in a property with other investors. For example, you might have the right to use the property (time rights) or the right to have a say in any decisions made for the property.
Investing in fractional real estate provides you with the benefit of not having to make a significant up-front investment. Instead, you invest a fraction of the cost of the property and invest with other real estate investors.
The key to this passive real estate investing idea is to read the fine print. Know your rights and what it would take to exit the investment should you decide it's not for you.
Tax Liens and Deeds
For many years, tax liens and deeds have been a form of passive income in real estate. Instead of buying rental property or an investment property, you invest in a property's tax liens. Usually, you buy them from an auction. Once you own the tax lien, you have the right to collect the taxes from the homeowner, plus any fees or interest due.
Most homeowners redeem their property taxes before the due date. If they don't, you have the right to start foreclosure proceedings on the home and collect the amount due to you if there are enough proceeds.
Note investments are the opportunity to be the 'lender' for real estate investing. You don't own real estate directly or indirectly. Instead, you invest in the debt side of real estate. You help fund a loan with other investors so real estate developers can purchase and manage rental properties.
If the borrower defaults on the loan, you can start foreclosure proceedings on the property. If they make their payments, though, you earn interest on the loan, which is your monthly cash flow, and earn a fraction of the principal back with each payment.
Hard Money Lending
Real estate investors are increasingly turning to hard money lending as a passive income source. Rather than buying rental properties, you lend the money to investors that buy the properties.
You usually lend to borrowers who can't qualify for traditional financing, allowing you to charge higher interest rates and fees to make up for the risk. You earn interest payments monthly and a fraction of the principal owed too.
Hard money loans are a bit riskier than other forms of real estate investing, so make sure you understand the risk and do your due diligence to spread out the risk.
Passive vs Active Real Estate Investments
As a real estate investor, you have options for investing in real estate, whether passive real estate income or active real estate income.
We've discussed passive real estate investing options, but what about active real estate investing?
Most active real estate investors own rental property, whether residential or commercial and manage them. They may hire a property management company to do the daily management or do it themselves.
Oftentimes, active investors handle the management of the property themselves, acting as the property manager and making decisions about the property. There is a lot more work involved, but you don't have to share the profits as you do with most passive income investments in real estate.
Passive Income in Real Estate FAQ
What Is Residual Income?
Residual income in real estate is the money left over after all expenses are paid to run or maintain the property. You can earn residual income monthly in some cases, accumulating your earnings throughout the investment.
Can Rentals Be Passive?
Rental property may not seem like a passive income investment, but if you hire a property management company to do the daily management of the property and tenants, it becomes a passive investment.
What Is the Best Form of Passive Income in Real Estate?
The best passive income investment in real estate is the one that fits within your risk tolerance, timeline, and financial goals. For some investors, investing in a rental property and hiring a property manager to manage it is the best option. Others want a hands-off passive income opportunity and will choose ETFs or REITs as the best form of passive income in real estate.
Is Real Estate Investing a Full-Time Job?
It can be a full-time job, depending on how you invest in real estate. For example, buying a rental property and managing it yourself can be a full-time job. You'll earn rental income monthly, but you're in charge of the property's maintenance and dealing with the tenants. It's not a passive real estate investing opportunity, but some people prefer a more active role, so they have some control.
The Bottom Line
You have many real estate investment options to create the perfect passive income strategy when investing in real estate. You don't have to own property yourself or at all to make money in real estate. Passive income in real estate is possible if you think outside the box and look at your opportunities! Learn more by signing up and visiting our blog.
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