Have you ever considered active or passive real estate investing? It turns out, a surprising number of people have. A Gallup survey found that since 2013, real estate has been the favored investment for American investors. 35% of Americans cited real estate as their top investment choice, while only 21% said stocks and mutual funds. That being said, real estate doesn’t have to be as hands-on as you’d think — there are plenty of opportunities to create real estate passive income.
What is passive real estate investing?
Passive income refers to any income stream that’s somewhat automated. You can make money without having to put in a significant amount of time. Like investing in the stock market, a passive real estate investment involves putting in money but then largely remaining uninvolved. If the investment does well, you get a return.
Active vs. passive real estate investing
When you think of real estate investing, you might picture buying and maintaining a rental property for tenants to live in. If you’re actively involved in the property management and maintenance, it’s an active real estate investment. If you simply put in money and someone else does most of the work, it’s a passive real estate investment.
What are the benefits of passive real estate investing?
For most people, passive income is the key to growing real wealth. Most of us aren’t going to land jobs with multi-million dollar salaries. In fact, the average millionaire has about seven streams of income. And since no one can work seven full-time jobs, they rely instead on passive income.
In addition to the obvious benefit of more income, passive real estate investing also allows investors to get involved with real estate. Many people have considered dipping their toes into real estate but don’t necessarily have the experience or the time to manage a property themselves. Passive real estate investing provides a pathway into the world of real estate without having to dive in head-first.
How do you know if passive real estate investing is right for you?
Passive real estate investing is just one of many ways to make extra money. So how do you know if it’s the right choice for you? As with any significant financial decision, it’s important to weigh the pros and cons.
The first question you’re likely to ask is how real estate investing stacks up against other investments in terms of the return you can expect. It’s not an apples to apples comparison, but we can try. Consider the S&P 500 United States REIT Index — it’s a stock market index that tracks publicly-traded real estate investment trusts (REITs). That index performed slightly worse than the S&P 500 during the ten-year same period. In the ten-year period before February 2020, the S&P 500 saw an annual return of 14%. For the same time period, the S&P United States REIT Index saw a return of 12.50%.
But investing in REITs isn’t the only way to invest in real estate. Many people instead choose to purchase individual properties. And the benefit of this type of investment over many others is that, when you own the property, it creates a stream of monthly income that might be more consistent than other investments.
The bottom line is that if real estate interests you and you like the idea of a monthly stream of income, you might consider real estate investing. If you don’t particularly care what type of investment it is and just want to put your money in and watch it grow, you might feel more comfortable going in a different direction.
How do you get started with passive real estate investing?
Anytime you want to take advantage of a new investment strategy, there are a few key questions you need to ask yourself.
- What is your goal? Do you want to create a monthly income stream? Or are you just looking to put your money somewhere and watch it grow, so you have it during retirement?
- How much are you willing to spend? Set a budget for yourself upfront so you don’t go overboard. Consider the risks involved with real estate investing and decide how much you can afford to lose.
- Where else is your money invested? Diversification is key, so it’s best not to put all of your money into one investment class. Do you have money invested elsewhere?
- How passive do you want it to be? Real estate investing falls on a spectrum of very hands-on to very hands-off. And you can land anywhere in between. Ask yourself if you want this investment to be fully passive or if you’re willing to put in a little work.
How to create real estate passive income
There are two primary ways to make money through real estate investing: direct and indirect.
Direct real estate investing
A direct real estate investment involves purchasing your own property to either rent out or flip. When you’re going this route but want it to remain a passive income stream, you have two options. You can go into business with someone else who will act as an active investor. You could instead purchase a property on your own but then hire a property management company who will do the hands-on work.
Indirect real estate investing
Indirect real estate investing is an easier way to get started but doesn’t involve purchasing any property yourself. First, you could choose to invest in REITs — real estate investment trusts. Think of these as mutual funds, but for real estate assets. You can buy and sell these like you would other stocks and funds.
Another way to indirectly create real estate passive income is by investing in real estate crowdfunding. Like other types of crowdfunding, this involves a developer or real estate investor soliciting money for a new project. Except unlike some other types of crowdfunding, you become an investor who may get a return in the future.
Are there any risks to passive real estate investing?
Passive real estate investing can be lucrative, but it’s important to know that every type of investing comes with some level of risk. In fact, real estate is often considered one of the more volatile investment classes because of its unique risks. Here are some of the things to consider before investing in real estate passive income:
The real estate market is unpredictable
It ebbs and flows over time, sometimes dramatically. Real estate was at the center of the 2008 recession, causing property values to drop dramatically. And in 2020, we saw a huge real estate crisis given the number of people who are out of work and can’t pay their rent or mortgage.
Real estate can be expensive
If you invest in individual properties, you’re also stuck footing the bill when repairs are needed. As a result, there could be months where you actually spend more than you make.
Your fate may be in someone else’s hands
When you’re passively investing in real estate, you aren’t the one doing the hands-on work. As a result, you rely on someone else to manage the property and keep things running smoothly. But if you end up with a partner or property management company that doesn’t do their job well, it could cost you money.
Real estate is illiquid
If you face a financial emergency, you could quickly sell off some stocks in your portfolio to get cash. But real estate doesn’t quite work that way. You can’t just decide to sell a property and have the money in a few days. Expect that your investment will be tied up for a while.
The bottom line
Real estate can be an exciting investment opportunity, but not everyone has the experience or the time to manage a rental property themselves. Passive real estate investing is an excellent opportunity for people to get started with real estate income without doing hands-on work. It comes in many different forms, so all it requires is some research to find one that works for you!