Have you ever considered active or passive real estate investing? It turns out, a surprising number of people have.
A Gallup survey found that real estate has been the favored investment for American investors. 34% of Americans cited real estate as their top investment choice, while only 26% said stocks and mutual funds.
However, 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.
But first, let's discuss exactly what passive real estate investing is!
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 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 e.g. with a real estate syndication.
What are the benefits of passive real estate investing?
There are many great things about real estate, including income and not having to spend too much time on it. Here are the best things about passive real estate:
You can build wealth
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 multiple streams of income. And since no one can work multiple full-time jobs, they rely instead on passive income.
Allows you to get involved with real estate as an investor
In addition to the obvious benefit of more income, it 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. That's where passive investing can be helpful.
Passive real estate investing provides a pathway into the world of real estate without having to dive in head-first.
It won't take too much of your time
It's one of the better investment opportunities that allow passive investors to make money without spending a large amount of time on the project.
So if you're low on time but you have some money to invest, you can try this out. And besides research time, you won't need to spend hours on maintaining a real estate property.
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 were out of work and couldn't pay their rent or mortgage due to the pandemic.
Real estate can be expensive
If you invest in individual properties, you’re also stuck footing the bill for repairs. As a result, there could be months where you actually spend more than you make. There's also the cost of property taxes.
And this sort of long-term investment means that you may have to pay for things continually for years.
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 professionals to manage the property and keep things running smoothly.
Or if you've invested money, your real estate investment portfolio can be affected by many factors.
In addition, if you end up with a partner or property management company that doesn’t do its 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 physical 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.
However, if you decide to go the route of purchasing publicly-traded REITs, know that these are considered liquid.
While it is part of your overall net worth, some real estate doesn't have high liquidity like cash or stocks. So it is important to understand the type of investing you are getting into and how easily you could sell if needed.
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. You can consider comparing the performance of real estate, to stocks and bonds, or to business, etc.
Comparing investments is not an apples-to-apples comparison, but it's worth the assessment so you have the right insights for your decision-making.
For example, if you compare the stock market to the real estate market, you'll find that in the last 50 years, on average, REITs have outperformed the S&P 500, according to data analyzed by fool.com
It's worth restating that stocks and real estate are very different types of investments. And regardless of your comparison assessment, it's always a smart move to have a variety of different investments in your portfolio.
Understand investment income and rental property income
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 have ownership of the property, it creates a stream of monthly income that might be more consistent than other investments.
Not to mention you can build equity over time and potentially sell for a high profit in the future.
Depending on how much you can spend, you may choose to purchase a single-family home or an apartment building or get into commercial real estate investing. Of course, these likely require a minimum investment, as well, so keep that in mind.
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.
Questions to ask yourself before 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 as a passive real estate investor.
What other investments do you have?
Diversification is key, so it’s best not to put all of your money into one investment class. Do you have money invested elsewhere?
If not, consider your investment strategy before you start purchasing real estate investments.
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 several different ways to make money through real estate investing that are both direct and indirect.
Renting or flipping property
Renting or flipping is a direct real estate investment that 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 in order to not become an active real estate investor.
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 that will do the hands-on work instead of dealing with being a landlord. This would involve having to fix appliances when they break and maintaining the property.
With both options, you'll need to understand using real estate leverage if you don't have large amounts of cash to put down.
If you do choose to buy an individual property, you will likely be able to secure some rental income, make a profit from the sale, or make money by turning the home into an Airbnb.
While it can be a great opportunity for consistent cash flow, it isn't without risk.
REITs (Real Estate Investment Trusts)
If you prefer online platforms, you could choose to invest in REITs — Real Estate Investment Trusts. It's an indirect way to invest in real estate and it's easier. Plus, it doesn’t involve purchasing any property yourself.
Think of these as mutual funds but for real estate assets. You can buy and sell these like you would other stocks and funds. They also pay dividends, helping you to make a profit.
Real estate crowdfunding
Another way to indirectly create real estate passive income is by investing in real estate crowdfunding, which allows shareholders to buy part of a real estate investment in hopes of making a profit later.
Unlike some other types of crowdfunding, you become an investor who may get a return in the future. Crowdfunding platforms could be a good way to go if you have some money to invest.
Passive real estate investing might be an option for you!
A real estate deal 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.