Have you ever considered making a real estate investment, either actively or passively, as a way to diversify your portfolio? As it turns out, a shockingly significant number of people have had this kind of event. According to a Gallup study, real estate has been the preferred investment for American investors since 2013. Only 21 percent of Americans said stocks and mutual funds were their top investment choices, compared to 35 percent who said real estate was their top option. Having said that, real estate does not have to be as hands-on as you may expect – there are several options to generate real estate passive income that are worth exploring.
What is passive real estate investment, and how does it work?
Passive income may be defined as any revenue source that is at least somewhat automated. Without putting forth a large amount of effort, it is possible to generate income.
A passive real estate investment is similar to investing in the stock market in that money is sponsored, but the investor is essentially uninvolved in the process. If your investment works out, you will get your money back.
Real estate investment is divided into two categories: active and passive
When you think about real estate investment, you may see yourself purchasing and managing a rental property to let renters live there. It is considered an active real estate investment if you are actively engaged in the management and upkeep of the property.
Suppose you merely put money into a real estate investment, and someone else takes care of the majority of the labor. In that case, this is known as a passive real estate investment, such as via a real estate syndication.
What are the benefits of investing in real estate but not taking care of it yourself?
For the vast majority of people, the key to building real wealth is getting income that they don't have to work for. Most of us won't be able to find jobs that pay more than a million dollars a year. In reality, a billionaire usually makes money in about seven different ways. Since no one can work seven full-time jobs, they rely on passive income to make up for what they don't make at their full-time jobs.
In addition to the apparent advantage of increased income, passive real estate investment provides investors with the opportunity to get more active in the real estate market.
Many individuals have pondered getting their feet wet in the real estate market, but they may not necessarily have the necessary skills or time to manage a property alone.
If you are new to real estate investment, passive real estate investing might be a good introduction without needing to get in headfirst.
How can you determine whether passive investing is good for you when it comes to real estate investment?
Passive real estate investment is only one of several options for earning additional income. So, how do you determine whether or not it is the best option for you? It's crucial to examine the advantages and disadvantages of every large financial choice, just as you would with any other.
Most likely, the first thing that comes to mind is how real estate investing compares to other ways
to invest in terms of the returns you might expect. We won't be able to compare "apples to apples," but we can still try. It's a bright idea to start your investigation by looking at the S&P 500 United States REIT Index (REITs).
Compared to the S&P 500 during the same ten-year period, that index did marginally worse. During the ten years ending in February 2020, the S&P 500 returned an average of 14 percent each year. With a return of 12.50 percent over the same time period, the S&P United States REIT Index also performed well.
However, real estate investment trusts (REITs) are not the only avenue to make money in the real estate market. On the other hand, many others choose to invest in individual homes. In addition, one of the advantages of this sort of investment over many others is that, after you own the property, it generates a stream of monthly income that is potentially more constant than other types of investments.
The bottom line is that you should think about investing in real estate if you are interested in real estate and like the idea of getting a steady monthly income. If you don't care what kind of investment you make and just want to see your money grow, you might be more comfortable going in a different direction than the first.
What is the best way to get started with passive real estate investing?
When considering whether or not to take advantage of a new investing approach, ask yourself a few questions first.
What do you want to achieve?
Do you want to establish a recurring monthly revenue stream? Or are you just interested in putting your money someplace and seeing it grow so that you will have it when you retire?
Make a financial plan for yourself ahead of time to ensure that you do not go beyond. Consider the dangers associated with real estate investment and choose how much you are willing to risk in order to achieve your goals.
Where else has your money been put to work?
Because diversification is important, it's preferable not to put all of your money into a single investment class at the start of your career. Do you have money in other places that you'd want to invest?
What level of passiveness do you desire?
Real estate investment may be classified as either very hands-on or extremely hands-off. You have the option of landing wherever in between. Consider if you want this investment to be completely passive or whether you are prepared to put in a little more effort.
How to make passive income from real estate.
Direct and indirect real estate investing are the two basic methods of generating income from real estate investments.
Direct real estate investing
A direct real estate investment is the purchase of your own property with the intention of renting it out or flipping it. In the event that you choose this approach but want it to continue to generate passive revenue, you have two alternatives.
You may form a partnership with someone who will function as an active investor in your company. Alternatively, you might acquire a house on your own and then engage a property management firm to take care of the day-to-day tasks for you. With either choice, you'll need to be familiar with the concept of employing real estate leverage if you don't have a substantial sum of money to put down.
Indirect real estate investing
Indirect real estate investment is a simpler approach to get started in real estate investing since it does not need you to own any property yourself. First and foremost, you may consider investing in REITs – real estate investment trusts — rather than stocks. Consider these to be mutual funds that invest in real estate assets. You may purchase and sell them in the same way that you would other stocks or mutual funds.
Another method of indirectly generating real estate passive income is to participate in real estate crowdfunding campaigns. This sort of crowdfunding is similar to other types of crowdsourcing in that it includes a developer or real estate investor collecting funds for a new project. The only difference is that, unlike certain other kinds of crowdsourcing, you become an investor who may get a return at some point in the future.
Is there a danger associated with passive real estate investment?
It is possible to make money via passive real estate investing, but it is crucial to understand that every sort of investment has some amount of risk.
In fact, due of the inherent risks associated with real estate, it is sometimes regarded as one of the most volatile investment classes. Here are a few things to think about before making a real estate passive income investment:
The real estate market is a volatile environment
It fluctuates in intensity over time, sometimes severely. Real estate was at the epicenter of the 2008 crisis, with property prices plummeting by as much as 50% as a result.
And, as a result of the pandemic, a significant real estate crisis occurred in 2020, owing to the large number of individuals who were out of work and unable to pay their rent or mortgage.
Real estate may be too pricey
If you invest in individual homes, you'll also be responsible for paying for any necessary repairs as they occur. As a consequence, there may be months when you spend more money than you bring in each month. In addition, there are the costs of property taxes.
It's possible that someone else is in control of your destiny
When you invest in real estate passively, you are not the one who is responsible for the day-to- day operations. Consequently, you must depend on someone else to manage the property and ensure that everything runs as it should.
However, if you wind up with a partner or property management business that doesn't perform a good job, it might end up costing you money in the long term.
Real estate is a very illiquid asset
If you find yourself in a financial bind, you might rapidly sell some of the stocks in your portfolio to get cash. However, this is not how the real estate industry operates. You can't merely decide to sell a property and expect to get the proceeds in a matter of days. Expect your investment to remain stalled for an extended period of time.
You should consider if passive real estate investment is a good fit for you
Even while real estate may be a lucrative financial option, not everyone has the necessary skills or time to manage a rental property on their own.
Passive real estate investment is a fantastic way for individuals to get started earning money from real estate without having to perform any hands-on labor in the process.
It is available in a variety of formats, so all you need to do is do some research to discover one that works for your needs! Check out our pick of the finest passive income books to get you started on your journey!