The real estate market is red hot by any measure. Property values are up, interest rates are low, and there has never been a better time to make money through real estate investing. Real estate investments can come in many forms. Some require large amounts of capital and an active role in managing the investments. Others can be done with little to no money with very little ongoing management.If you're wondering how to invest in real estate to create passive income, you’ve come to the right place. Here, we will outline passive real estate investing, how you can get into it, and which strategies will set you up for success.
What Is Passive Real Estate Investing?
Passive real estate investing is the practice of creating income from real estate without being actively involved in managing it. Sounds pretty great, right? Well, if done correctly, it is.
By identifying the right opportunities and approaching them with a well-thought-out plan, you can enjoy checks from passive income every month without allowing real estate investment to become another full-time job.
Once all of your real estate investment business expenses are paid, the money left over is called residual income. This monthly cash flow can be created through various strategies across many different industries. Read on to learn how to invest in real estate for passive income and create long-term residual income.
What Are The Benefits Of Passive And Residual Income?
So, what’s so great about passive income? To be clear, there’s nothing wrong with active income. This is when you work each day and receive a paycheck for your work. This is the traditional work model most Americans are familiar with.
Passive income, in contrast, allows for an enhanced monthly income without doing a lot more work. This can augment your active income and enable you to achieve financial goals that might otherwise be out of reach.
For example, building or enhancing your retirement fund can be a great benefit of passive income. Wondering how to pay for college for your kids? Passive income can help ease that burden too. Paying off debt, building your savings, and charting a path toward financial freedom are all achievable through effective passive income strategies.
How To Create Passive Income Using Real Estate
Successful investors know the benefits of creating passive income well when it comes to real estate. It takes some work on the front end of an investment, but you can sit tight and let the checks roll in after that. How, you ask?
Successful passive real estate investment begins with planning and research that create a solid business strategy. This means becoming an expert in the real estate markets you want to target and the financial tools to invest in.
Once the right market and investment strategy is found, your education on implementing and executing your investment strategies begins. This includes creating an in-depth understanding of the paperwork, regulations, and other business operations that will keep your passive income from real estate coming in each month.
How NOT To Earn Passive Income In Real Estate
Possible pitfalls come with any worthwhile endeavor, and passive real estate investing is no different. Read on to learn about a few you should be sure to avoid.
Cash flow is the key to any great real estate investment strategy. For example, if you decide to purchase a rental property, make sure the expenses are such that you aren’t facing a cash flow problem at the end of each month.
One key factor in optimizing cash flow is properly screening the people you rent to. Using background checks, income verification, and checking references will help ensure you rent to tenants that will pay their rent on time and in full.
While the income is often referred to as “passive,” your role should remain somewhat active. For example, rental property owners who don't stay in communication with their tenants or property managers often won’t hear about possible problems until it’s too late to fix them.
15 Passive Income Real Estate Strategies To Consider In 2022
So, now that you know why passive real estate investing is worthwhile and a bit of how to do it, let’s get into some strategies you can implement in 2022.There are almost endless ways to invest in real estate, but not all of them are right for you. Consider your current financial situation and long-term financial goals to make the best choice.
If you already own a home, you can start earning passive income by renting all or part of it to short and long-term tenants. Websites like Airbnb make it easy to find people looking for a room for one night, a 6-month rental, and everything in between.
An extra bedroom or a finished basement that you don’t use can mean money in your pocket each month. Simply find people interested in renting part of the house, screen them to make sure they’re a good fit, and start collecting rent to put toward your mortgage.
You can also rent out your whole house to generate even more passive income. If you live in an area with a weekend attraction, like a pro football team, you might be able to cover your mortgage for the month just by renting out the home for a weekend or two.
Single-Family Rental Properties
When it comes to rental property investment, sometimes starting small is an excellent way to get your feet wet. Purchasing a single-family house or condo and renting to just one tenant is a good way to do this.
Renting a home to a family on a long-term lease can be beneficial because they tend to take better care of the property and stay longer. That means you can save money on maintenance and improvement costs. It also allows you to avoid looking for new tenants while the property sits vacant.If you decide to go this route, keep in mind that rental property loans and taxes are often higher than when you purchase your primary residence. You can get around this by buying a new primary residence and using the home you are moving out of as the investment property.
Multi-Family Rental Properties
Duplexes and triplexes are an excellent option when you are ready to up the responsibility and income a bit from single-family units. You can still rent to a relatively low amount of tenants, like two or three families, while multiplying your rental income streams.
One nice thing about moving up from single-family rental properties to multi-family is that if a tenant leaves, you still have another rental income stream or two coming in while you search for new renters to fill the empty unit.
When an income property has five or more units, it is classified as an apartment building. This allows for more income as the number of tenants increases with each new unit. As you might imagine, the responsibilities increase as well. For example, instead of worrying about 1 or 2 toilets backing up, now you have to worry about five or more.
The more people you are renting to, the more issues arise. It can become a bit daunting - from maintenance to repairs to rent collection and more, things add up. When you get to this level of passive real estate investing, it’s a good idea to consider hiring a property management company to take care of these things for you.
A third-party property manager will charge for their services (usually anywhere from 5% to 10% of your rental income). Still, they take care of maintenance, repairs, collecting rent, and all the other operational aspects of your rental property investment.
If you decide to invest in an apartment complex, your lending options increase. An apartment complex can be purchased with a commercial loan, while single and multi-family income properties can only be purchased with a residential loan.Be sure to take a long look at the complete financial picture by evaluating your potential rental income and operating expenses before buying any type of rental property. Determine your rental property ROI before signing on the dotted line.
Commercial properties are defined as real estate used for business income-generating purposes. Apartment buildings, as previously discussed, are commercial properties. Other commercial real estate includes retail space, office space, and industrial buildings.
Much like managing rental properties, managing commercial investment properties involves finding tenants and taking care of the property. However, commercial tenants are different from residential tenants in a few key ways.
Commercial tenants often sign longer-term leases than residential clients. This is great for turnover, as you will find yourself looking for new tenants less often. The flip side of that is when you need to find a new tenant, it will take a lot longer for commercial properties compared to residential ones.
Properties that combine commercial and industrial real estate are often referred to as mixed-use. These have become popular recently, as renters enjoy reduced travel needs. With shops, offices, and retail all in one place, the need for cars and other forms of transportation is significantly reduced.
Having commercial and residential units all in one place isn't just convenient for residents and consumers. It’s a benefit to real estate investors as well. With retail tenants, office tenants, and apartment renters, the real estate income can come from many different sources.
Passive income investing is at its best when many different types of passive income streams are working for you. That way, if the market or economy fluctuates and reduces one stream, the others are still flowing while you reassess your business strategy. Mixed-use real estate investing is an excellent example of achieving this.
Buying land is another form of real estate investing that can create passive income. If you can locate land in an area that is growing, chances are it will appreciate so you can sell it at a profit. You can also rent land to hunters through a hunting lease if it’s large and isolated enough.
Look for areas with an expanding city center and good job and population growth. More people moving to an area usually means more homes need to be built. If you have land on the outskirts of a city, it will rise in value as the city grows towards it.
If you don't want to wait for profits when you sell the land, you can rent it right after purchasing it. Many landowners rent to farmers to grow crops, and others rent to hunters. These are just a few of the many options for land rental tenants.
Speaking of land, owning the land in a mobile home park means you get to charge rent (also called lot fees) to the people living there. Mobile homes can be an affordable alternative in places where home values have skyrocketed (which is the current national trend).
It will cost some money upfront, and the initial planning will require active management. However, once the deal is complete, collecting rent from the residents of your mobile home park will create a nice income stream.
If you have a vacation home, renting it can help pay for the mortgage, yearly maintenance, and more. Many people are turning to rentals instead of hotels for their vacations, so you likely won't have any trouble finding short-term tenants.
If you don’t have a vacation home, purchasing a rental property on a lake or near a tourist attraction is a worthwhile investment. Real estate in these areas tends to appreciate at a higher rate as well, so you can usually sell at a hefty profit if you don’t want to continue renting.
Self Storage Facilities
Demand for self-storage facilities continues to rise throughout the country. You can take advantage of this by building or purchasing this type of property and generating passive income.
Self-storage buildings appeal to real estate investors because they require less day to day tenant requests. After all, the units are occupied with stuff instead of people. The number of units can be much higher than an apartment building.
However, there will be some costs to account for that are unique to storage facilities. The facility's security, insurance, and staffing will need to be factored into your bottom line.
When a homeowner stops paying their mortgage, they may face foreclosure. This means the bank needs to take their home and sell it to recoup their loan. People facing foreclosure can sometimes negotiate with their bank on a loan payoff amount that can be less than what they owe.
This is when a savvy real estate investor can swoop in to buy the home at a price well below fair market value. The homeowner is in a tight financial spot and doesn't have the luxury of waiting around to get the best price for their home. If you have the finances available, you can buy low and sell high to profit.
Hard Money Lending
Banks aren’t the only places people can go to get a loan to purchase real estate. You can serve as a lender as well. Potential homebuyers often don’t qualify for a traditional mortgage and look for alternatives. If you have the cash on hand, you can lend them the money and then collect passive income in the form of interest on the loan.
If you have good cash flow, hard money lending can be a great way to get passive income through real estate in a relatively short amount of time. Hard money loans have short terms and high-interest rates. Those high-interest payments from the borrower each month can provide a significant revenue stream.
House flippers are great candidates for hard money loans. The properties they acquire are usually in disrepair, which means traditional lending institutions avoid approving a loan. You can act as a hard money lender, providing them with the funds to repair and improve the property before they sell it at a profit.
Real Estate Investment Trusts (REITS)
A real estate investment trust (REIT) is an organization where investors pool their money to buy real estate. This allows investors to purchase more expensive properties than they could buy independently. REITs buy properties and then sell them at a profit once they appreciate over time or from improvements.
REITs also generate income from properties by renting or leasing them to tenants. Investors like these groups because they are legally required to pay at least 90 percent of their profits to their members.
Real Estate Crowdfunding
Real estate crowdfunding has made it possible for anyone to invest in significant residential and commercial real estate acquisitions. Historically, these deals were reserved for large corporations or very wealthy individuals.
Potential investors simply peruse a real estate crowdfunding site, select projects they want to invest in, decide what amount they want to contribute, and watch the checks roll in. There is some risk, though, as unsuccessful projects can result in a loss of the initial investment.
Real Estate Stocks And Mutual Funds
One of the easiest ways to invest in real estate without buying property is to buy real estate stocks and mutual funds. These work just like other stocks you might purchase and sell on a stock exchange.
The only difference between these types of stocks and mutual funds is that they invest in real estate-related companies. With the market so hot, considering stocks and mutual funds related to the real estate industry is a pretty safe bet for investors in 2022.
Passive real estate investing comes in many shapes and sizes. Acquiring property to rent or investing in real estate-related stocks and investment groups are just a few of the many examples.
Get your finances in order, choose the best way to invest for your specific goals, create a plan, and start enjoying the benefits of monthly real estate income streams.