How to Invest in Real Estate for Passive Income

A lot of people conflate the idea of real estate investment with passive income real estate investing. Real estate can be a form of passive investing, though not in the way investors think. Real estate investing for passive income can be one of the most powerful ways to make money work for you.

Before we continue, let’s clarify what passive real estate investing is and explain how and why it’s different from active real estate investing.

A lot of people envision buying and renting out a piece of residential property. They consider this passive income because, as they imagine the investment playing out, they will collect checks every month from tenants. This is not what passive real estate investing is.

An investor in this scenario is supposed to choose the property to purchase. They will then work with a property management company to make regular decisions about such matters. The decisions may involve fixing or replacing a broken water heater or painting the property, which the management company will be in charge of.

If the investor decides not to outsource those operational tasks, they will have to manage such responsibilities themselves. That is referred to as “active real estate investing.” So, what is passive real estate investing? It’s a strategy through which you can create earnings without being actively involved.

“Passive income” is used loosely as the amount of activity required varies depending on the type of investment. Investing in real estate comes in many flavours, with varying degrees of commitment and investment. Real estate investing provides opportunities for both passive and active income.

Investing in Real Estate for Passive Income

Passive income real estate investing is one of the most common strategies for increasing your income. You can also use it to grow your investment portfolio and build a healthy retirement in terms of your financial life. If done right, this kind of investment won’t take a lot of time and energy.

Real estate is a great option that you can use to build passive income streams. Find out how you can invest in real estate for passive income below.

1. Real Estate Investment Groups

Real estate investment groups are ideal if you intend to own rental real estate without the hassle of managing it. Investing in REIGs requires you to have access to financing.

REIGs are like small mutual funds that are committed to investing in rental properties. In a typical real estate investment group, a company buys or builds a set of appointment blocks or condominiums. They then allow investors to buy the apartments through the company, thus joining the group.

An investor can own one or several units of self-contained living space. They, however, don’t manage the units as that’s the responsibility of the company operating the investment group collectively. The company handles the maintenance, advertises vacancies, and interviews tenants. As payment, the company takes a percentage of the monthly rent as payment.

A standard real estate investment group lease is usually in the investor’s name. All of the units pool a portion of the rent to guard against occasional vacancies. This is to guarantee that you’ll receive some income even if your unit is not occupied.

2. Short-Term Rentals

Short-term rental investments provide you with an opportunity to charge more on a nightly basis compared to long-term tenants. You don’t even need to spend time chasing down rent. Assuming you use a third party like Airbnb for your short-term rental investment, you’ll be able to earn money relatively passively.

Note that Airbnb isn’t the only option as they have competitors such as TripAdvisor rentals and Booking.com. Airbnb is, however, a clear leader. According to research from low-interest lender Earnest, an average Airbnb makes about $924 per month.

This income can, however, vary dramatically depending on where you’re based. It will also depend on how frequently you rent out your space, the quality of your home, and the services you offer.

A lot of full-time Airbnb rental estate investors began by using Airbnb as a part time side project. You can even rent out a room in your home instead of the entire apartment.

3. House Flipping

This investment is for people with significant experience in real estate valuation, renovation, and marketing. The investment requires capital and the ability to do or oversee repairs as needed.

This is the proverbial “wild side” of investing in the real estate sector. Just like day trading is different from buy-and-hold investors, real estate flippers are different from buy-and-rent landlords. A typical example is that real estate flippers always look to profitably sell the undervalued properties they have in less than six months.

Pure house flippers don’t invest in improving properties. Consequently, the investment must have the intrinsic value required to turn a profit with no alterations. Otherwise, the property will be eliminated from contention.

Flippers who can’t swiftly unload a property can easily find themselves in trouble. That’s because they typically don’t keep enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead them to continue to snowball their losses.

There are other types of house flippers who make money by purchasing reasonably priced properties. They then add value to them through renovation. This can be a long-term investment where an investor only takes one or two properties at a time.

4. Real Estate Investment Trusts

REIT is a company that owns income-producing real estate. They pool investors’ money to gain and manage real estate properties.

Remember that REITs are high-end or commercial properties whose prices can fluctuate depending on the stock market. REIT allows you to have real estate investments in a completely passive manner because you essentially own a share of the fund. The rental payments pass through to REIT owners either on a monthly, quarterly, or annual basis.

REITs investors receive dividends in the same way you receive dividends from certain stocks. But the returns here are usually higher when compared to most of the other stocks.

The good news with REIT is that your money will stay liquid since you can sell it at any time. Also, the upfront costs for this real estate investment are relatively low and it is simple to purchase through a brokerage account.

5. Mortgage Notes

The other way of creating passive income through real estate investment is by purchasing a mortgage note. An investor can purchase performing and non-performing mortgage notes from other investors.

You can also create a note from a property you own using owner financing. Note that mortgages and notes are two separate contracts. They are used by lenders to provide buyers with the money to buy real estate.

A promissory note outlines the repayment of a debt and the mortgage secures the lender`s property as collateral. That’s just in case the buyer defaults. Some home buyers take out a home loans as a private notes rather than traditional loans.

Think of investing in notes as you taking the place of the bank. The buyers will pay you a monthly principal and interest. It will be the buyer’s duty to maintain the property, have insurance, and pay taxes. Your job is to collect a check every month and keep records of the payment.

Keep in mind that you can take ownership of the property in case the property owner fails to make payments. This type of passive real estate investing can be very complex. But it’s a better fit for investors who are familiar with mortgage notes.

Conclusion

Passive real estate investments are a great way of earning a steady stream of cash. You don’t even have to toil over renovating a property and neither do you have to worry about managing the real estate. That said, real estate investments aren’t for everyone. More active investments like flipping homes may appeal more to some investors than others.