Real Estate Passive Income
You can make passive income from real estate in various ways. Choices range from low-cost basic investments to more involved methods that require greater amounts of time and effort. Whatever your lifestyle and personal financial situation may be, there is a passive investment method suitable for you. There are attractive options available for virtually any budget and time involvement in passive property investing.
What Is Passive Income from Real Estate?
According to the IRS, passive income is defined as regularly generated income from a financial trade or a business activity that you do not take part in materially throughout the year. Common examples are income from dividends and royalties from published material. Anyone who is not a real estate professional can also claim rental income, even with material participation.
Real estate passive income includes all money produced by property investments or rental real estate business projects. Frequently, passive income from property involves an up-front investment that produces recurring financial payouts. If you are new to property investing, it is important to explore the different ways of investing to gain passive income from real estate.
Different Ways to Make Passive Real Estate Income
Various methods of making lucrative passive income from real estate include two very popular choices, REITs and real estate syndication investments:
Real Estate Investment Trusts (REITs): Publicly Traded
Publicly traded real estate investment trusts (REITs) on stock exchanges are essentially the most low-cost, easy financial vehicle for real estate investing to build passive income. REITs are excellent income generators since they are required to distribute 90 percent of their taxable net generated income to shareholders. These dividend payments to the shareholders are necessary in order for the REITs to retain their IRS tax-advantaged status.
There are currently over 200 publicly traded REITs, and many pertain to certain real estate sectors like office, industrial, retail or residential. Others may be aligned with specific markets, such as the West or East Coast. These are passive investments since you have no need to perform any related work except due diligence research.
You should also follow the progress of your investment in the market. You can buy and sell shares of your investment with a brokerage account during market trading hours. This fact gives these publicly traded REITs high liquidity. These REITs offer investors plentiful passive income investment choices. In addition, many REIT shares can be bought for less than $100 each.
REIT Exchange-Traded Funds (ETFs)
REIT exchange-traded funds (ETFs) provide beginning investors with an effective method of producing passive income from property investing. These funds lower the risk of income loss for investors by containing a wide array of different REITs. Otherwise, if a single investment reduces its dividend because of less than favorable market conditions, a significant loss may occur.
Since you can purchase just one share, if you like, REIT ETFs can be low to moderate-cost investments. They are quite liquid because they trade on the stock market. ETFs offer a very passive method of property investing. However, investors in ETFs must pay a fee that is called the “ETF expense ratio.” Also, both public REITs and REIT ETFs leave investors open to high volatility risks.
REIT Mutual Funds
When you invest in REIT mutual funds, your investment consists of a versatile bundle of REITs that represent extensive business sector diversity. The manager of the mutual fund strives to purchase shares of REITs that they expect to yield superb financial returns when compared to a standard index.
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Most REIT mutual funds are available only through a broker. These investments typically have a higher minimum investment requirement than REIT ETFs, for example, approximately $2,500. They also frequently have a greater expense ratio than REIT ETFs.
Non-Traded REITs
REITs that are not traded on stock exchanges are non-traded REITs. As an investor, you can buy shares of these REITs via an online portal that handles direct-to-consumer purchases or through financial advisors. Two popular online portals are Realty Mogul and Fundrise. These private property investments have less volatility than REITs that are traded publicly, and the private investments typically return a greater financial yield.
Yet, numerous private REITs require a greater minimum investment of at least $2,500. They also may be available only through a financial advisor. These property investments tend to be illiquid, preventing you from transacting an easy purchase or sale of their shares. The sponsors of non-traded REITs often redeem shares just once during a quarter. They may also place a limit on the number of redemptions that they will complete.
Real Estate Syndication Investing
You can invest in multifamily properties and other types of commercial real estate as a passive investor through a real estate syndicate. These other commercial properties may be self-storage facilities, office buildings or retail space. As a passive investor, you will also be a limited partner. The syndicate sponsor (general partner) manages the syndication investment deal, and you along with the other limited partners pool your capital to fund the deal.
All partners receive shares of the passive income produced by a syndication investment property. These syndicated investments are typically less volatile than publicly traded REITs. They also usually provide a greater financial yield, distributed to the investors in the form of dividends or scheduled payouts. Online portals that offer property syndication investments include EquityMultiple and CrowdStreet.
Syndication real estate deals are not liquid investments. They frequently have long-term holding times of from five to ten years before a property is sold. For this reason, they are suitable for investors who are not seeking a fast return on investment (ROI).
Some real estate syndicates are only available to accredited property investors. These limited partners (passive investors) must have proof of a net worth equaling $1 million, not including the value of their primary homes. Investors with annual incomes of $200,000 or a combined income of $300,000 with a spouse also qualify as accredited investors.
Some syndication real estate investment deals also allow participation by non-accredited investors. These passive investors lack the net worth and annual income requirements needed to qualify as accredited investors. Yet, they can participate as passive investors if they have knowledge, experience or education that can benefit the investment deal.
Once they have performed due diligence concerning the syndicate investment property that they will invest in plus its location, the passive investors have the sole duty of funding the investment with their combined capital. After the deal is funded, the syndication sponsor manages all remaining aspects of the investment for its duration. The passive investors can relax and await their dividends and payouts from the investment property.
Real estate investing through a syndicate enables passive investors to participate in a large commercial property investment that they could not afford to fund on their own. These investors can build an impressive and profitable investment property portfolio by investing through respected real estate syndicates. This type of investing can also act as a strong hedge against inflation.
More Ways to Earn Passive Income from Property
Additional ways to earn passive income from real estate include the following:
Debt Backed by Real Estate
Property-backed debt is another option for producing passive income from real estate. You can lend funds for financing the buying, redevelopment, renovation or initial construction of a property. Your choices may include:
- Purchasing mortgage notes;
- Becoming a hard money lender for fix-and-flip property or a development project; or
- Investing in mezzanine debt or preferred equity involving a single-property syndication deal.
Rental Real Estate and Vacation Properties
You can also create passive real estate income by owning rental properties and vacation properties. By owning single-family homes or condos, you can rent them to long-term tenants with one or two-year leases. This will provide you with a steady flow of passive income. Although vacation properties are short-term rentals, you can often rent to several different tenants during a summer or holiday season.
However, neither of these types of property rentals are entirely passive investments. Unless you hire the services of a property management company, you will most likely need to spend considerable amounts of time making plumbing repairs or renovating and painting your rental properties.
Also, during a season or a year when you have heavy renovation or repair expenses, your passive income flow may be seriously reduced. Both long and short-term rental properties often require large upfront costs, including down payments and closing costs.
Concluding Thoughts
There are multiple ways to earn passive income from real estate. You may choose to engage in REIT investments, syndication property deals or investments in debt backed by real estate. From any of these investment options, you can enjoy building significant amounts of passive income.
You may also decide to invest in rental properties and vacation rentals. Yet, you should consider the fact that these choices are not entirely passive investments. You will have up-front costs when acquiring these properties. In addition, you may have to make costly renovations or repairs to them that can offset your expected profits.
Before choosing a method of investing in real estate for generating passive income, be sure to do some research and due diligence. By understanding the benefits and disadvantages of different types of passive REI, you can map your path to success. You can become a well-informed earner of impressive passive ROI in the lucrative real estate industry.