Real Estate Passive Income 101: How to Passively Invest in Real Estate

Wouldn’t it be a relief to have a reliable source of passive income? A passive income rolls in regularly with very little work on your part, and for the average person, real estate is one of the best paths to developing this kind of cash flow.

Passive income is money earned from an investment that requires little to no effort to profit and maintain. Who doesn’t like extra money on the side without the extra work? For the average person, real estate offers one of the best paths to developing this kind of cash flow. In this post, we’ll take a closer look at how to make passive income with real estate investing. Read on to learn more about options to create and sustain passive income in the real estate industry.

Interested in real estate investment opportunities? Contact Life Bridge Capital to discuss forming a passive income partnership.

What is Passive Income and Why Do You Need It?

Passive income provides an additional revenue stream, much like a second job, without the daily active efforts and time commitment. Instead, the commitment comes up front in the form of time and/or money—then the investment returns revenue on an ongoing basis. 

To be considered passive, the income source should have minimal daily involvement. Several of the real estate investment opportunities discussed in this article will have zero daily involvement or are comparable to logging in to check your online banking accounts or investment portfolios.

With a finite number of hours in a day, establishing a passive income source gives investors a method for maximizing both time and money to meet wealth planning goals. Whether your ideal outcome is to set aside money for a second home, plan for your children’s education, or even replace your 9 to 5, consider passive income from real estate investing as an option that could get you closer to that goal.  

Ways to Make Passive Income with Real Estate Investing

If this sounds interesting to you, take a look at some of the ways you could make passive income with real estate investing:

Real Estate Syndication

Real estate syndication is an investment strategy where a sponsor/operator locates properties and shares them with you as potential investment options. In a syndication, you are part of an investment group—or syndicate—that looks at the options your sponsor/operator presents and decides whether to move forward with investing.

Your sponsor/operator is someone with investing experience and well-earned wisdom about making money through real estate. Ideally, they have a full portfolio of projects where they have helped others successfully develop a reliable income from real estate projects.

Your sponsor handles all of the legwork of identifying the potential projects and examining what needs to happen in order to make them profitable. As the syndicate investor, you simply agree to contribute your money to the project, then sit back and wait while the sponsor/operator and other hands-on professionals manage the rest of the process.

Pros of Real Estate Syndication

Real estate syndicates have become a popular method of passive investing for multiple reasons:

  • Low Stress. Syndications provide a low-stress way to invest in real estate for busy people who are short on time to spend on investing. That’s a huge benefit when your main focus is elsewhere: working, raising kids, running a business, or pursuing retirement. After researching and choosing a sponsor and committing to a project, no active involvement is required of the investor. 
  • Low Capital Entry. This investment approach works for middle-class people who don’t have millions of dollars to spend in real estate. With a group, you can invest in bigger and more valuable properties than each of you could afford—or even find—alone. For example, your syndicate could invest in a large and undervalued multifamily property that could be renovated to deliver reliable returns. Your sponsor/operator might discover an apartment complex that just needs a facelift and a new marketing campaign. Afterward, the new occupants would support the passive monthly or quarterly income your investment group receives.
  • Tax Advantages. Real estate syndication also has significant tax advantages. Investors in real estate syndications have mostly tax-free use of the distributable cash flow from their investments, which is almost like getting an interest-free loan. As an investor, you could also see financial benefits when the property is sold or refinanced.

Of course, we must share a disclaimer that this should not serve as investment advice and each person should consult with a qualified financial planner before starting a new passive investment in real estate.

Cons of Real Estate Syndication

Unfortunately, there is no such thing as a sure thing, even in real estate syndication. One of the most significant risks, though, is something that you do have an element of control over: the sponsor. Ideally, the project sponsor is seasoned and knowledgeable with multiple projects that they can pull from to make suggestions tailor for you. 

Not all sponsors are scrupulous, so research the person or firm you are considering and ask plenty of questions before committing to the deal. As always, be sure not to over-invest or create cash shortages for yourself, as the project may not create returns for some time.

Explore the many successful syndication projects led by Life Bridge Capital at our Portfolio page.

Real Estate Investment Trusts

Real Estate Investment Trusts (“REIT”s) offer another way to make passive income with real estate investing. REITs are companies that own or finance real estate properties that produce income. They then pay out at least 90 percent of their taxable income from those income-producing properties to the shareholders. 

Most REITs operate on major stock exchanges, and investors purchase company stock. The stockholders receive dividend payouts. Many people purchase REIT stock through their 401(k)s or other investment plans.  

Just like real estate syndication, REITs provide excellent opportunity for investors interested in tying up more modest amounts of money or even for those just wanting to dip a toe in the real estate investing water.

Unlike real estate syndicates, however, working with REITs gives investors the opportunity to be part of multiple projects at one time and to diversify their investments.

Pros of REITs

REITs investing is very accessible to anyone who manages their 401(k) or other investment accounts.  This easy entry makes it one of the most popular real estate investment strategies. REITs may be a great fit for people looking to make passive income from real estate but who want to commit very little time doing so. 

Even though you may use the same platform to purchase REITs that you use for other stock purchases, real estate generally weathers market fluctuations more steadily than equities. 

Cons of REITs

With so many checks under the plus column, REITs may seem like a must-have. Before purchasing REIT stock, do keep in mind that there are a few drawbacks.

REITs commonly specialize in a particular type of property, so investing a lot in one REIT can be risky.  For example, REITs that own office buildings or hotels have taken big hits during the pandemic, whereas REITs focusing on self-storage properties or open-air shopping developments have better weathered 2020. 

Just as investors usually see the best returns on properties after owning them for a number of years, so do REIT investors. While they do pay regular dividends, it can take a number of years to accumulate wealth from your investment. Best practice is to only invest in REITs if you do not plan to access the money for a few years. Conveniently, REITs are liquid, so you can retrieve your funds if unforeseen circumstances occur. 

Self-Owned Rental Properties

For most people, becoming a landlord and leasing a rental property is the first thing that comes to mind when considering real estate income. Being a landlord has long been a stepping stone to financial security, and rentals continue to be in strong demand. 

Unlike the previous avenues discussed above, owning a rental property likely requires a significant upfront investment in terms of both time and money. It is most likely to be successful if you can pay cash for a property or if you can snag a great deal that gives you room for markup. 

Fortunately, investors can find properties at a variety of price points due to the many types of rentals that tenants demand. Leasing a home or apartment may seem the most likely, but commercial leases and short-term rentals also offer passive income opportunities.

Do not overlook your primary residence’s passive income potential. For little upfront investment, you can turn your home into another revenue stream if you can tolerate opening your home to others (this is not for everyone). Perhaps you are an extrovert who would not mind welcoming tourists into your finished basement apartment on a regular basis. If that seems daunting, consider renting out your home while you are on vacation. It is easy enough to put your valuables in a locked closet (change out the regular doorknob for a keyed lock), and let your home make money while you are out of town.  

Pros of Rental Properties

Owning a rental property gives investors the chance of a two-fold source of financial gain. The monthly rental payments after expenses and set asides for future planned expenses should provide a regular monthly income. Second, the owner may realize gains from an increase in property equity in the future when selling the property.

Steady rent payments from a reliable tenant provide a great source of predictable monthly income on a property that is also growing in value. That is an investing win/win. Of course, no investment opportunity is guaranteed.

Cons of Rental Properties

One of the biggest drawbacks of generating passive income through self-owned rental properties is the upfront investment in terms of time and money. Purchasing a second home or apartment can be an inaccessible investment for many investors. And even for those who have the funds, a significant amount of time and work may be required to get the property into a rentable condition.

Additionally, there’s a reason that many people end sentences about being a landlord or having a tenant with a groan. It can be hard, unpleasant, and even unpaid work if you do it all yourself and run into trouble collecting rent. Being a one-person operation will likely not feel like passive income even though that is how the IRS classifies it.

Owners may consider hiring a property manager to manage the property on their behalf, but their services add to the expenses and eat away at the owner’s profits. Reliable, easy-going tenants will also diminish the burden of being a landlord, but unfortunately rental properties do not come with crystal balls to predict the future behavior of prospective tenants.

Rental properties bring many of the same risks of home ownership, including costly repairs that come on suddenly. Owners must remember not to think of the monthly rent above any mortgage and expense as pure profit. An emergency fund is just as necessary for your second property as your first. 

Is Real Estate Investing Right for You?

Your earning potential is not capped at the salary your career offers, nor is it reliant on labor-intensive second jobs. If you’re looking for viable ways to generate passive income, consider the real estate investing opportunities mentioned here.

What do you think? Is real estate investing the right fit for your lifestyle? If you’d like to do a bit more research first, the Real Estate Syndication Show podcast is full of helpful information about real estate investing.

We also welcome you to contact Life Bridge Capital to discuss forming a passive income partnership in a real estate syndication. And we’d like to leave you with this final thought: Within months, you could be receiving a reliable monthly or quarterly income simply by letting your real estate syndicate do its work.

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