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Making money outside of your job is a great way to ensure financial stability and take care of additional expenses. If you are looking for a way to earn passive income, real estate has several opportunities that might be of interest to you.
For those wondering what passive income is exactly, let’s break it down. Passive income is exactly what it sounds like: investing and then earning money, through interest or dividends, without the active day-to-day participation of managing the property or investment. Much like if you buy a company’s stock, you don’t take part in running the firm’s everyday operations; instead, you gain financial benefit based on your initial investment if the company does well.
Acquiring and managing real estate is an excellent way to earn income, but interacting with tenants, staying educated on the real estate market, handling paperwork and legal documentation, and maintaining the property requires you to be directly involved at all times. If you are not interested in actively managing and owning properties, there are still ways to invest in real estate without the day-to-day hassle.
Let’s look at a few ways to earn passive income from real estate investments.
1. Real Estate Investment Trust (REIT) Shares
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One of the easiest ways to earn passive income in real estate is to invest in REITs. REITs are very similar to mutual funds: Investors buy shares, contribute money and gain monetary benefit in return. In most cases, REITs are publicly traded investment opportunities and can be found on major stock exchanges, allowing you to quickly buy and sell online. With REITs, your investment is spread out over a portfolio of real estate properties.
REITs are required to return at least 90% of their income to investors in the form of dividends, and just like mutual funds, they are generally very easy to get involved in, making it a great passive income option for many investors.
A downside to this investment opportunity is the lack of transparency and control on your investment because REITs do not allow passive investors the opportunity to choose which real estate assets their investment goes into. Additionally, REITs will generate lower returns on average than other passive income real estate opportunities.
2. Real Estate Syndications
Unlike REITs, with real estate syndications, you are not investing in a fund; instead, you buy a specific real estate property and become an owner of the asset. As the owner of the real estate asset, you have more opportunities to increase your tax benefits as a passive investor.
In summary, a real estate syndication involves multiple investors pooling their capital to purchase a real estate asset. The general partner, or syndicator, of the real estate syndication finds a deal, coordinates the transaction and financing, and manages the investment once it has been finalized. Passive investors pitch in most of the capital required in exchange for equity in the real estate. In real estate syndications, passive investors don’t have to be actively involved in property management, accounting or tenant-related issues.
A great aspect of real estate syndications is the transparency in your level of risk. When you are a passive investor in a real estate syndication, you know exactly where you are investing, the asset you are investing in and, most importantly, who you are investing with. This allows you to correctly underwrite the opportunity and communicate with your sponsorship team directly throughout the course of your investment.
One of the benefits to real estate syndications is the potentially high returns. As a multifamily syndications firm, an average deal would look like the following:
• Hold Time: Five years of owning the asset.
• Passive Income: 8%-10% cash-on-cash return on your investment each year.
• Profit On Sale: 40%-60% (or more) return on investment at the sale of the property.
A downside to real estate syndications is the barriers to entry. The minimum investment for most offerings is $25,000. Additionally, unlike REITs, real estate syndications are, in most cases, held under SEC regulation. This put limits on the marketing of these offerings to the public. Finally, if you do not have a relationship with a real estate syndication company, it will be more challenging to find these particular investment opportunities.
3. Real Estate Crowdfunding
Another option is crowdfunding. Similar to syndications, real estate crowdfunding is when a group of individuals pool their capital together to purchase real estate. Real estate crowdfunding uses the internet and social media platforms to reach potential investors.
The main reason that many people opt for real estate crowdfunding is that it doesn’t require a large amount of money to start. You can invest as little as $1,000. Unlike REITs, with crowdfunding, you are investing in properties directly and can choose which properties you would like to invest in. Moreover, real estate crowdfunding helps investors to expand the risk in their portfolios by not having their entire funds in the equity market.
Conclusion
Investing in real estate is a great opportunity for those who are looking to take advantage of the profits real estate can yield without actively managing the day-to-day operations. Before jumping into passive income investing, connect with an expert in the space and continue your education on each of the investment vehicles mentioned above.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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