The moment you consider creating a big retirement fund, passive income is an instrument that is considered almost indispensable. But the question is how exactly would you generate this income? Most popular passive sources like dividends generate a minuscule amount of money. You would notice that many retirement calculators project stock market investment as a necessary tool but let’s face it; there is hardly anything passive about stocks. But there is another asset class that can sure yield strong and sustainable passive income over an extended period.
Yes, I mean that income you can generate from real estate in many passive ways like monthly rent and the like. One of biggest advantages of real estate passive income is that despite some ups and down, they continue to generate strong long-term returns. That is exactly why they are often the preferred choice of many who are looking to generate passive income. The initial investment in a rental property is not huge. Maybe to start with, you would have to pay about 20-30% of the property cost. But if you are saving regularly, that is not a huge sum.
After that, they can pretty much fund the mortgage cost as well as get a monthly cash flow from the rent they collect. But you have to make sure, you only have reliable tenants, and the paperwork is in place to safeguard your interest. But rent is not the only way to generate real estate passive income. There is another way to generate passive income through REITs or real estate investment trusts. This is particularly useful for individuals who do not want to handle the hassle of handling their property on a daily basis.
These REITs pay almost 90% of their taxable earning as a dividend. However, for those in the higher tax bracket, you have to explore how to manage the taxes. Here is a look at some of the most common and sustainable real estate passive income opportunities that you could explore.
What Are the Different Types of Real Estate Passive Income Opportunities?
When you are looking at exploring various income opportunities in the real estate world, there are some that stand apart from the rest, not just in terms of their dependability, but also the extent of income that they can generate over an extended period.
1. Rental Opportunity
This is perhaps the most basic option to generate real estate passive income. The idea is to invest in multiple properties that you can put up on rent. Sometimes investors look at ways to fund investment in the second property through the proceeds of the first one, and the third one from the second one, so on and so forth. So in this way, you create a reasonably stable cash flow cycle.
Of course, care needs to be taken that the overall cost of your mortgages, financial charges and other fees do not exceed the total rent that you collect from these properties. That, in itself, creates a stable revenue channel that helps you to enjoy the passive income. Over a point of time, these rental properties would continue to provide the cash flow even after you have paid off the mortgage costs and taken care of the insurance policies, etc. The core point here is that this is a passive income source that has a long-term sustainability opportunity. After you have put in hard work for initial few years to set it up appropriately, you can pretty much relax and enjoy the income generated.
2. Turnkey Rental Real Estate
These are essentially rental properties that are handled by professional property management firms. You can look out for a good quality and properly maintained option and then invest in them. Once you have taken care of the initial repair and maintenance work, you can then hand over charge to a third party company who would handle all the paperwork and collect rent, look after the maintenance, etc. You will get the money or income from the investment at the end of every month.
Of course, you would have to pay something to the firm managing all the paperwork and rent follow-up for you. But that’s only a small cost in exchange for the long-term income that you are able to generate. So in many ways, leveraging a turnkey rental investment is all about combining the best of both the worlds.
A Long-Term Passive Income Opportunity
You are able to generate a long-term passive income opportunity, but at the same time, you do not have to handle all the related hassle. Someone is doing the hard work on your behalf and helping you wade through the administrative elements of the entire business. But having a team of real estate professionals managing this passive income source means that you have to give up at least 10-12% of your income in paying them.
However, as a potential investor in one of these rental properties, you must undertake a basic due diligence of the turnkey property provider. He should be a reputable professional providing quality properties to you. Also, you have to calculate the relative return from the turnkey rental property quite closely. Remember you are giving up a certain amount of equity in the property in return for letting someone else manage the hassles. But the overall returns that you get from this real estate should be able to justify the cost that you incur. Only if you find a desirable balance in the overall cost-return ratio, it will justify investing in this type of turnkey rental property.
3. Look for Properties Below Market Value
When you are scouting for suitable real estate options to help generate passive income, you must remember that the price at which you finalize your deal will essentially help seal your overall earnings. If you manage a real estate that’s currently trading below market price and then look at enhancing its features some bit and put it up on rent, you can easily look at amplifying your market value. Of course, in this case, you have to carefully calculate how much you are going to spend in the repair work. In no circumstances should it exceed the overall cost of investing in a slightly higher priced, but better quality rental property. That is perhaps the biggest challenge that investors face. What is the type of real estate that they must invest in to generate a reasonably high passive income?
Making a choice is crucial because this often decides the exact amount of return what you have to earn to justify the overall cost.
4. Investing Private Money to Yield Passive Income
When we talk of private money investing in real estate to create passive income, it means there is one set of investors who are actually lending money to another set of investors who would actually be buying the property. Private money can be used to invest in a series of real estate opportunities like turn-key rental, flipping properties to even regular buying of property for the longer term. The private money invested to generate real estate passive income is generally secured by a deed. This deed is drawn against the real estate that is bought with the money lent.
On an average, if you see the returns on private money invested in real estate, ranges between 5-15%. This is decidedly more than the money that private money invested in stock markets would yield. Moreover, the risk involved in stock market investment is decidedly higher than what you would experience in real estate. This kind of investment also generates a passive income that is pretty long-term in nature. The flow of passive income would continue for almost as long as the investor can meet the obligations. However, care should be taken in choosing both the lender and the investor to see the deal go through. Ultimately the success and actual worth of the deal is in making the right choice to generate funds as well as choose potential end users of it. You must understand that you should have enough provision in place just in case the loan goes default.
5. Loan Against Properties
When you look at ways to create real estate passive income, renting a property is decidedly not the only way. But often the way that you choose also depends on the kind of instrument that you choose to facilitate the passive income. One of the options could be taking a loan against a real estate and using it to generate passive income. Are you wondering how you could facilitate this? Well, think about it again. When you take a loan from a bank or a mortgage company, they generally don’t fund the money themselves. Instead, they sell these loans as notes to investors.
Buying a note means pretty much acting like a bank where you get the funding, but at the same time, you need to take up the responsibility of the loan default if that happens ever. Once you have bought the note, you have to simply wait for the payment every month. Decidedly this is one of the easiest ways to generate passive income. But buying a note is not as simple as it sounds. A lot depends on whether you are buying a performing note or non-performing alternative. Moreover, the quality of the real estate that you are investing in to generate the passive income is also very important. You have to undertake appropriate due diligence to make sure you are buying the most sustainable opportunity with the best rate of returns for you.
Can You Create Real Estate Passive Income via Real Estate Business?
Well, that brings us to a key question, can you create passive income from real estate only if you buy it or is it possible to create a passive income opportunity through real estate business that you might be running?
Well, the good news is you indeed can. You can pretty much generate monthly steady cash flow without lifting a single finger in terms of effort to get money. Let us use an example to further clarify this point. Let’s say I run a real estate business, I have a team of 5 associates who sell houses on my behalf. They are all seasoned real estate agents who can handle the buying and selling of these businesses pretty much on their own without too much interference from me. They also manage the paperwork and handle the various other nitty-gritty of the overall business.
But once the commission flows in, you get the entire amount apart from the payout that your team members deserve. So in many ways, once you have put the initial effort of setting the team in place, getting individuals to run the operations and train the staff appropriately for a certain period. After this, the proceedings can follow its own course, and you can choose to relax.
A 90% Passive Income Avenue
Though the business might need your attention from time to time, this is a great opportunity for you to pursue a 90% passive income avenue. At least, it is a situation where you do not have to oversee day to day operations, and you can take a break for an extended period. In this regard, I would like to clarify that in no case does your geographical location come as a hindrance to your overall property investment plans.
If you are based in San Diego, you can still take advantage of the higher rental rate in New York and invest in a property there to enjoy the real estate passive income. The benefit of this outstation real estate investment is that it helps you take advantage of the favorable real estate rates in various parts of the country and enhance the amount of income that you can generate from this type of investment. Though you would have to spend a little extra on hiring a separate team there to take care of the property and undertake the investment on your part, it is offset by the potential rewards you earn. After all, the relatively better rental rates coupled with lower or more favorable business taxes that the specific location allows will help you enjoy makes it a win-win situation for you.
Locations with a Higher Rental Income
Obviously, to reap maximum benefit, you can choose locations that have higher rental income, and the per-capita income is higher. This will help you increase the relative amount of real estate passive income that you can generate for the same amount. You must remember the basis of most businesses is all about maximizing the value of every dollar that you spend or invest in real estates of your choice.
- It is advisable to look for markets
- Where there are more job opportunities
- Relatively large flow of new workforce looking at affordable house
- Areas with greater number of Fortune 500 companies
- Densely populated cities with higher rental income
All of these factors together will help you maximize the return on every penny that you spend towards enhancing the total investment that you make in a specific real estate market.
Avoid Potential Pitfalls While Generating Real Estate Passive Income
However simple it might sound, generating real estate passive income is not that simple. You must remember, it is a multi-layer complex financial arrangement. You have to look at ways how you can maximize the value of every penny that you invest in and do not just get into a potential financial trap where you could lose a significant amount of your base capital. So doing your homework is often the most crucial step before you can begin to enjoy the benefits of passive income. In the real estate world, a potential money pit is all such properties that might require a huge amount of maintenance and repair cost. You will realize that the rent and profit that you had hopes to pocket are being constantly eaten up by the perpetual repairs.
As a result of these maintenance and repair issues, it becomes very difficult to find regular tenants for your rental property as well. Either you have to vacate them to get the maintenance done, or they have to stay in a badly maintained flat which means the rent will be relatively lower than what you can hope to earn otherwise. That can surely make a huge dent in your overall profitability plan and income outlook going forward.
Well Maintained Properties
So you need to, therefore, look for properties that are well maintained and commit your cash there instead. Don’t just invest in a real estate because you are getting it cheap. It is extremely important to find out why and how you are getting it cheap. You would realize that sometimes rather badly kept properties that involve a large amount of maintenance work is often sold for a lower billing rate to woo buyers. It is better to avoid getting involved in such investment and, therefore, undertake due diligence before you finalize your buy.
You can even leverage with long-term property managers to make sure that you are able to zero in on only the most profitable deals. It is extremely important to understand the implications of the various pros and cons of buying a specific property or locality. Even if you have to pay a bit to property managers to make sure you are investing in a really good deal, it is more like an insurance that guarantees decidedly strong passive income going forward. You can even look at ways to follow the same plan to undertake investment in multiple locations and maximize your overall profitability.
The Big Strategy to Enhance Real Estate Passive Income
The next step is, therefore, how or what strategy should you incorporate so that you can maximize the overall income that you can generate from the real estate property. Planning is an extremely important step here as in any other investment avenue like buying stocks, bonds or even commodities. Real estate investment too needs a decidedly long-term planning and comprehensive understanding before you take a call on what or where to buy. When the prospect of your future income comes to play, the need enhanced.
1- Maintaining A Steady Cashflow:
When you are looking to generate real estate passive income, one of the most important considerations would be the cash flow you can look to generate. You have to understand that it is unfair to expect the same kind of cash flow from every type of property. There are many factors that you need to consider the expenses involved, profit potential, the rent expectation, the strategic location of a place and the impact of all these factors on the overall return that you can expect. You also need to assess the relative risk associated with a property. Often the locality, in this context, dictates the exact risk potential. It is always better to go for moderately good rent options compared to very high paying ones if the relative long-term prospect of the former is better than the latter.
Remember it is very important to choose options that come with an assurance of steady cash flow. After all, don’t forget the purpose of your purchase is to generate steady passive income. So at all costs, it is important to make sure that the steady flow of funds is maintained. You can even tie up with a property manager to help you get a favorable deal.
2- Quality Of Tenants:
Often the kind of tenant you get, decides the exact amount of passive income, you can hope to generate from a specific real estate investment. Let’s say if you have a property in a relatively stable and affluent neighborhood, you can hope to find a better quality of tenants. They are more likely to care for your property, take up their responsibilities and adhere to pre-decided rules. They are also less likely to default on the monthly loan payment. Properties in areas with lower rent rates stand a greater risk of tenants defaulting on payment and even moving out without notification. You have to be constantly on the watch, and your role can never be passive in this case. You have to constantly on the lookout for trouble.
Therefore, when you are looking to invest to get real estate passive income, it is extremely important to consider the location of the property. It is always better to opt for a residential area in case of a residential property and commercial hubs if you want to rent out shops and office space. Apart from that, it is also important to consider the relative crime rates in a locality and how that can potentially impact the prospects of getting tenants.
4- Rate of Vacancy:
Another important factor that you must consider when looking to generate passive income from real estate income is the vacancy rate of the property that you might be considering. A property with a very high rate of vacancy will not be able to generate strong returns for you. Though the property price might move up over a point of time, it will not be able to generate passive income steadily for you. A stable flow of tenants will maintain the cash flow and your prospect of passive income.
How to Determine If Your Real Estate Investment Qualifies for Passive Income?
This also brings us to a key point; does all type of real estate investment qualify as passive income?
When you look at convention real estate investment like buying a house, may be renovating it and then selling it at some point for a higher price, would that be considered passive income?
Well, it can be a profitable investment no doubt but in a way, it would be classified as a means to generate passive income. When you consider real estate passive income, income from rentals is by far the most convenient option that fits the bill. Investing in real estate cannot automatically translate into real estate passive income. You can invest in a property even when you are working in a proper job and have a source of active income. But of course, you can convert an active real estate income opportunity into a passive income one eventually. As you work in an active real estate business, you can gradually work towards saving and graduating to a passive income avenue eventually.
In fact, crowdfunding is soon coming up as a popular real estate passive income platform. The recent legal developments have made it possible to access different kinds of real estate properties and their unique offerings in diversified locations. The return prospects from these are also significantly higher than other conventional investment options like stocks.
So… Real Estate Passive Income Is a Great Opportunity
Therefore, we can conclude that real estate passive income is one of the best opportunities to cash in on if you are planning an early retirement. More importantly, this is unique passive income opportunity that gives you long-term visibility and plans your retirement a lot better. There are many ways to go ahead with you real estate investment to generate regular income. However, it needs to be mentioned that a well planned rental income can by far help you generate most stable cash flow and therefore, the most reliable opportunity to create passive income. But don’t be in a hurry to buy a property to put up on rent. It needs careful consideration to generate steady real estate passive income. Be very sure of the tenants you are dealing with the prospects of the property you are investing in. Commit cash only after that.