Is Real Estate a Source of Passive Income? A Beginner’s Guide
Making money from real estate without actively working is called passive income. There are various ways to do this, suiting different budgets and time commitments. Some methods require minimal effort, while others need more involvement.
So, is real estate a source of passive income? Yep, it is! Real estate is a source of passive income that ensures you more cash flow than most businesses. However, there are certain things that you need to consider before bringing on investments.
Here in this blog, we’ll guide you through all the insights of how real estate can bring in more cash flow!
Real Estate Passive Income: An Overview
Real estate passive income mainly means the money you can earn from any sort of rental business or other real estate investments. And the best part about this business is you don’t need to be active by yourself to generate more revenues (like any other business).
The income can come from renting out properties or through other real estate ventures. So, all you have to do is just invest an initial upfront money, which then automatically generates regular income over time.
Ways You Can Make Money Through Real Estate
Publicly Traded Real Estate Investment Trusts
Investing in REITs on stock exchanges is without question a considerable cost-effective way to passively earn from real estate.
REITs are needed to distribute a significant amount of shareholder income making them pretty suitable for generating income.
All these investments are usually quite affordable as most REIT shares trading starts from just $100. The reason it’s a “passive income method” as investors only need to conduct the research and monitor the investments without any sort of active management.
This means you don’t need to keep monitoring like other businesses! With over 200 publicly REITs available, investors have many options, including focusing on specific property sectors.
However, keep in mind that investing in REITs comes with stock market fluctuations, which can affect returns. Meaning it can even bring in losses to the business.
So, as a beginner, navigating the different REIT choices might seem daunting. And poorly managed REITs can result in disaster for your turnovers!
REIT Mutual Funds
Well, these funds are pretty much similar to REITs as they offer exposure to pretty diverse real estate investment trusts.
But, unlike ETFs, REIT mutual funds need to be actively managed by professional fund managers to outperform benchmarks and bring in more cash flow.
This active management can sometimes lead to higher expense ratios, especially when you compare them to ETFs. Moreover, investors are even required to meet a minimum investment requirement, which is somewhere around $2,500.
While REIT mutual funds assure you of potential returns, these also come with risks of underperformance. So, think wisely!
Non-Traded REITs
Unlike the listed public REITs, non-traded REITs are private investments that aren’t subject to any market fluctuations. Investors can easily purchase shares in non-traded REITs just through financial advisors or online markets. And it’s that simple!
All these investments offer higher income yields than publicly traded REITs and are often less volatile.
But, there’s a drawback to it too! The investment usually requires a higher minimum investment. Plus, non-traded REITs are less liquid than publicly traded REITs, with limited redemption facilities.
Real Estate Syndications
Real estate syndications give passive investing opportunities in many commercial real estate projects. This allows the investors to become limited partners in different private equity funds managed by real estate sponsors.
All these investments often offer hefty income yields along with potential tax benefits. Investors can even access real estate syndications through online platforms or directly through real estate sponsors.
Real Estate-Backed Debt
When you invest in real estate-backed debt, it means you’re involved in financing for property purchases, developments, or renovations.
This can include:
- Purchasing mortgage notes
- Acting as a hard money lender
- Investing in mezzanine debt
While real estate debt investments usually offer much lower risk and even assure fixed income, they lack capital appreciation compared to equity investments which can be a drawback!
Therefore, investors in real estate-backed debt should evaluate the credit of borrowers and the underlying collateral to reduce any associated risk.
House Hacking
House hacking mainly involves leveraging your primary residence to generate rental income. This can be done by renting out a certain portion of the property like additional units in a multi-family property or individual rooms to tenants.
Moreover, homeowners can convert spaces like garages or basements into rental units. While house hacking can give you additional income to offset living expenses, it requires active management and property upgrades.
That’s not all; homeowners should even be aware of the potential tax implications of their property.
Short-Term Vacation Rentals
The concept of short-term vacation rentals is pretty straightforward—get yourself a property in a sought-after vacation destination and rent it out to tourists!
Online platforms like Airbnb have streamlined the process of listing properties, offering higher rental rates compared to any traditional long-term leases.
Yet, you should know this, managing a short-term rental requires considerable effort and involvement. Operating such a property means running a hospitality business more than simply owning real estate!
Plus, the initial investment for a short-term rental property can be huge, usually requiring a substantial down payment and covering closing costs..
Vacancy rates tend to fluctuate, especially during off-peak seasons or economic downturns, resulting in irregular income streams rather than steady cash flow.
Bottom Line
So, if you’re a beginner and want to go on investing in real estate, then this blog will be a guide of what to expect and what not to!
Real estate, is without question, a relevant source of passive income, but knowing the odds and navigating your way through can help you decide whether or not to go for it!
Therefore, think and research properly before you head on to investing in real estate!
