Passive Income. Doesn’t that sound great? Invest money upfront and then reap the rewards. If it sounds too good to be true you’re partially right. There is a ton of initial work that goes into creating passive income, especially in the real estate industry.
Passive real estate investment involves buying a property, and re-position it, then later earn an income from the property through rent and leases. This could be a rental property in your town, a mixed-use property in a nearby city or an apartment complex in a neighboring state. What makes it passive is that all you are doing is investing your money into the property – you’re not flipping a home for resale for example, you are just managing the asset.
There are unique benefits as well as challenges when it comes to this form of investing.
We’ll go through what those are as well as how to get started if you find that this is the investment strategy for you.
Benefits of A Real Estate Investment
Let’s start by looking at the benefits of passive real estate investment. There are a number of reasons why real estate would be a good investment.
First, it helps with the diversification of your portfolio. Stocks go up and down. Companies quickly become out of touch while others become overnight successes. Property prices are always rising (sometimes slowly, but still an overall upward trend) compared to companies in the stock market. There’s a reason property investments referred to as a “hard asset.”
Second, a significant real estate property, over time, will give you a steady cash flow. To quote a common phrase in the REI industry “wait to invest your money or invest in real estate and wait.” It takes a while for those returns to kick in, but once they do you’ll get that monthly passive cash that you’re looking for. Stocks can’t give you a monthly return. Neither can house flipping. But this form of investment can.
Third, there are many tax advantages. Tax depreciation is a big one, allowing you to write off a certain amount of money per property for up to 27.5 years! You can also strategically avoid capital gains tax and much more.
And last, there is flexibility in where you want to invest and the kind of property in which you’d like to invest. You can invest locally, where you understand the local economy and neighborhoods, or you can invest in a different state, where there may be communities that are growing more rapidly. There’s also so many choices in terms of properties. Apartments, duplexes, mixed-use, retail, you name it. This allows you to have more control over your investment compared to other investment opportunities.
Challenges and Rewards
Now let’s talk about challenges. These challenges shouldn’t surprise you if you have considered real estate investment before, but they’re worth thinking about.
First, real estate investment typically involves a large sum of money upfront if you are looking to create passive income. You can always get an investment partner if you don’t have the resources, but this may take some time if you don’t have a track record.
Second, you have to wait for the return. The return can take several years, maybe even a decade. If you are looking for a quick return this is not the way. But good things come to those who wait!
Third and last, with any investment, there’s some risk involved. Is it as risky as playing the stock market? No. But there are things that can go wrong. This money is siphoned off – it cannot become liquid quickly, negative cash flow or unexpected renovation costs. There’s also a market risk. Natural disasters, changes in local and national politics, or investing in a city that is overgrowing can lead to a lack of ROI. There are also other players involved -your partners at the financial level, but also those who are managing the property as well as the quality of the tenants.
It’s important to consider all these factors before signing a deal.
How to Get Started
Does this sound up your alley? Do you have a certain amount of funds to invest and are o.k. with the risks? Great. The higher the risk the higher the reward, they say. Here are the next steps you should take if you’d like to move forward:
1. Decide how involved you want to be with the process
Are you interested in investing in a certain kind of property? Would you like more control over your investment or would you rather leave it to the professionals? How would you feel if 15 people had money in the property, compared to just you and one other person? These are things you should figure out before moving forward.
2. Begin to research locations
You may want to have your investment be close by to your home because you understand the area from a property stand point. Or, you may want to yield a bigger ROI and so you’d rather your money go farther and invest in a different town, city or state that has less development. Decide what works best for you.
3. Research possible partners and firms
Once you have points 1 and 2 figured out, you’ll be able to whittle down possible partners and firms. Choose who you partner with wisely! You can help hedge against risk by going with the most experienced and most professional groups. That being said, those groups may come at a higher price point.
Asa real estate investor, I highly recommend investing in real estate. It has been a positive experience for me, I’m passionate about the product as well as the process. At the end of the day, there really is no such thing as passive income- there is work to be done at some point.
What questions do you have about passive real estate investing? What’s holding you back? Let me know in the comments!