Passive Income Investing With Real Estate: How To Achieve Financial Freedom

Key Takeaways

  • Passive income investing is a form of consistent cash flow that, once acquired, can be relatively easy to maintain.
  • More freedom, more time, and future stability are just three benefits that come with passive income investing.
  • The first step of investing in passive income real estate is to identify your short and long-term goals.

Passive income investing isn’t for the faint of heart, but it is for those who want more freedom, more time, and a financially stable retirement. Passive income, as it relates to real estate, refers to buying a property (or several properties) and putting the units up for rent as a way to earn monthly cash flow. If you are able to charge more in rent than the combined total of your mortgage, maintenance costs, and other expenses, you could find yourself with the ability to live off said cashflow.

What Is Passive Income Investing?

Passive income investing is essentially cash flow that comes in on a consistent basis that requires little effort to maintain; however, implementing a passive income investing strategy won’t happen overnight. While the idea is to eventually have incoming cash flow without having to lift a finger, the set-up is crucial and will take time.

There are a number of ways to achieve passive income, but very few are as valuable and time-tested as real estate investing. Mutual funds, REITs, dividend stocks, peer to peer lending, and side hustles are several examples that have the potential to offer investors extra cash flow other than real estate. And while diversifying your portfolio is the key to success, may we suggest starting with real estate?

Why Invest In Passive Income Real Estate?

  • Freedom: Living off passive income as a real estate professional means the ability to be your own boss. You get to live life on your own terms without anyone telling you what to do or how to do it. You are in charge of your day to day tasks, as well as your financial future. Becoming a passive income investor means your office can be anywhere. One day you might find yourself signing important documents at your local coffee shop, and the next day you’re responding to emails from the beach. If you find yourself spending less and less time doing the things that make you happiest (i.e. spending time with friends and family or taking part in your favorite hobbies), maybe it’s time to consider passive income investing.
  • Time: When you’re working in the real estate industry, it is safe to say that time is your biggest asset. Think about it: How often do you hear people complain about not having enough time to properly complete A, B, or C? One of the biggest benefits of passive income investing is freeing up your time. The best passive income strategies are those that you can set and forget. When you have passive income, you’re not struggling to make ends meet at the end of every month because you have that reserved cash flow for emergencies. This is not to say that investing in a passive income property requires no work; however, once you have a property up and running, there is very little additional maintenance necessary.
  • Stability: Thinking about retirement, especially if you feel unprepared financially, can be daunting and stress inducing. Those “what-if” scenarios will keep you up at night and can eventually be a detriment to your overall health. When you can rely on your passive income assets, the fear of losing your full-time job or failing to close a different real estate deal won’t eat you alive. Learning about different passive income strategies is a also a great educational starting point. It has the potential to lead to research about taxes, stocks, and other investments, which will improve your overall financial literacy.

Why invest in passive income real estate? The better question is why wouldn’t you invest in passive income real estate?


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How To Invest In Passive Income Real Estate

  • Identify Your Goal: If you’re a first time investor, identifying your investment goals will be the key to your success. What do you hope to gain? Are your ideals realistic? Are you goals financial or lifestyle driven, or both? If passive income investing is something you plan to takes seriously, you must ask yourself whether or not you want to live solely off your investments or if you plan to use the monthly cash flow as supplemental income. Secondly, how “hands on” do you hope to be? If you hope to be less hands on, you may consider hiring a property management company to take care of the day to day tasks. Keep in mind if you do go the property management route however, there is a cost associated. Clearly defining your objectives before diving into the investing process is a must for newbie passive income investors.
  • Organize Your Finances: Organizing your finances is necessary before any investment you make; however, it is still important to address here. Start by looking at your overall financial profile. What are your assets? Is your credit score decent? Would you need to take out a loan to acquire a new property? Do you have enough in savings to avoid paying for PMI? How much money are you willing to put down? Would you consider pitching to a private money lender if necessary? How much money are you hoping to make in the transaction? Providing clear answers to these questions will help you avoid hiccups down the road.
  • Decide On Investment Type: Once you’ve decided passive income investing is for you, your next step should be to determine what type of property you hope to invest in. There are many strategies high on the list for today’s investors: : Single-family homes, apartments and multifamily homes, and commercial real estate are just the beginning. Single-family homes typically come with the lowest risk; however, they will most likely produce a lower monthly cash flow compared to other investment types. On the other hand, single family homes can offer greater potential for appreciation. Apartments and multifamily homes can be lucrative; however, investors will have to worry about vacancies and evictions more often than they would a single family home. Commercial real estate comes at a high cost, but it also has the potential to afford investors significant returns. If you can cover the high holding cost and initial investment, commercial real estate can provide great cash flow and appreciation potential. Remember, the type of property you choose will be based on the type of tenant you want to attract, as well as the amount of energy you are willing to give the investment.
  • Choose Your Market: While an investor can certainly invest from the comfort of his or her own market, passive income investing does allow the option to invest in properties across the country. If the market where you reside doesn’t offer much ROI potential, consider working with a realtor and property management company to secure a deal is a more desirable location. When researching various markets’ trends, be sure to focus on factors like economic indicators, population data, and housing data. Economic indicators include low unemployment rates, predicted economic growth, and a low cost of livings. Population data, like migration trends, past and projected job growth, and population changes in the surrounding cities, will also help to determine whether or not a market is prime for real estate investing. Median home price, low vacancies, increasing average rental rates, and property appreciation are housing data factors investors should also keep in consideration before selecting their market.
  • Determine Your Property’s Expenses And Cash Flow: Once you have a business plan in place, you’ve reviewed your finances, chosen a market, and selected a potential property, you must calculate your expenses to determine your expected cash flow. The more research you do the more accurate your projection will be. Start by talking to other landlords and investors in the area. How much do they charge for rent? How often do they experience maintenance issues? What problems do they face on a regular basis? Review common rental property expenses like loan interest, taxes, repairs, maintenance, insurance premiums, utilities, etc. While a number of rental property expenses are tax deductible, it is still necessary to calculate your total projected costs in order to estimate your monthly cash flow. Once you’ve run the numbers across a variety of properties, take the average of the results you collected to determine the cash flow of a single unit.
  • Decide On Number Of Units: The last step is easy. Let’s say your goal is to generate $5,000 of income a month. Use this formula: number of units needed = (equals) $5,000 / (divided by) expected cash flow of one unit. After you’ve established your expected cost of one unit, all that’s left to do is choose your desired income and use the above formula to find how many units you’ll need.

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How Many Rental Properties Should I Own?

The answer to this question will have a range and depend on each investor’s specific goal. Is your goal to secure enough passive income properties to be financially free in retirement? Do you want to buy and hold a property for a few years before selling to make a lump sum profit? Do you hope to make just enough cash flow to supplement your current income? Do you plan on taking part in any other real estate exit strategies like wholesaling or rehabbing? Or are you simply trying to diversify your investment portfolio? Because every investor has a different goal, every investor will have a different answer to the question “how many rental properties should I own?” Some investors have just a few passive income properties to help support their full time job income, while others have a complete rental property investment business where they own 50 plus properties. Go back to step one and identify your goal before uncovering your answer to this question. Know that it is okay for your goals to change over time, but establishing an action plan to start will help get you up and running.

Passive income investing is arguably one of the best ways to ensure a future of financial freedom, especially if you choose real estate investing as your passive income vehicle. Do you have experience in investing in passive income real estate? Share your stories in the comments below.

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