Passive Income Real Estate Investing: Breaking Down The Basics

Key Takeaways

  • Passive income real estate is an investing strategy through which earnings can be created with a loose level of involvement.
  • Those wondering how to invest in passive income real estate can first examine rental properties.
  • Individuals should always know the right questions to ask before investing in a passive income property.

Passive income real estate is known as one of the best ways to gain an additional source of revenue, attain security in retirement, and ultimately design a roadmap to achieving financial freedom. However, passive income real estate investing is not necessarily the right fit for every investor. Would you like to take a more active role in real estate investing, or a relatively passive role? Read on to learn all about passive income real estate, and see whether or not it sounds like a good fit for your investing personality type.

What Is Passive Income Real Estate?

Passive income real estate is a strategy through which an investor can create earnings without having to be actively involved. The term “passive income” is used loosely, as the level of required activity and involvement varies based on the investment type. Some common examples include rental properties, or earnings made from investment portfolios.


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Real estate passive income

How To Invest In Passive Income Real Estate

Passive income can be a great way to supplement your current income, as well as help you create financial streams to help secure your retirement years. One of the most popular ways to generate real estate passive income is through rental properties. Investors who play their cards right can create a steady revenue from rental income, while they also have the option to make improvements to the property and build equity.

There is a common misperception that passive income real estate investing requires little to no work. However, those interested in creating passive income with real estate should plan to take an active role in what should be treated like a business. Whether it be searching through properties, screening tenants, hiring a property manager, or addressing repairs, owning passive income properties does require a certain level of involvement. This especially rings true for those who wish to maximize their profits.

One of the keys to building a successful passive income real estate investment involves planning and creating a sound business strategy. This includes versing yourself in your target market, whether it be the same neighborhood as your primary residence or even out-of-state, so that you are aware of local real estate trends and values. The information you glean from the real estate market will help you pick out the best possible market to hold a passive income property, as well as identify property listings that promise good cash flow. After the research phase transitions into the execution phase, you will also need to have a strategy in place on how you will manage tenants, finances and paperwork, as well as the property itself. As you can see, passive income real estate is quite a complex process, and perhaps the term “passive” is a little deceiving. However, with plenty of planning, research, as well as knowing the right questions to ask or common mistakes to avoid, you will be well on your way to a sound strategy that can make your life much easier in the long-run.

Rookie Passive Income Investor Mistakes To Avoid

  • Not having enough cash flow: You may have heard the phrase “cash is king,” and any passive income real estate professional would tell you the same. When owning a rental property, your main goal is to gain appreciation while earning a steady cash flow. However, the market can fluctuate over time and affect your appreciation. Cash flow becomes your bottom line in terms of providing an income and being able to take care of your property.

  • Failing to thoroughly screen tenants: One of the best ways to maximize your passive income from real estate is by leasing only to the best possible tenants. A bad tenant can turn out to be much more expensive than any vacancy, such as through property damage or even a lengthy, expensive eviction process (or worse, a lawsuit.) Take the time to property screen your tenants, and be sure to check their records and references.

  • Not being ready to become a landlord: Newbie investors might choose the approach of a passive income real estate investment vehicle without realizing that being a landlord is tough business that should not be taken lightly. Be sure to understand that managing rental properties should be approached as if it were a small business.

  • Not collecting rent in a timely manner: It is important for new landlords to be very clear about rules, and hold tenants accountable for following these rules, from the very beginning. Tenants may take advantage of their landlord’s kindness and create a pattern of being late on rent payments, or even have a problem catching up. Waiting too long to collect rent will not only hurt your cash flow, it can lead to a delayed eviction process that can lead to hostile emotions on either end.

  • Not keeping an active role in management: Even when going through a property management company, an owner should actively manage their property by means of keeping in regular contact with tenants and providing regular care and maintenance of the property. Although this may require extra time, effort and cost, it will help protect your bottom line in the long-run. Proper management of a property can help reduce tenant turnover, improve property value, as well as prevent avoidable repairs costs.

15 Different Ways To Create Passive Income In Real Estate

  • Single-family units: Those wondering how to create passive income in real estate can start off with the most common of examples. Perhaps the simplest type of property to understand, a single home or condo can be purchased and rented out to just one tenant. Single-family tenants tend to take more psychological ownership over the home, leading them to take better care of the property. However, when vacant, a single unit will bring in no income at all.

  • Duplexes, triplexes and more: Properties with two to four units offer similar benefits to single-family units while offering a lower requirement for intensive management when compared to apartment complexes. Due to the increased number of tenants, these properties can be a little tougher to manage than a single-family unit, yet tend to provide a better cash flow prospective. The risk of a potential vacancy is spread across multiple units instead of just one.

  • Apartment buildings: This building classification is often applied to properties with five or more units. Investors are able to take out a commercial loan, instead of a residential loan, and enjoy economies of scale. However, they should be prepared for more intensive management or to hire a property management professional.

  • Commercial buildings: Commercial properties can be leased to retail tenants with long-term leases, thus promising a more stable stream of income. However, commercial tenants can be more difficult to replace, and tend to highly customize the property to their business needs. Investors should plan for longer vacancies, as well as having to consumer the cost of remodeling spaces between tenants.

  • Mixed use developments: Demand for mixed use development projects has increased steadily, and can provide a home for residential, office, retail, industrial and institutional tenants. Investors can enjoy a variety of income streams and lease lengths within one property.

  • Industrial complexes: Although residential properties tend to come to mind with the mention of passive income, properties geared toward the commercial sector need not be ignored. Commercial warehouse, storage or manufacturing facilities can provide steady performance while requiring minimal management. It should be noted that tenant turnover can lead to extended vacancies.

  • Self-storage facilities: Self-storage facilities continue to be very much in demand and can be found almost anywhere in the U.S. All facility costs and vacancies can be spread across many units, equating to a relatively low per-unit cost. However, these facilities require a customer service and management team, often staffing the premises for extended hours. In addition, owners should factor in security and insurance expenses.

  • Mobile home parks: Mobile homes offer an attractive housing option for residents under economic stress, or in markets where housing prices have skyrocketed. Investors who own a mobile home park typically own the land, while collecting rents from residents who choose to locate their mobile home on the property. Because this investment is quite capital-intensive, investors will often go into the deal as a part of a fund, or in multiple partnerships.

  • Land lots: Investing in land in itself can be a unique niche, and can be used to improve or split up to be sold as smaller lots. This strategy can be effective if the invest finds a plot of land in an area that is up-and-coming or will soon be developed, and sells it for a profit. However, land can be tricky, as there are very little ways to produce an income while it sits empty.

  • Vacation rentals: A property might pose as a good short-term or vacation rental candidate, especially in markets with a significant transient population, as well as tourist attractions. Investors who own a vacation rental can often charge more on a per-night basis, than they would with a long-term tenant. However, vacation rentals require constant scheduling, dealing with cancellations, paying for housekeeping services, and worrying about slow seasons.

  • Real Estate Investment Trusts (REITs): REITs can be thought of as a mutual fund, and offer individuals with an opportunity to invest in the real estate sector while remaining completely passive. The target of REITs are usually high-end or commercial properties, and can fluctuate in correlation with the general stock market.

  • Tax liens & deeds: The government reserve the right to seize a property when taxes go unpaid. Investors have the opportunity to buy up tax lien properties at a significant discount, but should only take action if they have a solid strategy in place.

  • Note investments: Homebuyers have the option of taking out a home loan in the form of a private note, instead of a conventional loan. There is a large market surrounding the buying and selling of these notes, some of which are delinquent. Investors can purchase performing and non-performing notes from other owners at a discount. This provides them with the right to collect monthly payments or take ownership of the property if the property owner fails to make payments.

  • Hard money lending: Investors who have sufficient liquidity can consider privately lending money to help other individuals purchase property, who promise to pay back the principal at a high interest rate. The end user is often a fix-and-flip investor who needs quick access to liquidity to jump on a deal. However, there is always a risk that the deal will not go well and the borrower will default.

  • Property rehabs: Fixing and flipping properties requires a more active role in real estate investing, but can be quite lucrative. Properties that are located in a promising rental market, but are not up to par in terms of appearance and condition, can go through a rehab phase before being rented out.

Questions To Ask Before Investing In A Passive Income Property

By knowing the right questions to ask, individuals can make as much of an informed decision as possible. Passive income real estate investing is no exception to this rule. Asking as many questions as possible before going into an investment deal represents a critical part of minding due diligence, and is a step that should never be skipped. The guide below provides a list of critical questions to ask before investing in a passive income property, along with considerations for each:

Passive income real estate

If you are searching for a stable method of building financial freedom over time, then perhaps passive income real estate is just the right investment strategy for you. However, if you have gleaned anything from the discussion above, it should be that the word “passive” can be somewhat deceiving. Any investor should always head into a deal with the resolve to mind their due diligence, ask the right questions, and provide the level of commitment and involvement as required to make that specific investment strategy successful.

Which method of creating passive income through real estate did you find the most appealing or interesting? Feel free to share in the comments below.

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