I’ll admit, when I first started this site, I didn’t know much about passive real estate investing. My primary focus for readers was to utilize the methods I’ve used in the past to dump debt and start learning the basics of investing. That’s it.
Dr. David Graham (FI Physician) and I were recently talking about this same subject and initially he wanted to talk about basic investing on his site but now has shifted towards his passion of helping other docs with retirement income planning.
When you think about, it’s really no different than starting off in medical/dental school considering about working in the “general” practice area but falling in love with a specialty and then beginning to purse that goal.
You never know where life is going to take you once you begin gravitating towards your likes and interests.
Due to the fact that I frequently get emails asking for more information on passive investments such as real estate, I decided to dedicate an entire section to this subject.
What Is A Passive Income Investment?
Before we get into passive real estate investing, let’s first define passive income investments.
Dave Ramsey defines passive income as: “Money you earn in a way that requires little to no daily effort to maintain. Some passive income ideas—like renting out property or building a blog—may take some work to get up and running, but they could eventually earn you money while you sleep.”
Investopedia defines it as: “Passive income is earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved.”
Typically, passive income is something that you receive regularly which involves little effort from your own part. That’s why it’s so attractive to most of us. We can continue to work while beginning to add multiple streams of income to our portfolio.
Once you build enough to more than cover your expenses….congratulations, you’re financially free!
Many people typically refer passive income to income that is automated. What I like about it is the fact that you’re not directly managing the investment.
To learn more, Dr. Peter Kim has dedicated an entire site to passive income on his site Passive Income MD.
What Is Passive Real Estate Investing?
In the past, if someone wanted to invest in real estate, they were limited to actively owning residential or commercial properties firsthand. Many of us (myself included), are too busy to manage tenants.
Who has time to see patients, raise a family, try to stay in relatively good shape and then take calls from tenants when their AC goes out in August? Not me.
But in the past, there weren’t too many options.
With today’s ever-changing technology, owning real estate for passive income is becoming easier (we’ll get into some different ways shortly).
With passive real estate income, you earn a portion of the monthly revenue as long as the investment exists. This is a great way to invest to supplement your income without the stress of active ownership in the property.
In some instances, if the property is sold, you also receive a portion of the proceeds as well.
3 Ways Of Passive Real Estate Investing
1) Investing in REITS
A real estate investment trust (REIT) is a type of company that lets investors pool their money to invest in a collection of properties or other real estate assets. The goal is to receive rental income on properties and also participate in price appreciation.
You can invest in REITs in a variety of different ways, including purchasing shares of publicly traded REIT stocks, mutual funds and exchange-traded funds.
An example is the Vanguard Real Estate Index Fund (VGSIX).
Some of the properties held within a REIT portfolio may include:
- Apartments
- Hotels
- Cell towers
- Single-family homes
- Warehouses
- Shopping malls
- Retail centers
- Healthcare properties
- Office buildings.
- Industrial buildings.
- Self-storage facilities.
- Data centers.
The advantages of investing in real estate through a REIT include:
- obtaining exposure to a diversified portfolio of properties
- lack of direct property management
One of the more popular ways to passively invest in real estate is through crowdfunded real estate companies.
These companies allow investors to make direct investments in individual real estate deals by pooling capital with others.
Examples of properties purchased are apartment complexes, single-family homes and commercial properties.
There are two main type of investment opportunities – Debt or Equity
Debt Investments
In debt deals, the investor is acting as a lender to the property owner or the deal sponsor.
The loan is secured by the property itself and investors receive a fixed rate of return that’s determined by the interest rate on the loan and how much they have invested.
Equity Investments
With equity investments, the investor is a shareholder in a specific property, and their stake is proportionate to the amount they have invested.
Returns are realized in the form of a share of the rental income the property generates, less any service fees paid to the crowdfunding platform. Investors may also be paid out a share of any appreciation value if the property is sold.
I personally still have deals ongoing with a handful of these companies that I discuss in more detail in the article:
“What I Learned From Investing in Real Estate Crowdfunding Platforms”
Syndications
A real estate syndication is a type of crowdfunding that allows investors to pool their financial and intellectual resources to invest in properties much bigger than they could afford or manage on their own.
These deals are a simple transaction between a sponsor and a group of investors (limited partners). The sponsor is an individual or company that’s in charge of finding, acquiring and managing the real estate. They have a history of real estate experience and the ability to underwrite and do due diligence on the real estate.
Typically, investors are paid a preferred return. This is a threshold return that is offered with the purpose of counterbalancing the risk associated with investing capital into the deal. It’s usually distributed prior to the general partners receiving payment.
Who can invest?
Some crowdfunding deals are only offered to accredited investors. This is someone that meets either of the following requirements:
a. Annual income of $200K single or $300K joint for the last two years or higher
b. Net worth of at least $1 million dollars
3) Turnkey rental property
A turnkey rental property is one that has been fully renovated and is ready for purchase. This helps decrease stress on an investor as the property can be rented out immediately after purchasing. Examples include: house, duplex or apartment building.
With this type of investment, everything is done for you. You would simply purchase an investment property and let professionals oversee it. They also would collect your monthly cash flow income while your tenants increase your equity or pay off your mortgage.
These companies also do their best to ensure your property never remains vacant.
Final Thoughts
If you are looking for a passive income stream, real estate can be one of the best passive investment vehicles available. As with any other type of investment, make sure you do you part and become knowledgeable about passive real estate investing.
Once you begin to understand what’s involved, you’ll soon realize that it can be a great way to add to your residual income.
As stated earlier, I continue to hold investments in companies such as Realtyshares which has been taken over by IIRR Management Service and Patch of Land.
Recommendation
The most profitable real estate investments I’ve had are with apartment syndication deals. I’ve enjoyed learning and investing so much that I’m now partnering with others on these types of deals.