How to Start Getting Passive Income Through Real Estate
There’s more to life than giving away too much of yourself to your job. While it can help you achieve financial success later in life, devoting every ounce of your energy to advancing your career can overwhelm you and severely impact your mental, physical, and social health. That’s why it’s important to find passive sources of revenue that’ll prevent your professional career from consuming all your time and energy. This can help you achieve security in retirement, as well as financial freedom.
One example of a passive income stream that piques the interest of many is real estate investments. Aside from allowing you to generate revenue without being dependent on your principal employment, real estate shows significant appreciation over time and has proven to be a stable sector.
In this post, we’ll discuss the different ways you can gain passive income through real estate and how you can secure your investment’s success.
Different Ways to Make Passive Income Through Real Estate
Rental Property
When people think of real estate investments, the first thing that comes to mind are rental properties. Rental investments fall under two primary categories: residential or commercial. Within these two categories are different investment types that generate rental activity, such as Airbnb listings, apartment complexes, office spaces, single-family rentals, and industrial buildings.
When renting out your property, you can choose to lease it for long periods of time, allowing you to generate income without much effort besides tending to occasional maintenance issues and general accounting. Meanwhile, short-term rentals demand you to be more involved in the business compared to long-term rentals. However, these can potentially generate a higher yield and are still considered as passive income.
REIT Dividends
Simply put, real estate investment trusts (REITs) are companies that own and manage properties by using money pooled from a group of investors. Think of REITs as mutual funds that mainly deal with real estate properties. Instead of investing in stocks, REITs fund real estate properties such as shopping centers, apartments, hotels and resorts, and office buildings. REITs are a passive source of income as the profit generated from the investment returns as dividends. The great thing about REITs is that you won’t need a lot of capital to get started, as they can be easily purchased through online brokerage accounts.
Crowdfunding
Crowdfunding is one of the newer ways to gain passive income through real estate. It simply means funding a real estate property along with other investors to buy and manage an investment property. If you invest in a crowdfunded real estate property, you essentially become a shareholder. You can then start receiving dividends as well as capital appreciation. Often times, you can see advertisements for crowd-funded properties on social media platforms like Facebook, LinkedIn, and Twitter. However, returns from crowdfunding opportunities are ultimately dictated by the structure that a sponsor has arranged. You can generate income periodically or receive a split of future profits from the sale of the crowdfunded property.
Real Estate ETFs
If you’re not ready to put your money in REITs, you can instead invest in real estate exchange-traded funds (ETFs). Here, an expert fund manager carefully selects profitable REITs and pools your money with other investors to buy baskets of REITs. The main edge of real estate ETFs is that it can still provide you with passive income through dividends, but carries fewer risks compared to REITs. Similar to REITs, your real estate ETF earnings are also taxed as portfolio income and are subject to the capital gain tax rate.
How to Maximize Your Success When Creating Passive Income Through Real Estate
Do Your Due Diligence
Having passive income doesn’t automatically mean that you’re free from putting in any work. As with any type of investment, you should always do your research before you jump the gun and attempt to generate passive income. For instance, you should take the time to fully understand the benefits and risks of real estate investments, so that you can decide which ones fit your lifestyle and goals the best. Additionally, you should try to be more proactive in asking questions about a property or real estate investment that you’re interested in. According to US News’ article on investing in rental properties, doing your research prevents you from making mistakes like over-improving and overestimating the worth of your property.
Pick the Right Business Structure
You should always try to seek ways to help you protect your passive income, and you can do this by choosing the correct business structure from the very start. While having insurance can protect your real estate investment to a certain extent, ZenBusiness’ guide to forming an LLC highlights how an LLC business structure is better geared towards securing your passive income. Unlike sole proprietorships, an LLC creates a clear divide between your personal and business assets. This means that, in case you ever face legal problems, your real estate business will be safe from being taken down by creditors.
Don’t Be Afraid to Seek Professional Help
Lastly, there’s no better way to ensure the success of your real estate investment than by employing the services of a trusted and experienced financial planner. Aside from helping you figure out which real estate investments will generate stable and passive income, financial planners can also assist you in managing your finances and creating long-term strategies. Wall Street Journal notes that when choosing a financial planner, you should make sure that they have the right certifications and licenses so that you can get your money’s worth.
There are many ways to generate passive income through real estate. But as we said, you should first understand the risks of these investments before you take the plunge and be on your way to financial success. For more posts on how to achieve financial security, be sure to check out our blog here on MoneyByRamey.com.
About the Author
Jodie Billar is a New Orleans-based investment advisor who specializes in real estate. When she’s not busy helping her clients, you can find her training for her next triathlon or playing with her golden retriever, Trumpet.
