Most of us have been conditioned to believe that we have to exchange our time for money. Now that the new “work-from-home and be-your-own-boss” professional lifestyle has become increasingly popular, we are hearing a big buzz around the topic of passive income.
You don’t have to sell a product or service to make money. Neither do you have to exchange your time or make a huge effort. If you know how to invest your money well, you will see it multiply and you will never go back to the “employee” mentality.
Another misconception is that you need lots of money to start earning passive income. That is far from the truth! Small investors can start earning passive income even on a small budget.
Continue reading to learn more about passive income and what strategies you can implement as a small real estate investor.
What is Passive Income?
There are two definitions of passive income that you must consider:
- First, there is the term used to define the money generated from various systems without the commitment of a full-time job. It requires little or no effort to maintain, much different than active income such as what you receive from exchanging a service or product.
- The other definition refers to the technical term used by the IRS since they treat active income differently. The IRS considers passive income “net rental income” or income received from a business in which you materially don’t participate.
Creating Passive Income With Real Estate
Being a real estate investor goes beyond owning commercial or residential properties directly. There are various traditional and innovative ways to make passive income with real estate.
Real estate remains the preferred strategy that investors use to gain long-term returns. It is one of the best ways to create multiple revenue streams, secure your retirement, and achieve financial freedom.
Small investors and those who are just beginning to take interest in real estate can reap lots of benefits from creating passive income. When you learn to earn this type of income, you will be able to utilize your time for other activities that will improve your quality of life.
Passive income from real estate investments allows you to achieve the financial freedom you need to spend time launching your passions or simply being with family.
Below are some of the strategies you can use to build multiple passive income streams with real estate.
We’ll start with the most traditional real estate investment strategy: owning properties. As an investor, you may choose to own commercial, residential, farmland, timberland, or other types of properties.
You will be able to rent out any type of property you own. Hiring a property management company will allow you to step back while your property is completely taken care of.
The key here is to ensure your property is profitable, which means you have to analyze your numbers well. If you pay a monthly mortgage, you have to calculate the net profit you will have each month after receiving rents and paying for maintenance, repairs, insurance, and other costs.
If you pay off the mortgage, you will have a higher amount of passive income each month and that’s where you eventually want to be as a property owner.
An important factor to keep in mind is that having a property management company will free your time to pursue bigger goals.
If you get caught up in the day-to-day activities of being a landlord, you will create a “job” for yourself earning active income instead of creating a passive income stream.
Learn to think big and you’ll see your money multiply!
A great way to own real estate without being directly involved with properties is through crowdfunding, which is also known as real estate crowdsourcing. Anyone can get started with as little as $500.
Real estate crowdfunding involves using small investments collected from various people to buy real estate. You can think of it as the crowdfunding platform GoFundMe, but instead of people giving donations, they buy into an investment that pays dividends that grow their long-term capital.
There are several crowdfunding platforms where you can get started. This great article on NerdWallet shows you some of the best picks.
REIT stands for real estate investment trust, which is similar to a mutual fund. It is essentially a company that owns, finances, or operates income-generating real estate. The capital is pooled from multiple investors, and you as an individual investor can earn dividends.
REITs are highly liquid, similar to stocks, which are also publicly traded. You can cash out at any time without the burdensome task of selling a property you own directly.
By diversifying your investments with REITs, you won’t run the risk of putting all your eggs in one basket as with a rental property.
REITs are registered with the SEC (Securities Exchange Commission) and can be traded through a broker.
In real estate, a joint venture refers to two or more parties that bring together their resources to develop or invest in properties. You can think of it as a business partnership where the parties involved determine the terms.
Responsibilities and profits are shared according to the agreement. A joint venture is a great way to get started as you build your capital and expand into doing deals on your own.
Not all JVs provide you with passive income, it all depends on the type of investment and the role you play.
If you are a managing partner, you will have to be very hands-on. However, being a money partner allows you to profit without getting being involved in the day-to-day management of the investment.
Nonetheless, as the investment grows, all parties will reach the point where they will earn passive income with little effort.
P2P (Peer-to-Peer Lending)
In simple terms, P2P in real estate means to borrow money from another person or entity without getting financial institutions involved. It is not to be confused with crowdfunding as they are different types of investments.
Instead of leaving money sitting in the bank, you can invest it by lending it to experienced real estate investors that know how to generate passive income and multiply the money.
A way to get involved in P2P without major risk is to split the money you invest across multiple borrowers. Your money will be working for you without having to dedicate your time to a property.
Different platforms make it easy for you to invest in P2P real estate loans. You will have the option to put all your money into one loan or spread it across different loans to reduce your risk.
A newly created way of investing in real estate is the innovative Fundrise. It is an online investment platform that allows you to get started with as little as $500. They offer eREITs focused on commercial real estate.
An eREIT is a combination of a non-traded REIT and an exchange-traded REIT. They are typically more accessible to small investors because they have very low fees compared to traditional REITs.
The advantage of using platforms like Fundrise is that you won’t have to pay a middleman such as a broker. That means you will save money on broker fees and administrative costs.
Another innovative type of investment that has surfaced is a platform called Streitwise. They provide the opportunity to get started with only $1,000 in a crowdfunded-type REIT that manages commercial real estate.
When you become a real estate investor with this platform, you will have access to a managed portfolio of private real estate assets. You can expect an average of 10% in annual returns.
The dividends you receive can become passive income or be reinvested.
My Final Thoughts on How Small Investors are Making Passive Income with Real Estate
There are more ways to make passive income with real estate than those I listed here. Real estate investments can be as creative as you make them.
That is great news because it means that just about anyone can become a successful real estate investor.
No matter which strategy you choose, just get started! Owning an interest in a real estate deal is much easier than you think. You don’t have to get your hands dirty to earn passive income.
Being a hands-on landlord may suit some people, but to truly grow as an investor, you have to realize that your time is gold. Learning how to earn money passively will create a much more fruitful financial future.
What is your investment style? Even if you have never invested in real estate before, the type of investment you lean towards is the one you should try first.
Once you begin, you will be able to easily jump into new types of investment strategies. Making money while you sleep can be a reality. You don’t have to be a seasoned investor to achieve this goal.
Share a comment below and tell us how you envision yourself as a real estate investor and which passive income strategy you will try first.