Last updated October 15th, 2019.9 minute read
The following is a guest post from Financial Wolves, a blog focused on helping you make more money to achieve financial freedom
Financial freedom! Everyone is striving to attain this state. Whether in developed countries or third world countries, everyone wants to have a sense of freedom when it comes to money. No one wants to work for their entire lives. For this reason, people try to find opportunities that can guarantee them a constant flow of income, especially during their old age. Real estate investing is an area that most people tend to lean on.
The whole idea is to have a flow of income without you having to put much effort anymore. Also known as passive income, all of us strive to have a source of passive income. Numerous opportunities provide a source of passive income and which can give you that much sought financial freedom.
Real estate investing is one common idea that clicks to the minds of many when passive income investments are mentioned. But, is real estate investing genuinely passive income? In this article, we will explore some types of real estate investing and why its passive income nature is being debated.
What is Passive Income?
The term passive income is used to define a situation where someone earns a constant stream of money without putting any direct effort. However, when we look at real estate investing, there is an overwhelming opinion that investors cannot build passive income properties. There is this belief by some people that there are no passive income properties in the market.
But, is this belief actually true or just an opinion? The simple answer to this is that they do exist. Passive income properties exist in one or various forms, including real estate crowdfunding, and REITs, among others.
But again, why do some people believe that you cannot create passive income from real estate investing? Before we answer that, let’s first understand what passive income properties are.
What are Passive Income Properties?
When we talk about passive income properties, we mean the rental properties that are built to generate passive income. They are properties from which an investor derives income without putting effort on the property’s daily operations.
In most cases, the investor has property managers who do the work for them. Therefore, passive income properties refer to properties that give you income while you sit and relax.
Why is Passive Income Properties Idea Debated?
Someone may ask, why then do some people, including some investors, doubt that passive income properties do exist? Well, the most probable answer would be this. Many base their argument in the fact that the process of choosing a property to invest in requires so many steps.
They say that finding an ideal property, as well as all the activities involved in property management needs a lot of work and time.
But for the proponent of the existence of passive income properties, this idea of hard work and many steps don’t hold. They argue that although in the past one had to put in extra effort and time to succeed in real estate, right now it’s not the case anymore. Currently, there are numerous investment tools and avenues that one can use and still make it big in real estate investments without much work.
Also, they argue that although hard work may be required at the initial stages, as time passes the work reduces significantly. This means that you can make dollars by doing very little, which forms the basis of passive income. Whether or not rental properties form a source of passive income, one real thing is that they eventually grant you financial freedom.
How to Create Passive Income from Real Estate Properties
Several ways exist through which you can generate passive income through real estate investing. Some of the most common ones include Real Estate Investment Trust (REIT) and real estate crowdfunding.
If you want to learn how to be efficient with real estate investing, these two platforms can help you in that. Let’s look at what they entail.
What are REITs?
REITs are typically corporations that own and manage portfolios of income-generating real estate properties on behalf of the investors. Some of the properties they deal with include hotels, apartments, and malls, among others. REITs form an ideal way through which you can earn passive income from real estates.
There are both public, as well as private REITs, which manage investor’s property portfolios. In the US, there are over 200 public REITs and over 800 private ones with a total asset worth of over $400 billion. However, even with these amounts, REITs forms a small fraction of the entire commercial real estate industry which totals $11 to 12 trillion.
This shows that the real estate market is a vast market that rakes millions of dollars to investors. Through REITs, it is easier now to view real estate as passive income sources since you are not involved in the daily running of the company. You invest passively and wait to start earning.
What is Crowdfunding Real Estate?
Crowdfunding is a new way in which businesses use to raise money from investors. Instead of asking large amounts from investors, crowdfunding uses social media platforms to request small amounts of money from a large pool of investors. This way, even small investors can have a chance to invest in the real estate market.
Crowdfunding real estate has eliminated all the barriers that traditionally used to bar small investors from real estate investing. Crowdfunding companies then invest the money (as a collective fund) in real estate on behalf of the customers.
In a real estate crowdfunding scenario, investors have direct access to the assets or properties, whereas, in REITs, the investor doesn’t own any property. You simply own the equity in the trust. The trust then owns the underlying real estate assets. Think of yourself as an equity owner in an owner/operator of real estate.
At the end of the day, both forms of real estate investing aim at balancing your real estate portfolio to maximize your return on investment. They can provide diversification to your assets that comprise of both increasing your income and long-term capital appreciation.
Types of Rental Properties
If you want to invest in rental properties, here are a few that can be ideal for you:
• Turnkey Rental Properties
These types of rental properties are among the best sources of passive income in real estate. Firstly, they require the least amount of work and can generate a steady stream of income for you. The only effort needed is in researching the company offering the rental properties. You should ascertain that the turnkey rental properties will provide you with a good ROI.
You can use a tool like a rental property calculator to determine how feasible your investment in such a property will be. This way, you won’t invest blindly and run the risk of inevitable loss.
• Single Family Homes
If you choose the right property at an ideal location in the market, then you can have a great passive income property. How to get it just right will depend on the kind of research you do and the tools you use. The rental property calculator will still be vital in this process.
Since management of the house will be needed, the best option in the case of a single-family property is the “lease-up only” contract. With this kind of agreement, the property management company job is to get you the right tenant and get the tenant settled in the property. This helps you avoid additional charges.
• Airbnb Investment Properties
If you want a steady passive income from Airbnb investment properties, then you will have to do more than making use of the rental property calculator. Professional management of the property, automation, and delegation are other things that will help ensure that you have a passive income property here.
Automation is necessary when it comes to customer check-in and check-out processes and bookings. An efficient process will guarantee you a steady passive income. A company like Smartbnb offers software solutions that can help you in the automation process in Airbnb management.
Becoming a Landlord Pros and Cons
When you invest in real estates, in most cases, it means that you have become a landlord somewhere. This comes with its share of benefits and shortfalls.
Here are some pros and cons of being a landlord.
Being a Landlord Pros
- Extra income: When you become a landlord, it means that as long as your property has reliable tenants, you have an additional source of income.
- Flexibility: Since you own the property, you are at liberty to set your rules, term, as well as the cost of rent as long as you stick to the set laws.
- Minimal time commitment: With proper management, the property will bring you money even with minimal supervision. This helps you to concentrate on other things, especially if you have a day job.
- Long-term profit: Real estate is a long-term source of income that can help you in old age.
- Tax deductions: Although the rental income is taxable, there are some tax deductions that you can benefit from to offset the cost. These include tax-deductible expenses such as accounting, buildings & contents insurance, cleaning, depreciation due to wear and tear, gardening, mortgage interest, and more.
Being a Landlord Cons
- Start-Up Costs: These may include the cost of buying, as well as renovation costs if it’s an old property.
- Tenant Issues: Having to handle tenant issues can be a headache. If you are managing your property, concerns with rent payments, damage of property, and violation of contract among others are issues that you may have to handle.
- Maintenance Costs: Regular repairs can also be costly, especially if there is poor plumbing causing leaks, roof leaks, adhering to safety codes, and more.
- Legal Issues: There are numerous property laws and new legislation that keep emerging that you should keep up to date. You must stay informed.
Conclusion on Real Estate Investing
Although some may not see real estate as passive income, I believe now it’s clear that in the long run, and when done right, it amounts to a source of passive income. There are other ways to make money online, but REIT investing and crowdfunding can be a great way to park hard earned side hustle money to make your money work for you. I hope that this piece has given you a clearer picture of real estate investing.
Ready to start? I challenge you to invest $500 in crowdfunded real estate today.
Author Bio: Financial Wolves provides alpha and beta perspectives on how to make money to achieve financial freedom. Our advice has helped thousands of people travel the world and achieve financial freedom. We love providing advice about increasing your income to help you achieve financial success. Follow us on Twitter and/or Facebook for all the latest updates.