The US real estate sales and brokerage market size is estimated at a staggering $156.2 billion in 2021.
Through the years, the real industry has attracted an increasing number of investors. Few sectors have churned out more millionaires. It’s no wonder real estate is the preferred long-term investment for 35 percent of Americans.
One of the reasons investors love real estate is its ability to generate passive income, a critical aspect of wealth creation.
But exactly what is passive income? More importantly, how can you create passive income in real estate?
This guide sheds light on these issues. Read on to learn more.
What Is Passive Income?
Passive income refers to any income that you make without active, ongoing participation. Simply put, you don’t have to physically trade your time for this income like you would when earning an active income through your job.
However, don’t think that there’s absolutely no work involved in creating passive income. There’s significant upfront work you need to do. But once the investment or business is established, you won’t need to materially participate to earn income.
There are many reasons you’d want to make passive income, even if you already have a job you love. Passive income ensures that you can make money while sleeping, playing, vacationing, or working at your regular job.
Passive income can help you reach your financial goals, finance your retirement plans, increase your savings, replace your active income, and so on. Ultimately, the goal of passive income is to help you achieve financial freedom.
Earning Passive Income in Real Estate
Now that you’ve seen what passive income is and how it can help you, it’s time to look at how real estate investing can help you create it. Here are our four top picks on how to generate passive income in real estate.
Real estate investment trust (REIT) is a term that refers to a privately or publicly traded company that lets investors pool their money and invest in real estate assets. Some REITs opt to buy rental properties, while others develop properties from scratch. Some REITs don’t own any properties, choosing instead to focus on the financial and mortgage part of real estate.
Any company designated as a REIT must pay at least 90 percent of its taxable income to the shareholders in exchange for tax benefits afforded by its REIT designation. REIT dividend returns thus tend to be higher than those of most other stocks.
REITs are a great investment opportunity for creating passive income. Their upfront cost is low, and you can easily purchase them through a brokerage account. Besides, REITs offer significant returns.
Real Estate ETF Dividends
Like a REIT, a real estate exchange-traded fund (ETF) enables you to receive high dividend returns. The main difference is that a real estate ETF allows you to diversify your holding across more than one commercial real estate property type.
With a real estate ETF, you’re not restricted to buying individual shares of just one REIT. Instead, you have a professional fund manager who determines the suitable REITs to invest in for investors. This expert then uses investors’ funds to purchase groups or baskets of REITs.
Because ETFs are much fewer than REITs, it’s always easier to choose the right ones for you.
Most Americans looking to earn passive income in real estate put their money in rental property. There are lots of ways to invest in rental property, but they generally fall into two major categories:
- Commercial rental properties
- Residential rental properties
Within these two categories is a wide variety of investment types through which you can earn rental income. For instance, you can opt to invest in:
- Office space
- Industrial buildings
- Apartment complex
- Single-family rental
You may opt to invest in short-term rentals and lease property on a monthly, weekly, or nightly basis. You could also choose long-term rentals, where you lease property to long-term tenants.
To make a profit on your rental property, know how to calculate the expected rental income correctly. That means taking into account all the property expenses and ensuring that the rental income surpasses them.
Note that not all rental property income is passive. It all depends on how involved in the property’s management you are. If you’d like a totally hands-off experience, where your income is entirely passive, you may want to invest in turnkey property.
Real Estate Crowdfunding
Another lucrative passive income opportunity you can consider is real estate crowdfunding.
In this approach, an accredited real estate investor participates passively in financing real estate property as part of several investors who pool their money together to sponsor a third-party investor. The third-party investor purchases and manages real estate property, with the sponsors enjoying returns from the investment.
The returns you get from real estate crowdfunding vary based on the specific opportunity and the structure you’ve agreed upon with the person managing the property. Payments may be monthly, quarterly, annually, or whichever arrangement you deem suitable.
Before you put your money into any crowdfunding opportunity, take the time to review it carefully. Not every opportunity guarantees returns.
Take Advantage of Passive Income in Real Estate
Generating passive income in real estate does not need to be a tough affair. With a little research, you’ll find that the sector is brimming with lucrative opportunities for investors looking to create wealth with little to no active involvement in their investment.
Are you ready to start making passive income in real estate? Check out our inventory of cash-flowing rental properties today.