Are you just starting with real estate investments? Are you wondering about the basics of real estate passive income? If yes, this detailed guide is just for you.
Do you want to be rich? Do you like money? Invest in real estate.
Real estate passive income is proving to be one of the most straightforward ways of acquiring wealth. It’s on the radar of both low-income and high-income individuals, especially millennials and Gen-Z.
Like with any investment, you have to be smart with your choices and not only invest money but also time to find the right opportunity. Fortunately, investing in real estate has never been as easy as it’s now.
This is an educational post that will walk you through everything you need to know about generating passive income through real estate.
Table of Contents
What is Real Estate Passive Income?
Real estate passive income is an investment strategy that involves earning money through real estate without direct involvement.
By that definition, you’d think that there’s no active involvement, but passive doesn’t always mean passive. There’s some degree of oversight and involvement, depending on the real estate investment strategy.
The simplest example of passive income real estate investing is buying a property and renting it out. Rental properties generate passive income as you don’t really need to do much after renting it out. Yes, there can be maintenance requirements, but generally, you keep getting money every month without any physical work.
With technological innovation, passive real estate income is becoming more and more passive. Unlike the example above, you don’t even have to oversee any maintenance or renovation. In fact, you don’t even have to own the place.
Passive income from real estate can be highly beneficial in the long run. You can invest in more opportunities and diversify your portfolio.
You could easily pay for your kid’s college tuition. Or you could even retire early and enjoy your life without constantly checking your bank balance.
How to Create Passive Income in Real Estate?
If you’re considering investing in real estate to generate extra income, the most obvious choice is a rental property. But even in that category, there are many choices and many factors impacting the final outcome.
Investors who devise a smart strategy and pay attention can supplement their monthly income with minimal effort and build equity at the same time.
Today, real estate investing is a highly diversified business. The old-school buy and rent approach, while still very much active, is not the only option out there.
There are several ways you can invest in real estate for passive income:
- Buy directly and rent
- Real estate crowdfunding
- Digital real estate
Let’s look at all the options in detail:
The most straightforward way of creating equity and generating rental income from real estate is to simply buy the property. It goes without saying that buying a property on your own is a massive undertaking and requires massive capital too.
This traditional approach can be appropriate for mid to high net-worth individuals. The benefit is double. As you solely own the property, you alone get all the rental income. Plus, the value of the property appreciates over time.
When buying properties to rent out and earn passive income, you can buy both residential and commercial properties. However, residential properties are a safer bet, at least in terms of the commitment and work it requires.
First of all, commercial properties can be super expensive. Secondly, they may require a bit more active role as a landlord, as dealing with businesses is a little different from dealing with a person.
You may think buying directly would be discouraging for people because of the capital required for it, but really it’s all the hassle. Searching, vetting, and evaluating a property can be a lot of hassle. Fortunately, real estate investment has become a lot easier over the years.
If you’re considering buying a residential property directly and renting it, Roofstock is the best platform to do so. With thousands of properties from different states in the US, there’s plenty of diversity in choices.
You can easily find a residential property in the market you prefer and within your budget, as most properties are suburban, single-family homes and have affordable pricing. You get all the information you need right off the bat, so you can make an informed decision.
Roofstock has experienced property managers on the ground doing all the logistics of searching, analyzing, estimating, renting, and maintaining the property. The platform basically takes care of all the steps from you buying the property to starting getting rental income from it every month.
You can also create a whole portfolio of properties by buying shares with Roofstock in your choice of market. That, too, works in a similar way as buying an individual property.
Going with this platform is beneficial because you own the property and get the monthly income but don’t necessarily need to deal with all the work of owning and renting out a property. You choose the property manager to handle the property.
For each listing, you can see a detailed picture of how much it’s going to cost you, how much interest you have to pay, and how much return you’ll get over the years.
Roofstock charges 0.5% or $500, whichever is higher when your deal closes. Once you’ve chosen a property manager, you work directly with them and receive a rental income on a monthly basis.
Real estate crowdfunding has really revolutionized the real estate industry, very much like it has the tech world. It’s opened the doors to real estate to individuals who could not even imagine investing in real estate a decade ago.
What is real estate crowdfunding? It involves a number of investors investing in a property through an online platform for monetary gains/passive income.
Typically, one or a few persons buy a property, but with crowdfunding dozens, even hundreds of people can invest in a single property. Developers are now turning to the general public for raising funds to develop, flip, and rent properties.
Crowdfunding has essentially opened real estate investment apps to the masses. It’s no longer a game of millionaires, as individuals with small savings can also invest in properties through crowdfunding platforms.
The finer details of real estate crowdfunding differ by platforms, so a lot depends on which platform you go with.
Here are some of the best real estate crowdfunding platforms to start earning passive income:
Fundrise is one of the most popular and reliable real estate crowdfunding platforms. This Fin-Tech company pioneered crowd investing in the real estate sector back when it was a nascent idea. It allows non-accredited individuals (US Citizens and permanent residents) to invest in a diversified portfolio of properties.
It starts at just $500 with the Starter account. However, for other types of accounts, the minimum investment is higher. For Advanced and Premium accounts, the minimum investments are $10,000 and $20,000, respectively.
Fundrise is operating in all 50 states, providing a highly diversified range of properties to invest in. This diversity is what makes this platform so viable for both small and big investors.
There’s plenty of quality assets, from residential to commercial, and in different markets throughout the country. Their portfolio is intrinsically designed to reduce risk, yield higher dividends, and wither harsh economic crises.
Unlike most crowdfunding platforms, Fundrise has a more hands-on approach. They see through the entire process of investment, management, and returns. They directly work with developers and property managers, which translates into better management and higher yields from the properties.
It’s super easy to invest with Fundrise, as it only takes minutes to create your account. You can manage your portfolio on the go on their website or mobile application. You get updates about the properties your money is invested in.
Fundrise charges a 0.15 percent annual advisory fee. So each year, you pay 0.15 percent of your investment amount as a handling fee, which is lower than many other such platforms.
Your investment benefits you in two ways: quarterly dividends and appreciation of your property shares over time.
- Minimum Investment: $500
- Average Annual Yield: Over 6%
- Duration: 5 years
- Fee: 0.15%
Groundfloor is another groundbreaking real estate crowdfunding platform focused on short-term real estate debt investments. They call themselves a wealth-tech company, as they help their clients increase their wealth with passive income.
Unlike other crowdfunding platforms for real estate where you buy equity, this platform crowdfunds debt. As a result, the investment terms are shorters, typically one year to 18 months.
The return rates are very impressive, averaging at 10 percent in the past couple of years. The company is still quite young but has facilitated over $14 million and helped 3,400 members invest in real estate.
Another great thing about Groundfloor is that their minimum investment threshold is extremely low, starting at $10. So literally anyone can invest and get a taste of the real estate investment world.
You basically invest in loans secured by assets. Once you’re on the platform, you can access a long listing of properties spread across 30 states.
One way they ensure that the loans you’re investing in are high-quality with low-default probability is through vetting the developers. The company works with established developer companies with good credit ratings, reducing risk on your part too.
Properties are given credit ratings of A, B, and C, so you know the risks beforehand. Since the loan is backed by the asset, it makes it a safer bet than investing in a loan without any security.
On top of that, they regularly monitor the progress of the asset with asset management teams to stay on top of the performance of the loan.
Another great thing is that this platform is also open to non-US individuals. However, the minimum investment for them is $5000.
- Minimum Investment: $100
- Average Annual Yield: 10%
- Duration: 12-18 months
- Fee: None
PeerStreet is a crowd investment platform for real estate debt investment. However, it’s open to accredited investors mainly.
The properties on this platform are houses or multi-family properties. This allows you to diversify your investment by investing in different property debts.
They work with some of the most reputable lenders and borrowers with good credit scores in order to minimize risk. That, combined with the resilience of real estate, yields profitable returns.
If you’re an accredited investor, this platform is a great opportunity for you. You can start with just $1000 and go from there.
Also, if you’re not a very tech-savvy person, you’ll find the interface fairly easy to use. Everything is at your fingertips. With a heavily detailed analysis of the loans and their expected returns, investors can pick and choose the property that works for them.
Your money can also be invested automatically. You can set the criteria for investment and the automatic investing tool does the rest. The good thing is that new loans are added almost every day, so your money will be invested in a diversified property pool in no time.
The loans are typically short term, ranging from six months to 36 months. As for the returns, they can range between 6 to 9 percent.
As borrowers make payments, you get monthly returns. While your principal amount may return after the maturity period, you keep pocketing the interest on your investment every month.
The properties and the borrowers are thoroughly vetted. As a result, the LTVs are lower than 75 percent. Also, they are secured by First Lien, which means you’re first in line to get paid.
- Minimum Investment: $1000
- Average Annual Yield: 6-9%
- Duration: 6-36 months
- Fee: 0.25-1%
One of the earliest crowdfunding platforms for real estate passive income is RealtyMogul. It’s an elite platform with properties from hot markets across the country. Most properties on the platform are commercial or multi-family condos with massive potential for growth.
It’s open to both accredited and non-accredited investors. However, non-accredited investors can only invest in REIT products if they meet the required conditions. The minimum amount varies by the product, but it’s typically $5000. The returns for Mogul REIT I is 6-8%, while the return rate for Mogul REIT II is 4.5% annually.
RealtyMogul has shown an impressive trajectory both with its selection of projects and the performance those projects have exhibited. They also offer different types of REITs.
The project selection is helmed by their investment committee, which has some really big names. As a result, the development or rental projects have a high potential for high returns, which obviously means more passive income with each passing day.
REIT investors can also benefit from the Auto Invest tool. That basically does all the work on their behalf, investing in a diversified pool of real estate.
Those taking the crowdfunding route can select properties by themselves. The key stats are presented with each property, along with projections.
Once invested, the progress can be tracked from the dashboard. Investors also get quarterly reports regarding their investments.
It’s a highly sophisticated platform created by experts in real estate and technology.
Accredited investors can also invest in individual properties. The minimum investment amount varies. It’s typically over $15,000 and can be as high as $50,000.
- Minimum Investment: Varies
- Average Annual Yield: 4.5-9%
- Duration: Varies
- Fee: Varies (mostly 0.5%)
We’ve already mentioned REIT in crowdfunding opportunities, so what exactly is REIT?
Real Estate Investment Trust, most commonly known as REIT, can be a corporation or a company that owns multiple properties. The company also operates commercial properties to generate income.
They have a multitude of properties under their portfolio, including shopping malls, hospitals, hotels, offices, warehouses, etc.
The idea of REIT is very similar to crowdfunding, but REITs tend to be less flexible. Nevertheless, REITs also provide real estate passive income as you’re investing in a company working in real estate without actually owning or managing it.
REITs can be equity-based or mortgage-based.
Mainly, the REITs are of three types:
- Publicly traded REIT
- Public non-traded REIT
- Private REIT
Since most REITs are listed on the stock exchange, they are highly liquid. Even if you invest in a non-traded public REIT, the risk is low as your investment can be repaid by selling assets.
You get regular dividends on your investment, which the company pays with the income from the properties. It’s a pretty straightforward business model that individuals can use to generate passive income for themselves.
There are currently over 225 REITs registered with the Securities and Exchange Commission (SEC).
Traditionally, investing in REITs involves buying stocks through a broker. Even for non-traded ones, you’ll have to consult with a broker or financial analyst. However, more and more REITs are moving online (eREITs), making it easy for non-accredited investors to invest in them.
The return rates vary by each REIT, so it’s important to evaluate their portfolio and past performance before investing.
It’s best suited for high net-worth individuals. On the other hand, real estate crowdfunding is more suitable for smaller investments. With crowdfunding, the minimum investment amounts are typically smaller, and you have a lot more flexibility.
Digital Real Estate
Physical real estate is no longer the only solid investment opportunity. In this digital age, digital real estate is also a thing.
Yes, you can also generate passive income for yourself with digital assets, also termed as digital real estate.
How do you make money off property? Mostly by renting it or selling it at a profit. Certain digital assets are no different.
In the world of digital real estate, websites are the biggest assets. Think of them as homes or office spaces online that can be bought and sold for a profit.
Digital real estate investment for passive income is still a growing trend and frankly has fewer risks than physical real estate investing.
Domains and Web Hosting
If you want to invest in digital real estate, you should invest in websites. There are multiple ways to do that:
- Invest in domains
- Buy established websites
- Develop new websites
Domain and website auctions are pretty common online, where website owners are selling their digital assets for a profit. However, many investors find a way to generate passive income from it.
For instance, if you have a running website, you can generate passive income through advertisements, affiliate links, and selling products. Yes, that sounds like running a full-fledged business, but you can set it up in a way for it to make money passively.
Blogs remain the best option for passive digital real estate income. It will take some investment and time to set it up and run initially, but once it’s established, you can have people running it for you. Even if you’re not active on the website, the advertisements running on the blog will continue to pay.
If you’re thinking of investing in domains or web hosting to generate passive income, here are two hosting providers:
Bluehost is one of the leading hosting platforms in the world. With domain hosting, WordPress hosting, Cloud hosting, and many other products, it’s truly an all-rounder platform to host any website.
They are ideal for setting a website that you exclusively want to turn into a passive income. Why? The hosting rates are some of the lowest.
Obviously, if you’re trying to generate income out of your website, you want to keep the operating costs lower, which is why Bluehost is a good place to start.
SiteGround is a Bulgarian web hosting company, ideal for hosting WordPress blogs. Again, their rates are some of the lowest, but the hosting quality is impressive. You can save overhead costs when trying to develop your own blog or website.
The tools on this hosting platform allow you to create a nice blog from scratch with minimal work. Once started and successful, you can see a steady income which would be a lot higher than what you’re going to pay SiteGround
Software to Manage Real Estate Passively
For those investing in real estate crowdfunding platforms and REITs, the companies take care of all the management. Investors can control their investments and analyze performance through their dashboard. But what about other real estate investors?
Owners looking to generate passive income from their properties can utilize software and tools to manage the properties. These tools are used by property managers at the institutional level, so they are pretty sophisticated.
How you manage your properties passively will have an impact on how much money you make. Again, passive doesn’t really mean passive, as there’s some form of management on your part. However, you can streamline that with real estate management software.
Here are the three best tools for managing your real estate passive income:
Rentec Direct provides an all-inclusive property management suite for owners and property managers. They have three products: landlords, property managers, and tenant screening.
The software for landlords is geared towards private owners renting out their properties to generate income. It includes all the accounting, finance, maintenance, and rent collection tools within the suite to facilitate this kind of investment.
The one for property managers is more suitable for professional property managers managing multiple properties. The tools are similar to those for landlords, but it’s pivoted for middlemen dealing with tenants and landlords. You can also handle maintenance through the tool, which makes it easy to account for maintenance expenses.
You can easily track your rental income and get timely payments. It’s a web-based solution with dedicated customer support, which makes it ideal for both active and passive management.
The tenant screening tool is available as part of the main Rentec plans, as well as a stand-alone tool. It can help with a basic and thorough screen of potential tenants to ensure that the property is being rented by someone who has a clean background and can pay rent.
The tool starts at $35 per month.
Landlord Studio is a popular property management tool for landlords. It was actually developed by a landlord to make it easy to collect rent and oversee residential property maintenance.
The great thing is that this tool also includes a mobile app, so landlords can manage properties on the go.
Think of it as a bookkeeper for all the rental income you’re receiving from your properties. It’s good for both residential and commercial properties.
The tool automates certain tasks that make it super easy to ensure proper and timely maintenance of the property. And everyone knows that maintaining a property is necessary to ensure it has the maximum market value.
It can even make life easier for your tenants, too, as they can securely make rental payments through Landlord Studio, which goes directly into your bank account. You can set up automatic rent collection within the app, so you don’t have to contact tenants every month.
Other notable features of this software include tenant screening and calculators. If you’re renting out a mortgaged property, the built-in calculator can help you find how much rent you need to charge to pay the monthly mortgage payment.
DealCheck is another handy tool for those interested in buying and investing in properties. It’s an analytical tool that can help you get a good deal on the property you’re after.
You can look up properties on the app and immediately get key data about the property, such as market value, rental estimates, taxes, etc. It’s ideal for rental properties (both residential and commercial), properties you want to flip, and BRRRR portfolios.
You can also make comparisons with recent property sales to come up with a good offer for the property you are saught. It can even estimate repair costs, which can be highly beneficial to know in advance because you have to factor in those costs as well before you can sell or rent the property.
DealCheck is a tool any active real estate investor or institute should use to avoid the hassle and exorbitant costs of conventional market research and consultation.
Real Estate Passive Income Tax
The dividends or interests you earn as real estate passive income are subject to taxes. Any income you earn through your investments is considered as a capital gain, and therefore, subject to federal and even state taxes.
The real estate passive income tax rates can vary depending on how you’ve earned that passive income. It may also depend on your overall income for the year.
The tax rates are mainly dependent on whether the income falls under short-term capital gain or long-term capital gain. Short-term capital gains are those earned within one year of holding the asset. On the other hand, long-term capital gain rates apply to assets held for longer than a year.
Most real estate crowdfunding platforms and REIT’s dividends and interests are normally treated as short-term capital gains. In such a case, the normal tax rates will apply depending on your income bracket.
If your property income qualifies as long-term capital gains, then you’ll pay a lower tax, depending again on your overall income bracket. As per the Tax Cuts and Jobs Act (TCJA) 2018, these rates are 0%, 10%, and 15%, based on the annual income bracket.
If you’re generating passive income through investment in real estate through crowdfunding or REITs, you will be provided with appropriate forms like the 1099-DIV or 1099-INT. The Form 1099-DIV is for declaring dividends, while the Form 1099-INT is for declaring any interest you earned on your investment in a loan.
When investing through an online platform, make sure to read all the tax rules beforehand. Some platforms will also present all the tax information with the properties, so investors know how much of their gains will go to the government.
Whether you’re 20 or 50 years old, investing in real estate is always a good idea. Real estate to this day remains one of the strongest investment areas with good profits even in the worst of times, so you can imagine how good it would be in the best of times.
Real estate passive income can accumulate over time and add to your wealth. If you start early on, you can make quite a lot of money before the age of retirement.
While it qualifies as passive income, it does require a bit of work on your side.
With real estate getting ever more digitized, it’s easy to invest right from the comfort of your couch, and that too with not that much money. If there was ever a time to get into real estate, it’s NOW!
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