Mastering the art of earning passive income through real estate can give you ample funds to save for your future.
With that said, not all types of passive income in the real estate market are the same, as some would be considered full-time jobs.
Understanding the different ways you can gather extra income through properties can help you better plan for financial freedom.
Earning Passive Income Through Real Estate: The Best Options
From deciding between long and short term rentals to researching crowd funding, passive income is possible for any investor.
Knowing the different avenues to explore within the real estate market is essential to get you started.
Let’s look at some of the most popular ways people earn passive income in the real estate market.
Long Term Rentals
These are often seen as a preferred method for making income with real estate.
With the current state of the real estate market, these properties have boomed in popularity.
Not only is there high demand, but the costs of long term rentals in large city centers can be pretty profitable.
Pros:
Let’s take a look at a couple of significant advantages of long term rentals.
- Consistent Income: When signing a lease agreement, your tenants will be responsible for monthly rent payments for a specified period.
- Utility Savings: Since you won’t inhabit the space, your tenants should be responsible for most, if not all, utilities.
- Reduced Furnishing Costs: When you rent out long term properties, your tenants are typically responsible for providing their furnishings.
Cons:
There are a couple of disadvantages to long term rentals as well, including:
- Property Damage: With extended leases, there’s more of a chance for wear and tear to occur on the property.
- Finding Tenants: It’s more challenging to find long term tenants than short term tenants and have a longer vetting process.
- Harder To Start: These properties aren’t ideal for quick starts since long term rentals require contracts, real estate agents, and attorneys.
Short Term Rentals
These have been around for decades, with cottages and vacation homes being particularly popular.
However, they’ve never been more popular than they are today with platforms such as Airbnb and VRBO.
With short term rentals, you can compete with massive hotel chains and multifamily vacation spots.
Offering affordable and flexible accommodations for travelers is a sure-fire way to get your passive income started.
Even with generic properties such as urban condos, you’re bound to see an increase in income.
Although they have many advantages, there are also disadvantages to note as well.
Pros:
Let’s take a look at some of the most notable advantages of short term rentals.
- Easily Started: All you have to do is write a brief description of your property, find a rental site to use, and get your rental listed.
- Less Home Damage: As long as you vet your renters properly, there’s a significantly lower chance of your property getting damaged over time.
- Immediate Income: With short term rentals, you’re likely to get paid immediately after your guests book your property.
Cons:
There are a couple of disadvantages to short term rentals as well, including:
- Less Stable Pay: If your rental is in a poor or seasonal location, you could be without income during certain times of the year.
- Regulations: These properties have fallen out of favor in large cities, meaning specific properties can’t be rented out.
- Increased Cleaning: You’ll need to ensure the property is adequately sanitized after every appointment, which can incur considerable costs.
Note Investing
Note investing is a popular type of investment for people interested in real estate.
With this method, you’ll be purchasing a property’s debt and security instrument, making you a lender.
As a lender, you’ll be responsible for collecting payments from the borrower.
There are two primary types of notes: performing and non-performing.
Performing notes include the debtor or borrower making on-time payments and doesn’t go into default.
Non-performing, on the other hand, is when the debtor is behind on payments.
If the borrower is overdue on payments for more than 180 days, the mortgage note defaults.
Pros:
There are several great benefits to note investing, including:
- Lower Expenses: To invest in notes, you won’t require a real estate agent nor property manager.
- High ROI: Property notes provide a higher return on investment as you control the loans’ interest rates.
- Easily Managed: With notes, you’re not responsible for managing your tenants or renovations since it’s owned by a different party.
Cons:
There are also a couple of disadvantages to consider as well, such as:
- Risk of Default: The largest burden of investing in notes is the likelihood of default in which you could have to liquidate assets.
- Auction: If the property’s tenant goes into default and the property gets auctioned, you risk losing money if it’s sold for less than what you paid.
- Uninsured: Another notable disadvantage is that FDIC doesn’t insure property notes.
Hard Money Loans
Hard money loans can be considered when it comes time to get your property out on the market as quickly as possible.
These loans are often referred to as bridge loans and used as short-term lending vehicles.
Real estate investors can use their loans to finance a real estate project, such as house flipping or home development.
Where hard money loans differ from standard bank loans is that your credit isn’t considered when borrowing.
Instead, the private lender uses the property’s value to determine whether to provide a loan or note.
Most often, lenders will consider the after-repair value to estimate the property’s value post-renovations.
There’s no doubt there are advantages to hard money loans, including their convenience and flexible terms.
However, they also typically come with shorter repayment periods, and there are plenty of fees to consider as well.
REITs
As a company owner interested in working in real estate, REITS could be something to look at.
A REIT is quite similar to mutual funds in that it pools multiple investors’ capital into one group.
This process allows individual investors to acquire dividends from their investments without managing the properties themselves.
REITs can provide you with a steady source of income and are traded publicly, similar to stocks.
Their high liquidity makes them appealing to potential investors, mainly since you don’t finance the property yourself.
Also, this type of investment is helpful for many properties, such as retail centers, hotels, homes, and medical buildings.
Crowd Funding
It can be challenging to come up with capital on your own when dealing with real estate.
At this point, you might be tempted to start looking into crowd funding.
This option includes money collected from a large group of individuals interested in financing a new venture.
What makes it unique is that it relies heavily on social media.
Entrepreneurs will post information about their venture online, and individuals contribute small amounts to reach a goal.
Typically, the entrepreneur will provide gifts or perks to individual investors based on the amount of money they contribute.
There’s no doubt that real estate investors can raise millions of dollars through crowd funding.
However, it’s important to note these programs are heavily regulated by the SEC to ensure their legitimacy.
Syndication
As a solo investor, there’s a limit to the amount of money you can put into your ventures.
At this point, you might want to consider syndication, which is a partnership with several investors.
Each individual pools their resources, capital, and skills to manage properties they can’t afford independently.
Typically, syndication requires two roles: a syndicator (sponsor) and an investor.
A sponsor will be responsible for finding properties and securing the contract while managing the investment.
As an investor, you simply provide the capital used to purchase the property with less legwork.
It’s also important to note how you’ll split the profits based on the invested roles and capital.
Syndication contracts with sponsors and investors typically include acquisition fees, appreciation values, and more.
Final Thoughts
Earning passive income through real estate offers multiple avenues to explore.
Syndication is excellent for a partnership for properties you otherwise couldn’t afford, while short term rentals are quick and easy.
Finding the ideal investment strategy can help you begin the steps to securing a financially free future.