Does Passive Investing in Real Estate Really Work?

By Ketan Patel
Date August 14, 2018

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Does Passive Investing in Real Estate Really Work?

The idea of earning more and working less is appealing. Identifying the right passive investing in a real estate income strategy can produce an exit strategy from your current job, improve cash flow in retirement, or allow you to retire early.

The catch is how do you produce reliable passive income without taking on high levels of risk?

What is Passive Income?

Passive income is money received, which is not directly related to the amount of time required to produce the profit. In most cases, you trade time for money. You work a certain number of hours in exchange for receiving a certain level of pay.

Instead of focusing on the investment of time, passive income relies on the value of an asset to provide ongoing income. Most passive income requires an upfront investment of time or money to establish the passive cash flow.

Potential sources of passive income can include traditional investments paying interest or dividends, gains from an established business, royalties from previous work, or real estate.

Ways You Earn Income Through Passive Real Estate Investing

Real estate investments produce income in two ways: Cash flow and appreciation

Cash Flow: Investors seeking passive income need a monthly cash flow created through tenant rent payments to provide consistent income on the property.

Appreciation: Real estate property values also tend to rise over time. Depending on the location, you can expect an average increase between 3 and 5%. Appreciation at or above the rate of inflation is a good hedge against inflation, an essential factor for long-term investments. Likewise, rents tend to keep or outpace inflation, making real estate a lower-risk option than many available investments.

The Top Passive Income Strategies

Not all real estate investments produce passive income. For example, renovating homes for resale often called flipping, requires active engagement from the buyer. You must identify the property, oversee or complete the renovations, and then sell the property all within a short timeframe. On the other hand, buying and holding property can create passive income depending on your strategy.

The top three ways to earn passive income through real estate include the following:

1. 1. Buying Turnkey Properties and hiring a property management company for ongoing duties. When bought at the right price, in the right location, rental income could cover 100% of the costs, plus extra money each month, which can become an income stream. Focusing on new construction or previously renovated properties will result in faster cash flow, eliminating the need for immediate repairs. After the purchase, a management company can oversee the day-to-day operations and send you a check on any profits.

The benefit of a turnkey investment is the low time requirement and the immediate flow of monthly payments. The downside is that you will achieve lower returns because you pay a premium for turnkey properties.  

1. 1. Share Responsibilities Through Outsourcing. A step down from a turnkey real estate investment is to buy a fixer-upper and hire professionals to complete the work and manage the property. You can often complete renovations and have tenants within a few months. Investors achieve better returns because you take on more of the duties during the renovation while hiring a property manager to reduce the long-term workload.

The advantage of shared responsibilities is that you pay less for the initial purchase, allowing you to build in equity through improvements. The downside is that cash flow takes longer to achieve and overruns during the renovation can deplete capital gains.  

1. Syndicated Buying. Purchasing real estate through syndication allows investors the best of both worlds. You get the benefits of hands-off investing minimizing your time commitment while achieving a higher level of appreciation realized through outsourced renovation and management. In most cases, the syndication purchases a commercial property too large for an individual to buy. Gains come from immediate cash flow, along with appreciation and higher rents due to upgrades, improvements, and rebranding.  

The advantage of a syndicated deal is the opportunity for higher profits without increasing the time involved in the project. You chose an investment company you trust, evaluate the deal, and receive income checks after the purchase. You also participate in the property appreciation at the time of the sale or refinance.

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