Building passive income is one of the easiest ways to generate revenue, especially when investing in a relatively safe market with high yielding potential, like real estate. Granted, if this is your first time investing, you might know where to start regarding which real estate method to pursue that will help you build substantial passive income with as minimal input on your part as possible.
- Rental Properties
- REITs
- Real estate syndications (our recommendation)
In this article, we’ll cover some of the best investment options for building passive income through real estate. As you read, you’ll learn what each method entails, what it will require from you as a passive investor, and which method we deem the easiest and most beneficial overall.
Rental Property Investing
If you’re an experienced real estate investor, you might be questioning why rental property investing is starting this list, as this is more commonly viewed as an active form of investing considering the property owner needs to endure a lengthy process of marketing and managing the property, screening tenants, approving repairs, etc.
While this is all true, there is an alternative way that investors can own a rental property and make passive income.
The best way to build passive income through rental property investing is to hire a professional and reputable property management company.
These highly skilled individuals will undertake all the responsibilities of an active investor for you once you’ve acquired a viable rental property and agreed on the terms of this partnership.
You will still have to play the role of the active investor to start, in terms of market and investment analysis and acquiring the property, but once that process is complete, you can hire a residential property manager to overlook your traditional rental property or Airbnb for a reasonable, average fee of 4% to 12% of the property’s gross monthly rental income.
In the grand scheme of the passive income and peace of mind you’ll obtain from this partnership, it’s well worth the initial effort.
Real Estate Investment Trusts (REIT)s
Considering most of us have full-time jobs and a myriad of additional responsibilities keeping us busy, even the smallest degree of active investing can be too much to incorporate into our daily lives. This is what makes passive investing so appealing, and if you have a considerable amount of expendable revenue, your go-to method might be investing in an REIT.
A REIT investment is comparable to a mutual fund or investing in stocks, except a REIT is specific to a company that owns or finances income-generating real estate. To generate passive income from a REIT, investors purchase shares the company is then required, by law, to pay out in dividends.
In fact, these companies must regularly distribute at least 90% of their taxable income to shareholders and typically provide an annualized total return between 5% and 15%, depending on factors like:
- REIT subsector
- Number of shares purchased/ amount invested
- Investment length
It is important to note that REITs typically involve high-end or commercial properties, with the occasional apartment complex, so you’ll want to consider if this is the property class you want to invest in regarding risk, profit, and other defining factors.
That being said, this is undoubtedly one of the most reliable and popular ways to build passive income with real estate, as long as the investor does their homework on the company beforehand.
Real Estate Syndications
We’re going to conclude this brief list of passive real estate investing methods with our top recommendation we deem easiest and most beneficial, particularly for beginners.
Real estate syndications are a specific type of real estate partnership where a group of individuals pools their resources (financial or intellectual) to acquire and maintain one or multiple properties.
As a passive investor, you would fall into the role of a limited partner (LP) whose overarching role is to contribute financially, allowing the active investors, also known as the general partners (GP)s, to purchase and maintain the property. This is more beneficial than a REIT because you, as the investor, legally own a percentage of the invested property.
There are multiple niche real estate syndication teams you can join, but the best option for investors prioritizing the production of passive income is a multifamily real estate syndication, where investors pool their resources to purchase a multifamily asset.
Passive investors can expect two forms of returns: 7-8% quarterly cash flow distributions known as preferred returns and 40-60% profit returns upon sale of the property. This provides investors with a sense of security, as they receive a portion of their passive income regularly until the more substantial, preferred return is acquired.
Of course, before you can have the luxury of kicking your feet up and reaping the passive income benefits of your real estate investment, you’ll need to thoroughly research reputable GPs that will ensure the safety of your investment and provide the highest yields possible. Or you can skip the random Google search and consider Paige Capital Group as your future multifamily real estate syndication GPs.