How to Generate Real Estate Passive Income
by Christopher Levarek
“You become financially free when your passive income exceeds your expenses.”
- T. Harv Eker
Many of us start our real estate journey because of a desire for financial freedom. We are searching for more time to spend with our family and enjoying our passions or finding purpose. Quite often, real estate investors jump head on into owning rental properties only to find the financial freedom they sought gets pushed further down the road as they manage the tenants, toilets and termites. What was supposed to be freedom becomes another job!
I’ve been in this exact position and have memories of dealing with multiple issues late into the night or at my W-2 job. Often I questioned, is this really the way to creating real estate passive income? Where’s the financial freedom? I can honestly say, at the time, it really didn’t feel very passive to me!
Let’s jump into taking a look at real estate passive income, what it truly means and how one can create this form of income to truly get into achieving more time and ultimately financial freedom.
What is Real Estate Passive Income?
Real estate passive income is any income generated from real estate for an investor requiring very little active involvement or effort. The idea is that an investor invests into a real estate project and that project generates income passively over a time period. If the investor is actively working day-to-day or even monthly on the project, this is not passive income!
Why Bother Generate Passive Income?
The reasons vary for many investors however, typically they include :
Time : Time is the most sought after resource by most people, also known as “financial freedom”. Time with family. Time spent on hobbies or one’s passion. Time to travel.
Pay off debts - More streams of income help pay down any long term or short term debts.
Retirement - Passive income can be a great way to accumulate a nest egg or ensure money is being put away for the future.
College Tuition - Saving for one’s kids tuition costs in the approaching years.
Savings - Passive income investments are often a great way to build savings and far outweigh simply letting cash sit in a savings account generating far less returns or losing to inflation.
How to Generate Real Estate Passive Income?
At the start of this article, I discussed the situation many investors ultimately find themselves in when seeking passive income. By taking an active role in real estate property management, investors ultimately create another job for themselves. These investments requiring active involvement can eventually become truly passive as an investor hands over management to another party, however the goal of this article is to share how to generate true passive income from day one.
With that being said, let’s jump into some investments that generate real estate passive income day one with very little active involvement required.
Real Estate Syndications
A real estate syndication is a combined effort between active and passive partners to acquire real estate providing returns, tax benefits and more. Often real estate syndications are found in large multifamily acquisitions, commercial real estate investments and projects too large for any one person to handle.
It is in the combined teamwork that a real estate syndication is able to achieve success. Active project managers or general partners work to acquire, improve and manage the property while passive investors or limited partners bring the capital used for the down payment/renovations in exchange for a return on investment and tax benefits.
These investments are truly passive for an investor as once the deal closes, monthly or quarterly checks are sent to investors based on the performance of the property with little effort or involvement from the investor.
For more on Syndications read this article on the Four Phases of Value-Add Real Estate Syndications.
Tax Liens & Deeds
Often called lien investing, this is when the government opens up the opportunity for investors to bid and purchase tax liens on unpaid property taxes by property owners. In essence, someone has not paid their taxes on a property and the investor is able to pay that tax for the owner to the government for an interest rate or return. If the property owner does not pay the taxes back, to the investor, over a specific time period, the investor can even claim ownership on the property!
This can be form of passive investment as once the tax liens are purchased, the investor simply waits collecting interest.
Note Investments
This passive investment opportunity is most found by forming a partnership or perhaps joint-venture on a real estate project. A passive investor loans a private loan to another party, similar to a conventional mortgage, in exchange for a promissory note and deed of trust. These documents detail the terms of private loan and establish the right for the private lender/investor to take ownership on the property if terms are not met.
In essence, the passive investor is acting as the bank and funding the deals for other real estate property owners. The deed of trust is typically something a bank holds to have collateral in normal conventional mortgages and so by holding it instead, a private investor is limiting risk just like a bank.
Real Estate Investment Trust (REITs)
REITs are essentially large funds that invest into real estate projects or real estate syndications(see above). In a REIT, a passive investor is investing into a large fund and given shares, just like a stock. In fact many REITs are publicly traded on the stock exchange, while others are more private and not registered with the SEC, Securities and Exchange Commission.
These REITs then issue out dividends just like stock and provide a return on the investment. A major difference between REITs and real estate syndications is the visibility into the real estate property.
A private real estate syndication, discussed above, offers much more direct contact and visibility with the acquisition then a REIT fund which might be investing in hundreds of properties across the United States.
In addition, it is worth noting, the tax benefits(deprecation/loss benefits) from private syndications are far more advantageous then a REIT as REITs don’t pass on any tax losses to investors.
In Final
When deciding what investment to choose, first always start with the end goal in mind. Active real estate investing or managing rental property can be a great way into real estate and can be very lucrative. However, it can also be very time-consuming, stressful and quite the opposite of the goal an investor had in mind.
Choosing to invest in some passive investment opportunities coupled with active real estate investing can be a great strategy and one which will afford more of the time freedom along the way.
If you are interested in learning more on real estate syndication, I invite you sign up for our Investor Club to have a one-on-one call with a member of our team.