3 Rules for Using Real Estate Investing to Create Passive Income

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Investing in real estate is a great way to create another stream of income, especially if you’re one of the many readers who hope to use their real estate investment as a way to achieve financial independence.

People often stay away from investing in real estate over the assumption that the money gained from investing in real estate requires too much time, energy, effort, and hard work. 

You may think buying and renting out a piece of property, for example, is passive real estate investing, but it’s not. As a landlord, especially without a property manager, you would actually have to manage the day-to-day responsibilities of owning the property yourself. Yes, that means hiring contractors to fix plumbing and electrical issues, dealing with tenants, late payments, and move-out procedures, and the oh-so-dreaded application process for finding a new tenant. This, my friend, is not passive real estate investing – this is active real estate investing.

It does create passive income, however, which is income that isn't proportional to the time you put into acquiring it. Meaning you don't need to clock in and clock out and get paid in direct proportion to the time spent. In fact, the IRS considers the income from being a landlord as “passive income.”

Passive real estate investing is a strategy through which you, the investor, can create earnings without having to be actively involved. And who doesn’t want to make money while spending their time how they want with who they want?

Therefore, passive real estate investing is a form of real estate investing in which you place your capital into a real estate venture that you will not have any direct responsibility for managing.

Throughout this article, I’m going to discuss three rules for creating passive income using real estate investing.

Diversify

Diversifying real estate income streams is the key to balancing risk and reward. There is more than just one way to create passive income using real estate investing without being a landlord. This is part of the reason why I diversify like crazy. Sure, there are times when I wonder if I’m just an investment collector, but this diversification allows me to sleep well at night.

Syndications, REITs, Real Estate Funds, and Real Estate Notes are all viable (and pretty profitable) ways to create that passive income. And the best part is you can get started today. 

Crowdfunding and syndications, for example, require virtually no oversight once you've done your due diligence–and can produce excellent returns. REITs allow you to simply invest some money and then let it increase in value.

Real Estate Funds are much like mutual funds where you invest in a fund and you own a basket of investments. A company goes out and purchases a bunch of apartment buildings under that umbrella with those funds. That's what's known as an equity real estate fund or real estate equity fund. 

Now remember, when investing in more passive real estate opportunities, whether it’s a syndication or a real estate fund, the sponsor is the one running the deal. It’d be nice to stick to one sponsor for life, but things happen – so be sure to consider diversifying your sponsor in addition to your entire portfolio.

Notes, on the other hand, are simply promises to pay. Anytime you borrow money and create a document that says you will pay someone back, you create a note. A few easy-to-invest-in notes include; Performing Real Estate Notes, Non-Performing Real Estate Notes, Hard Money Lending, Peer-to-Peer Lending, Loans to Small Businesses, and Treasury Notes. 

I also believe that you should diversify significantly with the actual asset class itself. That means I invest in different classes of multifamily properties – nicer A-Class properties and ones like C-Class properties that need a little bit more work.

For those of you investing in active real estate, however, it’s important to understand that “concentration risk” is a real thing. People like to talk about the real estate market as a whole, but in reality, real estate is a very local economy. Having all your eggs in one basket (concentrated in one city or one area) can lead to issues if there are political changes, economic changes, or even natural disasters.

Watch the Market 

Paying close attention to the market has a huge impact on your portfolio as a real estate investor. Learning how various parts of the real estate market react to changing economic conditions can help you find the best opportunities to keep passive real estate income coming in consistently when certain areas of the country are experiencing a downturn.

Remember, the real estate market is unpredictable, it flows and recedes over time – often dramatically. Just last year we saw how the real estate market could change so erratically; the pandemic led to some huge swings in the market and as of the time of writing this post, the real estate market is now red hot.

That's in spite of the fact that many tenants were unable to pay rent which led to some landlords defaulting on their loans. No one predicted the pandemic and no one predicted all the printing of money that took place to keep the economy afloat. No one would've guessed how home prices have skyrocketed and rent growth continues to happen.

So it goes to show that you have no idea how things will turn out. It may be better or it may be worse.

But as I've heard from many savvy investors, there are way to make money in whatever market environment. You just have to be cognizant of what works at what time. In fact, more money is typically made during downturns than at any other parts of the cycle.

Seek Professional Help 

Whether you're investing in real estate for passive income for the first time or you have several years of experience investing in real estate, consider calling in the professionals for help.

That might include hiring an accountant, bookkeeper, lawyer, and even making sure your spouse or significant other is on the same page as you. After all, this individual has a huge impact on your free time, decision-making, money, thoughts, and ambitions.

Yes, some of your profits will go toward paying whoever you decide to hire onto your team, but it will be well worth it when you’re able to generate passive income without doing all of the heavy lifting yourself.

If you’re fairly new to the world of passive real estate investing, there are several blogs that I highly recommend you check out. And if you’re still not a believer that real estate investing can really be passive, then I’ve got the perfect resource for you here

The point is, the best way to get started is simply by educating yourself through books, courses, and conferences. And learning by experience, of course.

Journal Club 6-26-20 Investor Club