Passive real estate investing, depending on which real estate investor you ask, is either a reality or a myth. Let’s find out which is true.
Table of Contents
- What Is Passive Real Estate Investing?
- Is Passive Real Estate Investing a Myth?
- How to Find Your First Passive Real Estate Investment Property
- 5 Strategies to Make Passive Real Estate Investing a Reality
- Where to Start Looking for Passive Income Properties
Real estate investing is an excellent tool for investors. But the problem is that the investor sometimes takes an active role and needs to focus on managing the properties and tenants, leaving little to no time for other things. If you’re the type of investor who would rather invest and sit back to collect your income, passive real estate investing is for you.
Passive and active real estate investing are phrases that have been thrown around more times than you can count in most real estate infomercials and seminars. And even though passive investment opportunity promises guaranteed income, more would-be real estate investors still wonder whether passive real estate investing is a myth or a reality.
As a real estate investor looking for answers as to whether passive real estate investing is worth it or a load of nonsense, you will find your answer here.
In this article, you’ll discover what passive real estate investing is and whether it is a reality or just a myth. And if it’s worth it, you’ll learn how to use Mashvisor to search for profitable passive income properties.
What Is Passive Real Estate Investing?
While there is a lot of disagreement as to whether passive real estate investing exists or not, there’s less debate when describing what it is. Passive income strategies refer to methods of generating passive income without any major effort. Often, these methods involve a third party to manage the property. Passive income strategies are more “hands-off” than active investing.
When it comes to passive investing, all you need to do is find a property and then hire a property management company to manage the property. You will get a percentage of the rental income every month, without lifting a finger maintaining the properties. The companies you hire should are experienced in managing investment properties.
In passive real estate investing, you don’t need to commit a major portion of your time because someone else will do the work. Now, there are some risks to this type of investing, but the risks are minimized. If you’re looking for a way to invest in real estate without the hassle of being active in maintaining the property, passive real estate investing will work great for you.
What Is the Difference Between Active and Passive Real Estate Investing?
There is a difference between passive and active real estate investing. In passive investing, you partner with a property management company that helps you run the day-to-day operations of the property. In this scenario, the investor will get monthly payments from those investments, but you won’t be involved in the daily operations and management of the properties.
Active real estate investing is the opposite of passive investing. In active real estate investing, you or a group of investors come together to buy a property. In active investing, you are responsible for finding tenants, buying the property, and managing the property. It is a very hands-on type of investing where the investors play a very active role in running the property.
There are some risks to both passive and active investing. For instance, in passive investing, you have no say in the daily running of the properties. Also, you will be charged service fees, which can reduce your profits. But even with such costs, passive investing is great if you don’t have enough time or if you don’t want to bother with managing the properties.
With active investing, you will need to be hands-on in the daily maintenance of the property. You will be at the beck and call of your tenants in case of an emergency to make sure everything is okay. It can eat into your time and energy. It all depends on how active you want to be in the running of the day-to-day operations of the property.
How Exactly Does Passive Real Estate Investing Work?
Passive investing means finding a property you want to buy and then looking for a property management company to partner with. The company will provide the necessary expertise and be involved in the property’s day-to-day running. It includes making decisions about finding and screening tenants and running other daily operations of the property.
If there is a problem or an emergency with the property, instead of the tenants calling you, they will call the property manager, who will go there and fix the problem. Sometimes, you may not even know about the problem. The job of the property management company is to exclude you from taking an active role in maintaining the property.
The same arrangement also works with getting tenants. Depending on your agreement with the property management company, when you buy a property or when a tenant leaves, the company is responsible for finding new tenants. It ensures that you continue to have a passive role in the day-to-day operations of the property.
Is Passive Real Estate Investing a Myth?
So, is passive real estate investing a fairytale? The answer is no…and yes. Passive real estate investing can be a reality, that’s for sure. However, it is sometimes advertised in an exaggerated manner claiming that all real estate investors need to do is purchase passive income-producing assets that will make them swim in rental income.
The truth is that owning passive income-generating assets is possible, but it requires considerable effort to start real estate investments. For instance, you will need to find a property that will be profitable or that you can make profitable. Afterward, you must find a property management company to work with.
Is Real Estate a Good Passive Income?
Real estate investing is considered one of the best investment strategies. It is a great way to earn extra income and secure your future. Many investors also find it one of the most secure ways to gain financial freedom. Plus, the way real estate investing works makes it a great way to earn passive income.
If you know what you’re doing and you know how to find a good partner to work with, investing in real estate can be a walk in the park. A good property management company will help you run the day-to-day operations of the property, thereby leaving you to do what you want. It makes the real difference between active vs passive income.
Your main job would be to find a good property that you would want to invest in and also find a good property management company to help you manage it. Once you get them done, you are on your way to earning your income passively through real estate. Mashvisor’s Property Finder tool can help you easily find a great investment property.
How to Find Your First Passive Real Estate Investment Property
Passive real estate investing will make life easier for you, but the process of finding profitable properties can be tough. Here are some steps real estate investors must take to guarantee passive income for their investment properties:
Step 1: Know the Location
The first step you must take is to know where you want to invest. Location is very important in real estate investing. If you invest in the wrong environment, not only will you not earn any income from the property, you will likely lose thousands of your investment dollars. That’s why location is extremely important in real estate investing.
Mashvisor can show you the best locations to invest in using its artificial intelligence tool. It will show you the average rent amount a location or neighborhood generates. You will also see the Walk Score and whether or not the location has access to amenities.
Step 2: Know the Type of Property You Want
When you find the best location, your next step is to know your property preference.
Are you looking for commercial property or residential property? Knowing this will allow you to choose the best property. Also, if you’re looking at residential properties, how many baths and bedrooms do you want? All this information is essential.
Step 3: Conduct a Property and Neighborhood Analysis
When you find the property you want to invest in, your next step is to analyze not only the property but also the neighborhood. Use Mashvisor’s analysis tool to do so.
The analysis tool will show you whether or not the property will be profitable. It will also estimate how much rent you should charge based on the average rent amount of the other similar properties in the neighborhood.
Before you start earning passively, you need to make sure that the property you invest in will make you money. Mashvisor’s analysis feature can help you evaluate properties for sale.
Strategies to Make Passive Real Estate Investing a Reality
Passive income strategies work best for investing in real estate: REITs, turnkeys, Airbnb, out-of-state investing, and ordinary residential income properties.
1. Real Estate Investment Trusts (REITs)
Investing in REITs, or real estate investment trusts, is one of the best ways to own passive income-generating assets. REITs are companies that invest in residential and commercial real estate income properties. All the real estate investor needs to do is pitch in the purchase, and they will receive rental income from the REIT.
What makes investing in REITs one of the best passive income opportunities is that the investor receives high rental income and does no managerial work. The REIT itself will manage the property. Most of the effort an investor will put in is searching for a REIT and finalizing agreements. The real estate investor receives passive income once everything is taken care of.
Ensure that the REIT you choose has historically been paying out dividends to its investors. Also, ensure that they have a policy of transparency. A good REIT will be protected against inflation, come with a decent amount of liquidity, and will diversify its portfolio. Do your due diligence before you choose any REIT to partner with.
2. Turnkey Investment Properties
Turnkey income properties are also one of the best passive income investments. They are properties that are purchased from companies and are immediately ready to be rented out. Turnkeys are always furnished, which lessens the burden on the real estate investor. If the investor is lucky, the company itself will also be responsible for management duties for a cost.
For these reasons, turnkey investment properties are among the best passive income strategies. Want to know what the best investment strategies are? Here are some of the top six real estate investment strategies you can use to raise your passive real estate investing game.
Turnkey investment properties are one of the best passive income strategies because they offer the investor convenience by eliminating the process of renovating the property. Also, it promises instant cash flow because the property is ready to be rented out as soon as you buy it.
Mashvisor can help you find turnkey investment properties in 15 minutes. With its Property Finder tool, you can search for properties in any location in the US. Mashvisor will not only show you turnkey properties, but it will also show you whether or not the property is worth investing in.
3. Airbnb Investment Properties
Even short-term investment strategies can be used for passive real estate investing. Airbnb properties are particularly useful for passive income. Most full-time Airbnb real estate investors started as part-timers yearning for passive income. It means they appreciate the fact that they can rent out their properties and earn passive income.
Airbnb allows investors to rent out their properties, or even rooms, on a nightly basis. It will enable investors to prepare their properties effortlessly and rent them out as they see fit. Hiring professional property management will also make the Airbnb real estate investment more passive than active, but at an obvious cost.
Also, once an investor is experienced enough, they can set their price, making passive income much more possible. Plus, if the investor decides to hire a property management company, the investment becomes at least 90% passive, which is a dream come true for most Airbnb real estate investors.
4. Out-of-State Real Estate Investments
Out-of-state real estate investing can also act as a passive investment strategy. Better deals and more profitable properties are often located out of one’s area. They often provide high cash flow and rental income. However, such investments have only one problem preventing them from being passive: property management.
Some turnkey and Airbnb properties face the same issue, too, but it is much more compounded with out-of-state properties. The solution once again is a simple but considerably costly one: hiring professional property management. But as mentioned above, make sure you partner with a good and reputable one.
Property management is the most obvious hidden cost when investing in real estate. Find out the six hidden costs of owning rental property. Once you know the hidden costs, you will be better prepared when considering out-of-state real estate investments to earn some passive income.
Mashvisor can also help you find good out-of-state properties. Instead of spending money traveling out of your state to check out the property, you can simply use Mashvisor to determine whether the property is worth it or not. Mashvisor uses its artificial intelligence tool to accurately analyze the property and its neighborhood, all in 15 minutes.
5. Single-Family and Multi-Family Investment Properties
The typical forms of residential real estate can also fall under passive real estate investing. Both single-family and multi-family properties check the profitable box but can be questionable when it comes to property management. Like out-of-state investments, property management is significant for such types of properties.
The best way to make investment properties passive is to hire professional property management. For instance, if you own a multi-family investment property, it is not unusual to get calls every month from your tenants about one problem or the other. And if you entered real estate investing for passive income, it can be a hassle.
Therefore, getting yourself a good property management company is a good idea, especially if you own multi-family investment properties. It doesn’t mean that a single-family investment property won’t stress you out. Some tenants won’t take care of their houses well because they know if anything goes wrong, they’ll just call the landlord to fix it.
Use Mashvisor to find profitable single-family and multi-family investment properties. All you need to do is enter your criteria into the Property Finder tool, and you will be shown different properties to your taste. Afterward, you can talk to your property management company to make the investment more passive than active.
6. Buy and Hold Real Estate
Another passive real estate investing strategy is buy and hold real estate. This is an excellent approach towards building wealth from real estate in the long term. As the name suggests, the idea behind buy and hold is pretty simple – you buy an investment property and keep it in your real estate investment portfolio until its value appreciates significantly, making it possible to sell the property for a lot more than what you bought it for.
The key to success with this long-term investment strategy is to buy the property in a housing market which is expected to undergo a major increase in home values in the next few years and decades. Pay attention to both the city and the neighborhood. Look for signs of major development works in public infrastructure being planned and/or big businesses moving to the area. Such developments will accelerate the rate of natural appreciation in the local real estate market and allow you to make more money with this passive real estate investing strategy.
Another tip to optimize your return on investment in the long term is to look for a property for sale by a distressed seller. Search for off market properties, foreclosures, short sales, bank owned homes, and other options to buy cheap real estate. However, before you decide on any particular property, schedule a home inspection to make sure it is in good shape and does not require an excessive amount of fixes and repairs as this will take away from the passive aspect of your long-term wealth building strategy.
Moreover, if you’d like to turn your buy and hold real estate into passive income investments, you can start renting them out through a professional property management services company, as discussed above. In this way, you will make money from real estate in both the short and the long run.
Similar to the property search for a rental, the process of finding a good buy and hold real estate property to invest in has become passive. To start looking for lucrative buy and hold real estate properties in upcoming markets, visit Mashvisor’s Property Finder tool.
7. Real Estate Investment Partnerships
If you are looking for passive income investments and would like to invest with partners, you can form a real estate partnership. Partnerships in the real estate investing business can take many different forms including a real estate limited partnership (RELP), general partnership (GP), limited liability partnership (LLP), and others. The legal form of the partnership depends on the number of partners, their roles in the investment, the right and responsibilities of each partner, and the laws of the state among other factors.
One of the advantages of investing with partners is that you can start out with little cash. Another benefit is that you can make passive income from real estate. Moreover, you get to tap into the expertise of other investors, pulling your strengths together and compensating for each other’s weaknesses.
In order for you and your partners to become successful real estate investors, it is important to decide on the precise structure of your partnership before you even start searching for lucrative rental properties to buy. Agree on who will do what and how the profit will be distributed as well as on an exit strategy. Set up mechanisms to assure all partners’ compliance and what to do in case of default. Write down everything in a contract, and have all partners sign the agreement. That’s the best way to avoid fights and problems in the future and to ensure that you all work as a team. Once you’ve done that, you can start on your passive income investments with your real estate partners.
8. Real Estate Syndication
One particular type of partnership which is ideal for passive real estate investing is syndication. A real estate syndication is headed by a sponsor, also called a syndicator, who plays the most active role in this investment strategy. The sponsor is responsible for finding an investment property or investment properties for sale, pulling the financial resources of the investors together, buying the rental property, and providing the long-term rental property management. The real estate investors, on the other hand, invest their money in order to finance the purchase of the investment property and then receive passive real estate income.
Syndications in real estate can be established as a corporation, a limited partnership, or a limited liability company (LLC). Each of these offers a different level of protection for the investors.
If you are a beginner real estate investor with some cash but not much free time, consider syndication as one of the available passive income investments.
9. Renting Out a Room in Your House
If you would like to make money in real estate but don’t have enough cash to purchase an investment property or a part of a property, you can start by renting out a room in your home. This is a viable source of passive rental income. You don’t have to go through the process of looking for profitable properties for sale, analyzing them, and buying them. Moreover, you are already managing your home, and having a renter should not increase the efforts and time you put into this significantly, as long as you are able to find a good tenant. In return, you can make a few hundred dollars a month. In addition, you can decide whether to rent your extra room on a short-term or long-term basis to maximize your return. It depends on your location, the rental demand, the regulations governing short-term rentals, and your personal preference.
The drawback of this passive income strategy is that you have to be particularly careful when screening tenants. You need to choose someone who will not only take good care of your property but who will also be pleasant to live with.
On the plus side, renting out a room in your house is an excellent way to get a taste of being a landlord and a real estate investor in order to decide if this is a good investment strategy for you. If you think investing in real estate is how you want to build wealth in the future, you can start saving the monthly rental income for a down payment on an investment property.
10. Real Estate Crowdfunding
Another one of the best passive income strategies for beginners in real estate is crowdfunding. The best feature of this real estate investing strategy is that some real estate crowdfunding platforms allow you to invest as little as $500. This makes it accessible to investors with very limited capital.
Real estate crowdfunding is one of the newest and hottest ways to invest in real estate passively which was made possible by the rise of technology and social media. This strategy allows hundreds of real estate investors from all around the world who don’t know each other personally to pull their financial resources together to invest in real estate. This is a truly passive investment strategy as you don’t have to buy or own a property, manage a rental, deal with tenants, or any of the other aspects usually associated with being a real estate investor and a landlord. You can research real estate crowdfunding websites from your computer or smartphone. Once you’ve chosen the right one for you, you just wait for the return on investment.
So, if you are looking for a very contemporary passive real estate investing strategy, give crowdfunding a chance.
Where to Start Looking for Passive Income Properties
In this article, you’ve discovered what passive real estate investing is and the difference between passive and active investing. You also learned how to find your first passive real estate investment property and the five strategies you can use to ensure that passive real estate investing becomes a reality.
Therefore, passive real estate investing can become a reality, and it can be your reality! With proper planning and research, particularly on property management, virtually all real estate investments can be passive income-generating assets. We recommend REITs and turnkeys as the top passive investments, but any of the five mentioned above will do just fine!
For the latter three passive real estate investing strategies mentioned in this blog, your first step will be to find investment properties. To get started, find low-risk investments with high returns. Some platforms can help you find great properties that guarantee returns. Mashvisor is one such platform.
With Mashvisor, you can find amazing deals on real estate investment properties that will guarantee you earn a consistent income. Its Property Finder tool will ensure that you get the right property. It will also show you how much you will earn as rent by analyzing similar properties in the neighborhood.
Click here to sign up for a 7-day free trial with Mashvisor, followed by 15% off for life.