The Short Answer
Real estate is a realistic and effective way to generate passive real estate income, with various options requiring minimal involvement. Passive real estate investments like real estate debt funds and Real Estate Investment Trusts (REITs) provide steady passive real estate income through interest payments or dividends, with debt funds offering lower-risk returns from diversified loan portfolios and REITs providing liquidity and consistent payouts. Other passive real estate investing options, such as crowdfunding and vacation rentals, offer flexibility based on investment size and management involvement.
For those seeking more direct ownership with limited involvement, syndications and vacation rentals are attractive. Syndications pool investor capital for large projects like apartment buildings, offering returns from rent and property sales, while vacation rentals managed by third parties can yield high returns, especially in tourist areas. These strategies cater to different investor profiles, from those seeking high income to those focused on stability and long-term growth.
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Is It Realistic To Generate Passive Income with Real Estate?
That’s an easy answer, yes! Many people have become millionaires through real estate, and earning an income from passive real estate investing is not only realistic, but it’s a very effective real estate investing strategy.
The degree to which each investment is “passive” depends on the investment type, your involvement, and the level of management required. Passive real estate investing requires an upfront capital investment, adequate planning, and in many cases the involvement of a property management company.
Top Performing Passive Real Estate Investments
For those who are interested in passive real estate investing, there are a variety of options available. Take a look at some of the most popular options outlined below to get a better understanding of which are best suited to different investor types.
Option 1: Real Estate Debt Funds
Real estate debt funds give investors the opportunity to invest in funds that are mortgage-backed securities, loans, or mezzanine debt. Investors enjoy the stability of debt funds which prioritize income over property value appreciation. Thanks to the interest payments and other variables, these funds typically offer higher annual returns than equity investments.
Real estate debt funds are diversified, and this gives investors the protection of the their funds being invested in multiple assets. Investors receive returns based on the interest assessed against loaned capital plus the benefit of seniority/payment priority to the other investment capital and the security of an underlying property. As far as passive real estate investing goes, this method is a great overall option.
Types of debt funds:
- Senior Debt Funds: These provide senior debt (first-position loans) that take priority over other forms of financing.
- Mezzanine Debt Funds: These funds invest in mezzanine loans, which are subordinate to senior debt but rank higher than equity.
- Bridge Loans: These loans provide short-term loans (usually 6-36 months) to real estate investors for property acquisition or renovation.
- Construction Debt Funds: These funds provide loans for property development and construction projects.
- Distressed Debt Funds: These funds focus on purchasing distressed real estate loans at a discount. These are often loans where the borrower is behind on payments or has defaulted, allowing the fund to acquire them at a lower price with the potential for high returns.
For example, New Silver’s Income Fund is for accredited investors and has 15 – 20% targeted annual returns. The Fund generates a high income return from a diversified portfolio of loans underwritten and originated by New Silver Lending LLC. The Fund offers quarterly payouts, and experienced a net return of 17.07% for 2023. All loans are short-duration and secured with a first priority, perfected lien on residential investment properties in the United States. Notes are held in an indentured trust for the benefit of investors, Ankura Trust Company serving as trustee.
Who are real estate debt funds suited to?
Investors who would prefer an option with a lower risk profile, and one that is likely to provide more stable returns over time with regular payouts. Investors who are happy to turn their funds over to be managed by a reliable Fund will appreciate the expertise being used to manage their investment. Investors who are looking for an easily accessible option to put their funds into.
Option 2: Real Estate Crowdfunding
Real estate crowdfunding platforms like Fundrise, RealtyMogul, and CrowdStreet allow investors to pool their funds, in order to provide the funding needed for various real estate projects. These real estate crowdfunding platforms typically offers investors a wide range of options, depending on their available funds, risk for appetite and investment goals.
The benefits to this type of passive real estate investing are:
- Flexibility: Investors can choose what they invest in, and this means they can select only the investments that align with their risk tolerance, capital, investing strategy and interests.
- Low minimum investment: Typically, real estate crowdfunding platforms allow investors to start investing from just a few hundred dollars. Instead of thousands of dollars, like many other passive real estate investing options.
- Diversification: One of the biggest drawcards of crowdfunding is the diversification that it offers investors, who can choose the number and type of specific projects they would like to invest in.
- Varied income sources: Crowdfunding can generate income in the form of interest payments on loans (debt) or dividends from property profits (equity).
Who is crowdfunding suited to?
Investors who don’t have a large amount of capital to invest initially. Those who are looking to diversify their portfolio and have flexibility with what they invest in, to suit their specific needs.
Option 3: Real Estate Investment Trusts (REITs)
Publicly traded Real Estate Investment Trusts (REITs) are typically the simplest and most affordable way to generate a passive real estate income. To maintain their tax-advantaged status with the IRS, REITs are required to distribute 90% of their taxable net income to shareholders in the form of dividends, making them an excellent source to generate income regularly.
The advantages of publicly traded REITs are that they offer a liquidity not provided by many other real estate investing options, where investors can buy and sell shares easily, much like stocks. There’s a lower risk with REITs as there is a portfolio of properties, which spreads the risk. Along with this, a REIT is required by law to pay out at least 90% of their taxable income as dividends, which makes them a reliable source of passive income.
Who are Real Estate Investment Trusts suited to?
REIT investing is suited to investors who need a regular and reliable income, who are looker for a lower risk real estate investing alternative and those who are in need of some liquidity when it comes to their investment.
Option 4: Vacation Rentals
Purchasing vacation rental properties to be used on Airbnb, for example, that are run by a property management company, can be an effective way to earn a passive income from real estate. Property management companies handle day-to-day operations, including guest relations, cleaning, and maintenance. Other tasks can be automated, to leave investors with very little to do and make this strategy a hands-off investment opportunity.
Vacation rental properties can generate a higher income than long-term rental properties, particularly in tourist destinations or where there’s a high demand. Another perk is that owners can use the property themselves, when it’s not in use, so it can double as a vacation home for them.
Who is vacation rental investing suited to?
This type of passive real estate investing is suited to investors who are looking to generate a high income, but are comfortable with the fact that this income may be intermittent, depending on seasonality and other factors that occupancy. Investors who use this strategy will need to be happy with outsourcing their property management. It’s also a good fit for those who would like a second home, and are happy to rent it out while they’re not using it.
Option 5: Real Estate Syndications
Syndication in real estate involves pooling capital from many investors in order to purchase bigger properties, such as apartment buildings. Investors who don’t want to be hands-on can leave the operations and management of the syndication to the sponsor or syndicator. All investors will receive income from the rent received, and profits from the sale of the property.
The biggest benefit of real estate syndications is that investors can gain access to large real estate deals, with a relatively small capital investment. There are also tax advantages associated with this method of passive real estate investing which include interest deductions and depreciation.
Who are real estate syndications suited to?
Real estate syndications are well suited to investors who are looking for passive real estate investing exposure to large real estate projects with professional management. It’s also suited to investors who are comfortable with illiquid, medium- to long-term investments and aren’t looking to make money quickly.
Are Rental Properties Considered Active or Passive Income?
Rental properties, in other words owning a rental property and generate income from it, are usually seen as passive real estate investments. However, depending on each investor’s chosen level of participation, rental properties can become less passive and more active. They’re considered passive real estate investments because investors are generating passive real estate income each month, without much direct involvement.
Other Ways To Generate Passive Income
Passive real estate investments offer various opportunities, but there are other options for investors to consider as well.
- Dividend Stocks
Investing in dividend stocks means purchasing shares of a company that regularly distributes a portion of its profits to shareholders. Many consider dividend stocks to be one of the most passive forms of investing, as they require an upfront investment with little to no ongoing effort. Most companies pay dividends quarterly, or every three months.
In addition to receiving regular dividend payments, investors may also benefit from the stock appreciating in value over time. The main appeal of dividend stocks is the ability to generate income through consistent cash flow without the need for active management.
- Peer to Peer Lending
Peer-to-peer (P2P) lending is just as its name suggests. Increasingly, individuals seeking passive income are investing their money into P2P lending platforms. These platforms pool investor funds and lend the money to borrowers in the form of personal loans.
Also known as lending clubs, these platforms allow investors to earn interest on the loans, similar to how banks or traditional lenders operate. Returns on investment (ROI) from P2P lending typically range between 5% and 10%, depending on the platform and the borrower’s creditworthiness.
- Unit Trusts
Unit Trusts are another passive investment vehicle which offer portfolio diversification through investment in stocks, bonds, and other securities. Unit Trusts pool funds from many investors and the fund manager decides where the capital will be invested. Investors will purchase “units” in the trust and each of these units represents a fraction of ownership in the underlying investments. Investors will then generate income through interest payments on the underlying assets, dividends, or capital gains.