Building passive income unlocks new levels of financial independence and stability. You can refer to it as the holy grail of money-making. We all want to make more money without putting in obscene hours, and that’s the promise of passive income.
To build a passive income, you have to think outside the box. While you can achieve it in many ways, the two main ways are through real estate and dividend investing. However, most people don’t know how to start, and it can be hard to figure out the best way to build wealth.
Passive income is a great way to do it, whether it’s to pay off debt, save for retirement, build your investment portfolio, or create more wealth. But how can you start building a steady stream of cash? Here are tips to get started.
What is Passive Income?
According to Forbes Advisor, Passive income is money you can earn without too much ongoing effort. After identifying and establishing a passive income stream, you won’t need to tend to it daily.
However, you will still have to work to ensure your investment stays successful. This fact is evident in real estate investments. Most of these investments require a lot of time and effort. After your initial effort, you can relax and watch the cash flow.
Passive Income VS Residual Income
While passive and residual income is frequently interchangeable, they are essentially different. Although residual income can also be passive, it isn’t necessarily always passive.
Monthly residual income refers to the money available after meeting all costs. Real estate investments generate monthly cash flow that directly improves your residual income. You will eventually recoup your one-time investment payment back as the investment starts to bring in money.
Money gained through a business with little to no continuous effort is passive income. Residual income calculates how much discretionary income an individual or company has left over after meeting their financial commitments and paying their expenses.
Building Passive Income Through Real Estate Investments
Investing in real estate is the most popular and effective method of creating sustainable wealth. Many other investment options appreciate more quickly, but no investment generates sustainable wealth as steadily and regularly as real estate.
But what does being a real estate investor mean? And what exactly is passive income real estate? And what options do you have to build passive income in real estate?
In real estate, it takes work to own passive income properties. Your job will include:
- Looking through houses
- Selecting tenants
- Employing a property manager
- Taking care of repairs
Planning and developing a solid business strategy is one of the keys to building a passive income in real estate. You must be familiar with your target market to understand local real estate trends and values in the same area as your primary property.
Why Is Real Estate a Passive Income Stream?
Passive income real estate with passive income is a concept that allows investors to generate revenue without having to be actively involved. Of course, you can make passive income through real estate investments. But some of these investments require certain levels of involvement and commitment.
You can invest in real estate in several ways, but let’s focus on rental properties and why they are a terrific source of passive income. However, a rental property won’t be entirely passive initially since you may need to remodel it to make it rent-ready. However, it can generate steady cash flow for you without requiring regular labor in the long run.
1. Investing in Rental Property
A rental property investment generates steady monthly rental income, and what could be better than that? With regular cash flow, you can pay off your mortgage, finance other debts, and save money for retirement. It is also a perfect opportunity to make more cash for other investments that’ll add to your real estate portfolio.
However, it may be okay to say that rental property investing isn’t passive. Since you’re in charge of the property, you may need to make some changes or improvements from time to time. But it’s not like you’ll have to do this every week, so it’s still one of the most consistent passive income sources.
In addition to monthly rental income, you earn money if the property appreciates. Owning a rental property means you also earn the capital gains from the property’s value appreciation.
If you decide to sell the property after a couple of years, the difference between the purchase price and the current market value is yours to keep. The best part is that if you managed your investment well, you would have made enough to clear all your debts from the monthly cash flow and the profit from selling the property.
Understanding Rental Property Investing
If you want to invest in a rental property and are entirely inexperienced:
- Consider something simple and reliable.
- Take things slow and experiment with things a little bit, with the help of sound financial advice, of course.
- Prepare to pay cash for the property, and avoid putting yourself into colossal debt to invest.
It’s advisable to look for a property that’s less than the average market value at your investment time. It’s easier to generate passive income if you start this way.
There are a few things to consider when determining how much profit you can make on a rental property. Every investor intends to profit from their investment. Therefore, making wise investment decisions is as critical as the investment itself.
Employ a Property Manager
Employing a property manager will help you save a lot of time and effort. With an expert property manager, you can oversee the management of all your properties and still make a good profit. Their job will include:
- Attending to tenants and their concerns
- Collecting rent
- Evictions
- Contractor scheduling
However, hiring a property manager will take a bite out of your profits. But your rental property should generate enough earnings to cover all these expenses if you make an intelligent investment.
Home Equity Refinancing
When the value of your property or your equity in it increases, you can obtain a cash-out refinance. With this strategy, you can obtain a new mortgage loan even more significant than your initial loan. After this, you can withdraw the cash equivalent of the difference between these two loans.
This process is essentially selling your home equity for money. But you’re not to use it as a get-rich scheme. It’s a unique opportunity to put the money to good use, such as making repairs or renovating your current property or investing in another property.
Pros and Cons of Investing in Rental Property
Pros
- Monthly rental income helps reduce your mortgage and build equity in your home.
- The workload for a rental property is minimal. Most of the work comes between when you purchase the property and when tenants start moving in. If you hire a property manager, you can reduce your workload by a large margin.
- Since real estate typically increases in value, you can be sure of passive income aside from your rental income. If the real estate market grows, you will get more money than you originally paid for the property if you decide to sell it.
- Using real estate as leverage, you can buy a home worth more than the cash you have to put down on it.
- Investing in real estate typically provides inflation protection. In contrast to most investments, real estate investments usually increase in value over time.
Cons
- Real estate investments can consume a lot of time and effort when done in the wrong location. Not doing your homework may result in investing more time and effort than you originally intended.
- Investments in real estate don’t have much liquidity. While you can always sell a property if you discover it’s not what you were looking for, it won’t be instantaneous. Sometimes, it can take several months to get your money back.
2. Investing in Real Estate Investment Trusts (REITs)
If you’d like to make passive income from real estate with little cash or without the hassle of owning a property, a REIT is a great place to start. Since they are typically commercial properties, you can profit passively from them with ease.
A REIT is a company that holds real estate. When the property produces rental income, shareholders in the company receive dividends.
Since REITs trade on the leading stock exchanges like mutual funds, investors can pool their funds and purchase real estate that they otherwise wouldn’t be able to buy.
Owning stock in a REIT is just like owning a share in a company. You own a small portion of the properties that the company owns. Additionally, they often perform better in circumstances with low-interest rates. Due to this, the REIT market may have a rough ride during times of increased rates.
Think of owning a REIT as investing indirectly in commercial real estate. REITs offer an opportunity to benefit from appreciation and regular cash flow even if you don’t own and manage the properties involved.
How Can You Profit From A REIT?
A REIT’s income is usually free from corporate taxes, meaning investors receive more money for investing in REITs. But since you’re a shareholder, you’ll still be required to pay capital gains taxes on the dividends at your regular income tax rate.
High dividend yields are typical in REITs, and if the value of the REIT’s properties rises over time, so may these yields.
eREITs
With just $500, you can invest in real estate through an eREIT. eREITs are less liquid than traditional REITs since they don’t trade publicly. You shouldn’t invest money in an eREIT if you need it quickly.
Retail ETFs
Malls and standalone retail make up about 24% of REIT investments. They are the most significant investment ever made in America, and REITs own many shopping complexes across the U.S.
Since retail REITs make money from tenants’ rent, it is vital to invest in retail REITs with the best anchor tenants. If merchants have cash flow issues, it will affect monthly rental income severely, which can affect your investment.
REIT ETFs
A REIT ETF focuses primarily on equity REIT investments. These ETFs are passively managed, like any other ETF, based on a publicly listed real estate index. The Dow Jones US REIT and the MSCI US REIT Index are the two indexes that get used most frequently.
You’ll need at least $3,000 to invest in a REIT ETF at a 0.12% expense ratio and a yield of 4.42%.
Pros and Cons of Investing in REITs
Pros
- Your potential to diversify your investment portfolio will increase when you start investing in REITs.
- REITs typically have higher dividend yields than other stocks since they are required to distribute at least 90% of their taxable income. While the typical stock yields are less than 2%, REITs frequently have a secure dividend yield of 5% or higher.
- REITs have excellent potential for good returns, especially if their underlying assets’ value rises. They can produce total returns that outperform the market over years.
- REITs make great liquid investments. You can easily buy or sell a REIT at any time. Additionally, you can quickly release some cash if you need money from your investment.
- With REITs, you invest your money in commercial real estate. Hundreds of data centers, apartment buildings, and even shopping malls can be yours to own through REITs.
Cons
- A REIT might not be suitable if you prefer a quick return. Don’t invest money in REITs if you need it in the next few years.
- The price of REITs may suffer as a result of rising interest rates. In essence, the trust’s value correlates with the Treasury yield. Thus, the REIT’s value will likely fall as rates rise.
- While you avoid corporate tax with REITs, the tax rate for dividends is relatively high. Since they don’t qualify as capital gains, they don’t use the same tax rates. Instead, they get taxed like ordinary income.
3. Investing in Real Estate Mutual Funds
Mutual funds investments involve several investors whose combined resources get used to investing in commercial real estate. You can say it’s similar to a multifamily syndication deal but for stocks, bonds, and short-term debts.
Although they resemble REITs, they are not the same. Instead, they invest in the businesses that manage REITs. One of the most passive methods to invest in real estate is through a mutual fund. A fund manager oversees your investment, and you must decide how much and how frequently you wish to invest.
Some mutual funds invest in businesses that consistently distribute dividends which can be remitted to the investor’s bank account or reinvested into new mutual fund shares. These dividend payments may be made monthly or quarterly, depending on the mutual fund.
Investing in mutual funds can be an excellent way to build passive income. Dividends sent to your bank account can boost your monthly cash flow. However, you can choose to reinvest your dividends if you don’t need cash in hand. Not only will it still generate passive income, but it’ll also grow your portfolio as the fund increases.
Unlike actual real estate, mutual funds can be bought and sold anytime. However, they have a direct connection to the housing market. That means the real estate market’s performance will affect a mutual funds’ performance.
Additionally, investing in a mutual fund can reduce your local, state, or federal tax expenditure. Certain municipal bonds help investors reduce their tax obligations while earning dividend income. That’s like making a good passive income and saving money simultaneously.
Pros and Cons of Investing in Real Estate Mutual Funds
Pros
- Real estate mutual funds are ideal for new investors. There are multiple investment options, most of which don’t require too much money.
- You can invest in and profit from the real estate market without buying and managing properties.
- Taxes on mutual funds in your investment portfolio are not due until the funds get sold.
- You can choose to reinvest your earnings. Reinvesting your dividend will increase the value of your real estate holdings.
- If necessary, you have the option of selling your mutual funds quickly. There’s no reason to wait too long to get your money back if you believe the investment is no longer safe.
Cons
- Real estate doesn’t give you depreciation or dividend income tax advantages. You merely own stock in the investing companies that benefit from these advantages.
- Since you do not own any real estate, you will not earn monthly rental income like you would if you owned the rental property.
- The fund manager is in charge of handling the funds, and they may make decisions that don’t favor every party involved.
4. Crowdfunding
Real estate crowdfunding is a means of making passive income. It entails multiple real estate investors pooling their resources to purchase and operate an investment property.
This investment involves a third-party sponsor who will purchase and manage the property. The sponsor sets an investment strategy that favors every party involved in the deal.
Some crowdfunding Investments offer returns yearly, quarterly, or monthly, while others offer a share of any future earnings from the property’s sale or both.
Because the entry hurdle is low, crowdfunding can assist you in beginning your real estate investing career. It is also one of the most passive forms of real estate investing.
You can start investing a small sum of money through a crowdfunding platform. Choose a platform and your desired investment amount. You can earn online revenue from the properties the platform owns and maintains.
Before investing in real estate crowdfunding, examine the platform you want to choose carefully and thoroughly. Your returns could be significantly lower than anticipated if the sponsor or the investment doesn’t perform as expected.
Pros and Cons of Real Estate Crowdfunding
Pros
- You can diversify your portfolio. By spreading out the risk associated with making a single investment across multiple investments, you can effectively reduce investment risks. Your investment portfolio is diversified, so it will be protected if one of your investments loses money.
- Crowdfunding increases the accessibility of real estate investing. It gives you the chance to start investing in real estate if you can’t do so due to the high capital needs of some real estate investments. Several platforms for crowdfunding let potential investors invest as little as $500.
- You can diversify your investments geographically. Geographic diversification is crucial since the real estate market varies significantly between regions. Because of problems unique to that market that don’t affect the larger market, you could get an abysmal ROI if you put all your money into one place.
Cons
- Your ROI may be smaller than what you would expect if you invested directly in real estate through ownership. The reason is that the sponsor needs to make a profit as well.
- Crowdfunding investments are not liquid. If necessary, these investments are difficult to sell quickly for cash. It could be tricky to withdraw the investment money in an emergency. You’ll need to find a buyer for the property you’ve invested in, which can take some time and possibly lead to a decline in the property’s value.
- Crowdfunding might not be for you if you prefer to have complete control over your investments. Once you’ve made your contribution, the sponsor will oversee the property’s growth.
Tips for Building Real Estate Passive Income
Passive real estate investing is the best way to build wealth. It’s a great way to make money while you sleep. But to be successful, you have to know what you’re doing. If you’re new to the real estate game, here are some tips for building passive income from real estate.
Determine Your Investment Capacity
It’s also crucial to consider your financial resources. While there are different types of real estate loans, you should keep your debt to a minimum as a rookie investor. Consider low-cost options like REITs, real estate mutual funds, or crowdfunding for a start. These options can help you build passive income with low entry-level capital needs.
If you have the resources, consider purchasing a rental property other than your primary residence and renting it out. It’s one of the most stable and reliable sources of passive cash flow.
Aim for Sufficient Cash Flow
If you own an investment property, your primary objective is to increase the value of your rental property while generating a consistent income stream. Over time, market fluctuations may have an impact on appreciation.
Not every location and property will be productive. Do your research and ensure that a property has the potential to generate enough cash flow to support your investment.
Decide on A Timeline
If you invest in rental property, it will take between 3 to 5 years to recoup your costs and turn a profit. If you’re unsure of your long-term investment abilities, you should consider investments that allow you to trade shares at any time during the trading period, like mutual funds.
Consider the Level of Control You Want
If you own an investment property, you retain complete control over everything concerning the property, even if you hire a property manager to assist with management. But not every real estate investment provides the same level of control.
For instance, crowdfunded investments, multifamily syndications, REITs, and mutual funds give an investor less control than rental properties. However, they are less time-consuming. These options are ideal passive income tools if you don’t care about control.
Maintain An Active Involvement In Property Management
Even when you hire a property manager, you should actively manage your property by staying in touch with tenants and performing routine care and upkeep on the property.
Of course, it will take more time, money, and effort. But it will ultimately assist in protecting your bottom line. By doing this, you can increase tenant turnover, reduce renovation costs, and increase the value of your property in the long run.
Is There Truly Passive Real Estate Income?
Several real estate solutions can generate income while you sleep, and a few hours of effort each week may generate thousands of dollars in income each month.
You can choose to create rental portfolios, buy and flip homes, invest in stocks and bonds, or join a crowdfunding program. But while these options are all solid strategies to build passive income, starting a passive revenue stream is not at all passive.
Real estate agents have another unique option. A revenue-sharing program provided by eXp Realty and Smart Agent Life enables any real estate agent to generate passive income through referrals without selling anything.
What is Revenue Sharing?
Revenue sharing involves distributing revenue with the agent who brought a new agent (s) into eXp Realty. The sponsoring agent receives a portion of the revenue in exchange for bringing an agent who generates revenue for the brokerage. It is different from a commission because there is no direct selling involved.
Every agent at eXp Realty receives an 80/20 share from the business. A portion of the 20% that the company receives when an agent closes a deal goes back to the agent who sponsored them.
How Revenue Sharing Works
Agents and brokers from across the nation have the chance to create a passive source of income while still collecting commissions from selling properties through eXp Realty Revenue Share.
You will receive 3.5% of the gross commission of any new agents you refer to eXp Realty. Your monthly revenue share check from eXp is 3.5% of that agent’s gross commissions, whether or not the brokerage was profitable that month or quarter.
- For instance, if an agent you sponsored sells a $300K property and earns $9K in commission. You will receive 3.5% ($315) of the gross commission. That’s all there is to it.
Since eXp Realty is a cloud-based brokerage with little need for physical offices, it has much lower overhead costs than conventional brokerages. This reduction in overhead costs allows the company to offer its brokers and agents a portion of the profits made from each new agent they bring on board.
eXp agents can take part in revenue sharing in two different ways:
- Single-agent revenue
- Cascading revenue
Each one presents intriguing prospects for agents trying to create extra income outside selling properties without spending much time and money.
Single-agent Revenue
eXp Realty has grown from a handful of agents in 2009 to over 80,000 agents today. This expansion has been effective thanks to agent recommendations.
Agents get compensated for referring other agents to eXp Realty when that agent completes their first transaction. Additionally, without lowering that agent’s income, you can earn over $2,000 per referral each year based on their sales.
Additionally, eXp Realty is the source of the money you make through referrals. Every agent can keep up to 100% of their commissions and generate a passive income.
Cascading Revenue Sharing
Cascading revenue sharing also applies to the recruits that other agents in the network bring. If you bring in two agents and each of them brings in two further agents, you gain from the revenue share that your referrals also make. Your group’s total number of agents will determine how much passive revenue you make.
The revenue-sharing program has no upper-income cap for agents. You will make passive income so long as the sponsored agents (and the sponsored agents of the sponsored agents) are active.
What’s even better? eXp Realty pays revenue share every month. If you have many other investments, you can build a reliable source of passive income with numerous cash flow streams.
The eXp Realty Seven-Line Revenue Share Group
Furthermore, eXp Realty’s Revenue Share has seven levels or tiers. The agents you have directly recruited for the organization make up the first tier. The second tier would consist of the agents your recruits brought on board for seven layers.
You get 4.0% of the commission from the agents in your second tier (agents that your recruits bring in) if you individually bring at least five agents to eXp Realty.
The commission from the agents in your third tier will be 2.5% if you individually introduce ten real estate agents to eXp.
For your fourth tier’s total revenue share (2.5%), you must have personally introduced 15+ agents. It goes on like this until your seventh tier.
For your seventh tier’s total revenue share (5.0%), you must have personally recruited at least 40+ agents. However, if you have real estate agents on your seventh tier but haven’t yet brought in 40 or more agents, you’d still get 0.5% of whatever they sold.
Final Thoughts
Passive income is one of the most popular ways to build wealth. It’s a great way to lock in earnings for years to come, and it can also help you diversify your income sources.
Real estate agents, brokers, and investors have access to many tools and opportunities for building a passive income. Whatever brokerage you work in, you can take advantage of these opportunities.
However, eXp Realty provides a unique opportunity to make passive income. It also provides all its agents and brokers with the resources and technology to grow their businesses, make passive income, and thrive in the industry.