How to Create Passive Income in Real Estate: Is It Easy? If you're a mortgage broker or loan originator wondering how to create passive income in real estate, you may have noticed there are a lot of investment strategies out there.
Is becoming a real estate investor as easy as TV and various websites and online videos makes it seem? Should you take your current cash flow and invest it in real estate, or should you find another way to develop passive income streams?
In this article, we'll explore the truth about creating passive income in real estate, and whether it is as easy as it looks. We hope you will be able to take this information and decide if this investment strategy of buying and selling single family real estate is the right passive income decision for you.
Passive Income Streams from Real Estate Don't Happen Overnight
Passive income streams from real estate simply do not happen overnight. Any real estate investment strategy takes time to do three things:
- Provide you with an income from real estate.
- Create a return on investment.
- Provide you with one or more passive income streams.
Passive income streams from real estate are a long term goal. Actually, passive income streams from any industry are a long term goal. It doesn't matter if it is real estate as an investment strategy, mutual fund investing, or investing in the stock market.
Additionally, real estate investment opportunities that are considered passive income streams may not in fact remain fully passive.
You'll need to pay them a salary and keep the property or properties in good repair. You may also need to evict tenants.
Getting and keeping good tenants in rental properties is about as close to "passive income" as you'll get if you plan to invest in real estate. Yet, it still requires a lot of work. And if you plan on just buying and selling, that activity isn't exactly passive either. So much so that many do not consider this type of investment opportunity "passive."
Is It Easy to Earn Money from Real Estate?
It is not always easy to earn money from real estate. Real estate investors with experience - who are willing to tell you the truth - will tell you that as an industry, real estate can be very unpredictable.
You know it can simply be difficult, as well as expensive, to buy and sell real estate as a way to earn money. Renting out property isn't necessarily any easier, buying a single family property, repairing it, advertising it, hiring a property manager, keeping it in good repair, and preparing for the possibility of evicting a tenant, a good portion of the money earned may need to be put back into the property to prepare it for another tenant
Buying and Selling Real Estate as an Investment Opportunity
As an investment opportunity, buying and selling real estate is often an attractive investment strategy. Yet, there are questions you must ask yourself before investing in real estate.
- Do you have the cash flow to invest to buy real estate, or will you need to take out a loan?
- Do you plan to use real estate crowdfunding?
- Do you plan to look for a real estate investor as your partner?
- Are you adept at predicting the health of the real estate market?
- Are you knowledgeable in choosing the best neighborhoods as an investment strategy?
- Are you interested in buying single family homes or multi-family units?
- Are you more interested in long term or short term investment opportunities in real estate?
Remember, your goal is to learn how to create passive income in real estate.
Buying and selling real estate isn't a passive act. It requires a lot of attention and time. It is also an act you have to constantly repeat to continue to make money on a long term basis. Unless you take the profit and invest it in another way, such as in a mutual fund or invest it in the stock market, it does not create passive income.
If You Invest in Real Estate, Will You Get a Return on Investment?
A return on investment is a crucial concept for any investment strategy. For real estate, it's even more important. This is because a real estate investor devotes a significant amount of their financial resources to purchasing. Their goal is, after all, to earn income from real estate. That return on investment (ROI) is important. You need to make back what you invest and earn additional money.
If you have other real estate investors or a traditional real estate loan that you used to purchase the property, it becomes even more important to get a return on investment, because the reality is that you have a burden that must be met. You don't just have a dream to earn income from real estate: you must also meet the financial obligations you entered into to get started with the real estate that you purchased.
Essential questions include:
- What is the current average return on investment for a similar real estate property?
- What type of income from real estate would you like to make?
3. What do you need to make to pay for any current loan or to repay any real estate investor that is involved in your real estate venture?
Other People's Money: Real Estate Crowdfunding
Real estate crowdfunding is a hot topic when it comes to an investment strategy for real estate. With it, you use social media and the internet, in general, to reach out to real estate investors in an attempt to secure investments for your real estate ventures.
One of the good points is that you don't need as much upfront cash flow of your own to invest in real estate, since there are people with money (real estate investors) who are part of the real estate crowdfunding world.
On the other side of the coin, you may need more than one real estate investor. There may be terms you don't like that you may end up accepting because you really want to get started. You may end up with more "partners" than you initially wanted. You may need to pay back more money than you wanted, which means you will earn less money. If you earn less money buying and selling, it makes it harder to get that next property on your own. And if you have rental income? That money goes back to the investors, too … all while you're keeping the property in good repair.
Rental Income, Property Managers, & You
Rental income is often seen as a way to create passive income from real estate: in the dream, you buy residential real estate, turn it into a rental property, and sit back and collect passive income. In reality, rental income isn't that simple.
Taking the entire previous part of the conversation out (buying the property, restoring it, etc.,), to make managing the property more passive for you, you will first need to hire a property manager. Your property manager should be experienced in property management and good at handling people. They should also be educated and experienced in the eviction laws and process in your state (including what is not allowed and what is known as "self-help eviction").
Hiring a property manager is an investment into your freedom as it allows you more time to pursue your real estate dreams and other business pursuits. However, it does cost you more financially. To get the best property manager possible, you must ensure that you offer competitive pay and fringe benefits.
Rental income may need to be used to repay the loan used to purchase the real estate, repay real estate investors, or be invested into repairing the property if it has wear and tear, has appliances that simply need to be replaced, or because you had bad tenants. Legal expenses associated with eviction could also be a factor to consider when deciding whether you want to become a landlord as well. Eviction isn't free.
Is There an Easier Way to Earn Money with Passive Income?
While buying and selling real estate, or managing single family real estate as a rental property, can be a good way to create an extra income, using it as a way to create passive income isn't as easy as some may make it seem.
If you’re curious about learning how to create passive income streams in other ways, why not explore the possibility of starting an insurance agency? You can earn money while creating a passive income stream for your future. To learn more about how you can take your current knowledge and client base and begin building a lucrative active business and real passive income in the insurance industry, contact Comma Insurance today!
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