Interest in real estate is increasing exponentially due to inflation uncertainty in the economy, real estate is considered by many as an inflation adjusted investment.
However, many interested parties are also unsure of how to get started or how to maximize income from these investments.
After all, passive income can be a great way to supplement your current income which will allow you tocreate some financial wiggle room to find security through your retirement years.
Read on for more information about real estate investing, including three ways you can earn passive income from real estate.
Reasons to Choose Real Estate
For those who want to diversify their investment to build wealth and increase their net worth, real estate investing has potential to be a more stable and less volatile choice.
Below are a few reasons and benefits as to why investors prefer real estate over other investment opportunities, as it pertains to passive income generation.
Appreciation is one of the primary ways that real estate investors make money. Because many real estate values increase over time, most investors are able to turn a profit and see a good return on their investment when the time comes to sell their properties.
Long - term Cash Flow
Whether it comes from dividends or rental payments, real estate investments generate cash flow in a variety of ways. Cash flow increases over time, too, as rent growth keeps pushing rents higher.
Furthermore, because rental rates tend to increase over time, investors can also generate more cashflow from their tenants the longer they hold onto and rent out specific properties.
In general, real estate has a low or even negative correlation with other major asset classes (equities, cash, commodities, etc.).
Adding real estate to one’s portfolio can lower the entire portfolio’s volatility and provide higher returns for other units of risk.
Finally, the tax benefits from real estate investments are undeniable.
Those who buy and rent out properties can deduct many of the costs associated with owning, operating, and managing that property. This includes the cost of repairs, property management fees, and the costs of upgrades to attract better tenants.
How to Earn Passive Income from Real Estate
Many investors look for options that generate passive income–whether it’s with the goal of an early retirement in mind, or just a general necessity to want more financial security.
Your income is often limited by time–despite your 9 to 5, any side hustles, all of which are limited by the hours in a day. This often leads to investors turning to the world of real estate as means to generate passive income.
From commercial properties to the more popular method of rental properties, investors can explore different options to generate income
Renting out properties is one of the most common ways to generate passive income from real estate. It can be a reliable source, but only once you are able to get a rental up and running.
It’s worth noting that it does require effort, as well as capital for renovations and upgrades, but it does eventually work its way up to generating profit.
Once an investor has purchased a property, they can renovate it, rent it out to tenants, and use the tenants’ monthly rent payments to pay off the mortgage and increase their monthly cash flow.
By working with a property management company that handles day-to-day operations (including finding tenants, collecting rent payments, handling repairs, etc.) it is even easier for investors to build wealth from rental properties without having to do the heavy lifting.
How Much Should You Spend
If you are new to the rental market, think more modestly. It’s easy to aim high, but it’s safer to play into a more stable, financially approachable property.
It will be difficult to request loans that can lead to hundreds of thousands of dollars in debt, simply to “invest” in real estate–these types of approaches can prove to be an uphill climb.
Where Should You Buy?
Like other investment properties, it’s pertinent to purchase rental properties that are in good neighborhoods within proximity to good school districts–as these types of areas have been known to appreciate more exponentially than their lower-priced counterparts.
Types of Tenants
It’s very important to attract and rent out units to reputable tenants. Maintenance is very important for the longevity of your property, so it’s wise to make sure your tenants are responsible and reliable with their payments.
Downsides of Property Rental
Investors often must put in more work upfront with this approach, from fixing up the property so that it can be rented out, to maintaining it and keeping tenants happy. Fortunately, working with a property management company can make this process easier.
Real Estate Syndications
Another way to generate passive income from real estate is through real estate syndications.
Real estate syndications involve multiple investors pooling money to buy or develop a property. The general partner (or syndicator) will find a deal, coordinate the financing and transaction, and manage the investment after it has been finalized. Other, passive investors will contribute the majority of the capital to complete the purchase.
Real estate syndications are different from REITs because the investor is buying into a specific property, rather than a fund or portfolio of multiple properties.
Why Consider Real Estate Syndications?
As a passive investor, you do not have to play an active role in managing the property, handling the accounting, or handling tenant-related matters. However, as partial owners of the asset, they get to enjoy more opportunities, including increased tax benefits.
Real estate syndications are generally well understood investment options. Investors know exactly which property they are investing in and the people with whom they are investing. This makes it easy to stay in touch with the sponsorship team over the course of your investment.
Downsides to Real Estate Syndications
The main downside to real estate syndications is the fact that they typically come with higher barriers to entry. For example, the minimum investment for most offerings at HNB Realty is around $50,000.
Real estate syndications can fall under the SEC regulation if they can be marketed to the public. If an investor does not have a relationship with a real estate syndication company, it is hard for them to find opportunities.
In many cities across the country, housing prices have been on a steady incline, often resulting in housing becoming unaffordable to those who are not at the top of the pay scale earning higher salaries.
The average American can often be outbid in purchasing homes.
House hacking has helped creative investors and home buyers to adapt and find new ways to own property without breaking the bank and emptying pockets.
House hacking is very popular among beginning real estate investors. It involves buying a property and renting out a portion to tenants. Typically, the goal is to offset your own payments with the tenant’s rent payments, cutting down on your costs (think your monthly mortgage) and other bills related to the property.
Not to mention, there are lower interest rates for first-time buyers because they can qualify for FHA loans, as long as they are living on the property and renting it out.
Reducing the Cost of Living
House hacking allows people to cut down on their housing expenses significantly. It can help attack their single biggest line item in their budget, housing, by freeing up money earned through rent.
This money can in turn be used for saving, investing and paying down the mortgage must faster than usual.
It can also lower the taxable income base by acquiring extra tax write offs through mortgage interest deductions, decreasing transportation costs, and increasing your personal time for productivity.
Most importantly, if you are able to make more than your mortgage on tenant rent, this will streamline your maintenance, insurance and other expenses in the process.
Less Money Down Up Front
Another huge benefit to house hacking is the idea that you would not have to put down 20%+ of the property value when purchasing. House hacking strategies allow buyers to purchase homes with little down because they are using this home for their own personal residence.
Bonus: Buy Hold Strategy / Buy Rehab Hold Strategy
Buy Hold Strategy
Buy Hold Strategy is another commonly used method to generate passive income. It is common due to the hope of long-term gains and a short-term cash flow.
However, it is considered a long-term investment strategy where the investor purchases a property and holds on to it for an extended period of time.
The owner of the property often holds the property with the intention of selling it later down the line after the property has increased in value. Until that is decided, the owner rents the property out to help pay for the property.
Buy Rehab Hold Strategy
The main difference between the Buy Rehab Hold Strategy and the Buy Hold Strategy is that the investor will improve the property after purchasing it to make it more marketable, and ultimately increasing its property value.
Start Earning Money from Real Estate Today
If you have been interested in real estate investing but have not been sure where to start, the methods listed above are all effective options to consider. They are tried and true techniques that can help you to generate passive income and build wealth for yourself and your family.
For more information on real estate investment opportunities in the Houston area, contact us today at HNB Realty for a consultation. We offer boutique investment consultancy services for your real estate needs.