How to Begin Earning Passive Income From Real Estate—No Matter Your Level of Experience or Wealth
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If you’ve got some money lying around and you’re thinking about investing in real estate, this is for you—especially if you have a fairly decent amount of money.
I’m actually an active real estate investor myself, with nearly 1,000 rental units. In fact, I just closed on a new property very recently. So, I know a thing or two about real estate because I’ve seen a thing or two about real estate.'
Now, when I say you’ve got some money, it’s kind of subjective, right? Maybe you’ve got $30,000 lying around. Or maybe it’s $300,000 you’ve got lying around, maybe it’s $3 million.
The advice I’m going to give really applies across the board. But obviously, the more money you have, the more you’ll be able to buy. Regardless, the concepts are the same.
First of all, I’m going to start by stressing a really important point that most people get wrong or get confused about when they get into real estate investing. Then after that, I’m going to lay out three different strategies that you could choose from to invest passively. And finally, stick around to the end, because I want to give you a strong word of warning that could save you tens of thousands—or even hundreds of thousands—of dollars down the road.
Why Should You Consider Investing Passively in Real Estate?
I want to stress this important point that most people miss when they get started with real estate: Your highest and best use should dictate how you invest.
In other words, you shouldn’t pick your strategy because some guy on TV or in a book or on YouTube said something is cool or it works. I mean, it all works, all of real estate investing. It works if you work it right.
But it doesn’t work necessarily for everyone.
If you’ve got money right now—and especially if you make a lot of money right now—your highest and best use of time might not be spending it actively working in real estate, trying to become the next great real estate investor.
I’m a big fan of a strategy that I call “earn, learn, and turn,” where basically you earn money doing whatever it is you currently do that makes you a great income. And then you learn about real estate so that you can make good decisions. But then you turn that money over into a passive real estate investment.
You do that again and again and again until you’ve got so much passive income lying around that you don’t need any more money from your active income source. Then, you can just retire in bliss.
What Is Passive Income?
Now, when I say passive income, let’s talk about that. Real estate isn’t like stocks. You don’t really just go on a website and press a couple of buttons and boom, you’re investing. But there is something that I call the scale of passivity.
In other words, some types of real estate are way more passive than others. And some are going to require a lot of work, some very little work. And it really depends on you and what fits your highest and best use.
If you’re a successful athlete or doctor or lawyer or whatever, you’re making a killing, your path is probably going to be a little different than the 23-year-old working minimum wage at Blockbuster. That’s a terrible example—but you get the idea.
Why am I telling you this? Why do we start this way?
Because I want you to think critically about the three strategies I’m about to lay out. This is the “learn” part of that “earn, learn, turn” strategy.
So, now let’s get to the strategies.
How to Earn Passive Income From Real Estate
1. DIY Rental Investing
DIY rental property investing means you are out there trying to identify the top markets, the best neighborhoods, you’ve got to find real estate deals. You’ve got to talk with real estate agents. You’re running the numbers to make sure the math works. You’re finding and managing property managers. You’re dealing with rehabs (maybe). You’re just doing it all.
And there’s nothing wrong with the DIY method. It’s just the least passive method of the techniques I’m going to cover today.
Now, it can be pretty unpassive at the beginning, of course, but the longer you own those DIY rentals, it gets easier and easier over time. In fact, I own a lot of those. When I got started, I was totally DIY. Today, I do hardly anything with them.
But there’s a lot of upside to this. Those properties tend to go up in value. Then, the loan that you used to buy the property (if you used one) drops every month, and the rent usually goes up, as well. And because you own that property, you get all the benefits—and all the risks—of owning that deal. It’s just you.
If you want to choose that route, here are three action steps you can take today:
- Pick a market. Do some market research, find out what areas are growing, where are people moving to, where are jobs going, where are other real estate investors making a killing. You can do a lot of that digging online on a ton of sites. You can also use BiggerPockets. We just came out with a thing called BPInsights, which is just for our Pro members. It’s pretty cool—it digs into the data for you. There are a lot of articles there based on that data.
- Find a real estate agent. If you’re going to DIY it, find a great agent, somebody who can help you. Not all agents are made the same. So, you’ve got to find one who understands investing.
- Analyze a bunch of deals. Do this until you feel comfortable with the math. You’re not going to feel good up front. You’re not good at basketball the first time you hold a basketball. You have to practice. If you want some help with that math, we do have calculators on BiggerPockets.
Alright, so that was the DIY method, that was number one. Now let’s move to number two, a little bit more passive.
2. Turnkey Investing
There are a number of turnkey companies out there in the various cash-flow-friendly markets that’ll do all the work of finding a good deal.
They’ll renovate the property. They’ll rent it out to some tenants. They’ll manage the property. All you’ve got to do is turn the key, get it?
And here’s funny side note: I don’t even understand that phrase. You’re not even turning the key. You’re not the landlord. You own the property, but you’re not even there. So why are we turning the key? I don’t understand that name. I never really thought about that too deeply before.
Now, turnkey sounds awesome, doesn’t it? I mean, you get all that upside, no downside, right? A lot of people do choose the turnkey route, and I have nothing against that. But I’m going to lay out a couple of concerns here.
- Turnkey companies are notorious for doing bad math.
They oftentimes underestimate just how much it really costs to operate a rental property long-term. Like, repairs? What are those? Vacancy? No, our tenants will stay forever. You’ll never have problems.
They wear these rose-colored glasses because they’re incentivized to do so. They want you to buy their property. So, rely on your own math.
- The returns aren’t always that great.
Turnkey companies might be finding great deals, but they aren’t necessarily passing that discount on to you. That’s their profit. They’ve got to pay their bills, put food on the table. At the end of the day, you might just be paying full retail price for a property.
You could probably get a much better deal and get a higher return going the DIY route. But of course, that comes with a lot less passivity. So your actual return on investment every year might not be much better than you’re getting investing in the stock market or some other investment on a typical turnkey.
Now, of course, cash flow isn’t all there is in real estate, right? We talked about that a minute ago. There’s cash flow, which is great, the money coming in every month, but the property value’s probably going up over time if you bought in a good area, too. And that loan’s getting paid down, there are tax benefits, so on.
The bottom line is to run your numbers, do it yourself, make sure the returns are something you can accept, and then do it.
3. Invest With Someone Else
When you’ve got a good chunk of money, you can always invest with somebody else.
There are a lot of ways to do this:
- Crowdfunding, which is where you use online companies, kind of like stocks. They put your money together and they buy some big things.
- REITs, real estate investment trusts, like publicly traded companies. I’m not a big guy in that.
- Syndications or other people’s funds—my personal favorite. Full disclosure, I do own and operate my own fund. It’s called Open Door Capital. We raise money from people to buy big deals. So, take this all with a grain of salt and know that I’m a little biased here.
Before I even had my own fund, I would invest in other people’s funds because the returns looked better than what I could get from crowdfunding or through REITs. But it was still fully passive. I didn’t have to DIY it.
Now, here’s the thing with investing in other people’s deals, though: These deals are super big and complicated. And honestly, you’re likely not going to fully understand everything that these funds are doing. If you tried to learn every single thing they’re doing, it’s no longer passive anymore. You might as well just do your own.
So, it means that you’re not even really investing in the deal. You’re really investing in the team. It’s largely based on trust. Do you trust the team you’re investing with to guide your money and deliver a good return?
If you invest with a terrible company or in a real estate asset class that’s going to end up losing money or in a terrible area, well, that sucks. Hopefully, you invest in a smart team that’s investing in a smart asset class in good areas, and they can navigate the complex and changing economy that we have toward mutual wealth.
What I like about investing in these funds and syndications is that everyone wins together. It’s mutual wealth. I won’t get my big payday in my company until investors get their big payday. So, syndicators have a really good reason to perform.
Those are three ways that you can invest in real estate when you have some money to invest. Real estate is not always easy, but it’s also not super complicated. What it requires is taking action over and over.
The warning I have is don’t let this information sit here. Don’t just think, “Oh, that’s a good idea.” Do something about it today, because you don’t want to look back 10 years from now going, “I wish I would have done it.”
My warning is don’t let the complexity—or the imaginary complexity—of real estate stop you from moving forward. Instead, wake up every single day and ask yourself, “What is my most important next step toward achieving wealth and passive income through real estate?”
It might be reading a book, it might be listening to a podcast, or watching more YouTube videos. But if every single day you take a little bit of action, you’re going to get there.
If not, you’re going to be wishing 10, 20, 30 years from now that you would have gotten started decades earlier.
So, my warning is this. Don’t just make this another article or YouTube video. Make this a pivot point in your life that’s going to change your destiny and your family’s financial destiny forever.
This article was originally published on biggerpockets.com