Real estate investing is in elite company when it comes to big pay days. Depending on the investing strategy you pursue, you can make tens of thousands of dollars or more in a single day. However, real estate investing also takes a lot of work. You’re going to work hard for every check you collect, unless you build a business with passive income streams.
Thankfully, passive real estate investing isn’t as difficult as it seems. There are three tried and true strategies you can pursue to reduce your workload. In fact, if you’re diligent, you can use these strategies to remove yourself from the day-to-day operations and turn yourself into a true, hands-off business owner.
So without further ado, let’s explore what passive income is and the top three passive real estate investing strategies you can implement to transform your business.
What is passive real estate investing?
As the name implies, passive income is any money that you make without actively working for it. It’s an important concept in the world of real estate investing, because you probably got into real estate for a level of freedom that a 9-5 job wouldn’t provide.
However, real estate investing isn’t a low-effort process. It involves a lot of calculation, evaluation, and risk. It also involves spending a lot of time looking for deals and talking to property owners. Therefore, if you want real estate to give you freedom, you need to find a way to create cash flow with as little work as possible. Here are three ways to do that.
Renting and other long-term investment strategies
By far the most popular passive real estate investment strategy is buy and hold. This strategy usually takes the form of building a rental property portfolio, where an investor purchases a single-family home, townhouse, condo, or multiplex and rents it as a vacation home or primary residence.
However, residential real estate isn’t the only way to create a passive income stream. In many cases, commercial real estate investments offer even larger profits for a similar amount of work. For instance, investor Hannah Ingram bought a self-serve car wash that pays her over $5,000 a month for a few hours of work per week. Many other investors rent commercial real estate to local businesses and collect a check every month without ever interacting with the business.
The best part is that you don’t always need a large sum of cash on hand to get started. There are several creative financing options such as seller financing, hard money loans, and lease options that you can leverage to get your first property. You can also make your portfolio a true passive investment by hiring a property management company to handle all the operations of your property.
Just be aware that both of these options will cut into your profits. A loan will come with fees and interest rates. Likewise, a property manager will collect a portion of the incoming rent every month. They’re both great ways to start passively investing in real estate, you should just do your due diligence before making any decisions so you don’t end up owing more than you make.
Scaling a business
If you’re not interested in slowly building wealth by collecting small but regular payments, building an REI business may be more your speed. Unlike piecing together a rental portfolio, this strategy is focused on mastering the art of acquisitions and flipping so that you can buy properties at low prices and sell them at a premium.
There are two paths you can take to build an REI business: wholesaling and flipping. Wholesaling is the most beginner friendly way to invest in real estate because it doesn’t involve buying properties at all. Instead, you’ll get a deal under contract at below market value and then sell that contract (AKA the right to buy the property) to another investor.
Flipping is similar, except you’re buying distressed properties. Then you rehab or renovate them to raise their value and sell them to prospective homebuyers for a profit.
As you can imagine, both of these strategies involve a lot of work because not just any homeowner will sell property for less than it’s worth. You need to be able to find these properties, negotiate a profitable sales price, and then sell it to someone else for a profit.
However, once you master the process, you can make it passive by hiring and training employees to tackle the individual steps. This is known as scaling, and it allows you to build a business that runs mostly on its own as long as you put the right processes in place.
So what if you already have a decent amount of money and you want to grow it without the initial effort that the two previous strategies require? You can play the role of a bank and loan money to other investors to help them close real estate deals.
One option is to issue short-term hard money loans to help facilitate fix-and-flip deals. When the borrower repays the loan, you’ll make money on the interest and fees. Additionally, the property will be held as collateral, so if they default it will become yours, even if they’ve already renovated it. Either way, you’ll make money from the loan as long as you vet the property first.
You can also serve as a transactional lender for wholesalers who want to double close. This is another kind of hard money loan, just with 30- or 90-day terms. Once again, you’ll profit off the interest and fees and if the wholesaler can’t sell the deal and pay you back, you’ll gain a real estate asset, no lead generation required.
Finally, you can pursue seller financing and lease options. Both of these strategies are alternatives to selling outright. Seller financing is the process of funding a transaction by selling a property without receiving the full payment. Instead, you’ll collect monthly payments as if you were a mortgage lender and, just like a lender, you’ll repossess the house if the buyer defaults at any point.
Lease options are a cross between seller financing and traditional renting. A buyer will rent the property from you with an option to purchase it for a specific price at a later date. They’ll pay you every month, which will lower the final purchase price, until they can buy the house outright. However, if they default or decide to move, you’ll repossess the property and they’ll forfeit any money they paid up to that point.
All of these private lending options can be very lucrative if you pursue them strategically. However, there is risk involved. While each of them include property as collateral, it’ll be up to you to vet deals and make sure you can profit from them if the borrower defaults.
These strategies also don’t protect you against market changes that can impact the value of your property. For instance, if you sign a seller financing agreement and the property skyrockets, there’s no way to capitalize on this. On the other hand, if property values drop, you’ll be protected. In short, it’s wise to do your due diligence before you engage in creative financing, because external market factors are always at play.
There’s no way to overstate the benefits of passive real estate investing. If you’re looking for a way to make more money and free up your time, one of the strategies we’ve discussed in this guide is almost certainly the way to go.
Unfortunately, there’s no such thing as day one passive income. It’s essential to understand that building a passive income stream takes time and effort. If you want to build a portfolio, you’ll have to invest in finding and landing great deals. If you want to build an REI business, you’ll have to learn the skills before you make your first hire. Even if you already have a lot of money, you’ll have to learn how to vet loan applicants and their deals.
However, the benefits of passive real estate investing are worth every bit of work and risk you put into building a passive income stream. Once you start making thousands of dollars every month with very little effort, you’ll be thankful for the hard work you did in the beginning.