7 Rules for Using Real Estate Investments for Passive Income
Investing in real estate can be a smart move if you're interested in creating new avenues of incomes for the new year. At Realty Exchange we firmly believe that investing in property is the best and safest way to grow your investment portfolio. According to the President of Integrated Financial Services Rock Meyers, "Real estate can be a great way to generate passive income that's not dependent on your principal employment". As a landlord, you can reap the dual benefits of appreciation from your investment and ongoing rental income, which in turn, can help to ensure a more comfortable retirement or help to keep you afloat if an economic downturn results in the loss of your primary job. If you're interested in using passive real estate investing strategies in your portfolio, our Realty Exchange agents have come up with seven rules for you to follow.
Pick your game plan.
Investing in real estate for passive income isn't one-size-fits-all. Before wading in, first figure out what strategy fits best. For example, consider whether you're more interested in owning: an apartment building or multifamily home in order to generate real estate passive income, versus a commercial building in which you're dealing with business tenants. At Realty Exchange we have agents that special in both areas, and I can guarantee that we will have someone that would be a good fit for you.
Also think about how involved you want to be when it comes to things like collecting rent or handling repairs, and whether you'd prefer to hand off those duties to a property management company. There are no right answers, but one of our agents will be able to see with you to figure out what will work best to fit your life style.
Passive doesn't mean hands off.
Generating real estate income passively can help you make money in your sleep, but it requires putting in some work up front to get that income flowing. While there are plenty of opportunities to create passive income, rental property investors can't skip out on due diligence. Robert Kahn says investors should be proactive in thoroughly researching investment properties. That means asking our agents any questions you have about the property and communicating with the seller before committing to the purchase. If the answers you get leave you with even more questions, our agents will move on to finding you something that makes you feel more comfortable.
Diversification matters as much as location.
When using real estate for passive income, it's important to consider the level of diversification in your portfolio. "Investing in a portfolio that's diversified by property type, tenant mix and geography will greatly increase the probability that it will provide a stable and predictable stream of income over the long term," says Bob Kahn, the Broker of Realty Exchange. Depending on how much you have available to invest in passive real estate, that may mean owning multiple rental properties. Or you could choose to spread your investment dollars across different real estate mutual funds, real estate investment trusts or crowdfunded rental properties. Diversifying real estate income streams is key to balancing risk and reward.
Pay attention to real estate market trends.
Certain segments of the real estate market may perform better than others during periods of market volatility or broader economic shifts, such as a recession. For instance, the multifamily sector as potentially being more resilient than commercial properties such as hotels or office buildings during challenging economic environments. While multifamily housing isn't completely risk-free, it may offer better opportunities for returns if demand for residential rental units remains as high as they are right now. Learning how various parts of the real estate market react to changing economic conditions can help you find the best opportunities to keep passive real estate income coming in consistently when the country is experiencing a downturn. Our agents remain diligent about keeping up with market trends and are more than happy to share their vast amounts of knowledge with their clients.
Choose the right capital sources.
When buying real estate for passive income, taking out a loan is an obvious choice – but don't overlook the benefits of leveraging retirement assets to create rental income. "A self-directed IRA gives you the opportunity to make investment decisions in areas based on your knowledge and expertise," says Kelli Click, president of Strata Trust. You can use a self-directed individual retirement account to purchase residential rental properties, commercial rentals or even land to generate passive income. Leveraging IRA assets can help you avoid taking on debt and having interest payments on a loan detract from your returns. There are certain IRS rules you need to follow when taking this route, so we suggest bringing a third-party property manager on board to avoid overstepping or consulting a lawyer.
Know your time horizon.
Passive real estate investing is something you could include in your portfolio for years to come, but it's important to know your time horizon when deciding which properties to invest in. "High-quality real estate is more illiquid in nature and designed for the long term," says Peter Brunton, chief investment officer at Strategic Wealth Partners. That means if you anticipate needing the cash you're planning to invest in a rental property in the next five to 10 years, you'll need to think ahead about how easy it will be to eventually offload that asset. Again, that goes back to consulting with our agents to help you in performing due diligence and studying market trends so you have an idea of what demand for the property will be like down the line.
Professional help can make passive real estate investing easier.
Whether you're investing in real estate for passive income for the first time or you have several years of experience owning rental properties, our Realty Exchange agents are here to help. We will connect you with an experienced agent who can walk you through the pros and cons of various investment options. Once you find a rental property for passive income, your team may expand to include a property manager, real estate attorney and contractors to get the property in shape or keep it maintained. Some of your profits will go toward paying them, but it can be well worth it if you're able to generate real estate income without doing any heavy lifting yourself. It is important to remember that once your transaction is complete, our agents are always here to help.