For many people, living the dream means sitting at home by the pool, relaxing while your money is working for you. While this isn’t an easy lifestyle to swing, it becomes all the more attainable once you know how to generate passive real estate income. But before you sign up for afternoon Pina Coladas and a subscription to sunscreen, it would probably pay to understand what passive real estate income is precisely, wouldn’t it?
As briefly as possible: Passive real estate income is money an investor makes from real estate investments that they may have no direct involvement in. The investment is generally towards a fund that handles all other aspects of the deal. This means that the investor plays no part in the procuring or operating real estate other than the provision of their principal.
Now that we know the simple definition, it’s time to get into how passive real estate income truly works. Because while you may think that passive means that investors have to do no actual labor, in reality, nothing could be further from the truth. And be sure to stick around to the end as we go over all the pros and cons to consider as well.
How to Build a Passive Real Estate Investment Portfolio
Are you not looking to babysit your investment? Those that want to be completely uninvolved in their real estate portfolio should consider limiting their options to large industry funds. Doing so will allow investors to park their money with professionals who have a fiduciary responsibility to provide the best return for shareholders as possible.
Of course, there is also a more hands-on approach to creating passive real estate income, one that sees investors take a more active role in the management of their properties. Investing in smaller multi-family dwellings can be an excellent way to break into this industry. This is because mom-and-pop outfits and individuals own the majority of one-to-four-unit rentals. Building this sort of portfolio isn’t easy. It will take a lot of time and research to be sure you are making a sound investment.
When looking for property to manage yourself to generate passive real estate income, consider the following:
· Competition: Are the units you are interested in becoming popular with other investors? Don’t be discouraged. This can be a positive sign. However, set your limits when it comes to what you would pay for a property. Base your calculations on the available data, and stick to your ceiling once you’ve set it!
· Location: Is the property in an area you are familiar with? Or is it in another state? You don’t need to live nearby, though that can be nice. But you will need to study local market conditions to ensure you have a good buy.
· Amount of work needed: Any intelligent investor will also want to know what rehab may be necessary for a property before they take the plunge on it. There isn’t anything wrong with having to buy a new roof, as long as you are properly prepared for it. But finding costly mistakes after you’ve bitten the bullet and signed the deal is a sure-fire way to tank your passive income portfolio. This makes completing thorough due diligence key!
Considerations When Generating Passive Real Estate Income
Think passive income is tax-free? Think again. Just because you aren’t actively working to earn your dough doesn’t mean you won’t be paying taxes on it. Investors will still have to pay taxes and figure out how other standard business expenses, such as insurance, will impact their profits.
Of course, people who are not in the industry will struggle to figure out how to estimate the actual commercial property insurance cost. These insurance costs will be based on a variety of factors including the location of the property, claims history, the property type, and how high policy limits are set. Additional factors that can impact insurance prices include the amount of experience in the industry the client has. This is why knowing how much a particular property you’re interested in will pay out on their premiums is important and you should ensure to read the fine print on all insurance documentation.. This is where finding the right partner can be of the utmost importance. A good insurance agent will be able to get you the correct info you need to make an informed decision.
Benefits of Building a Passive Real Estate Investment Portfolio
The benefits of building a passive real estate income portfolio should now be relatively straightforward. Generating passive income isn’t as easy as some would like to make it seem. Still, creating income through real estate is a great way to build on residual income. Investors can use this extra income how they please. Such ancillary can be put towards a retirement fund or college plans.
Start Building Towards Your Dream Passive Income Today!
And there you have it, almost everything you need to know to start generating a passive real estate income. It doesn’t matter if you keep your investment strictly monetary or take a more hands-on role in managing your properties. Remember, the most critical decisions will be the ones you make before a deal is ever signed. It is by doing one’s due diligence today that you can ensure you’re creating meaningful passive income for years into the future.