Investing

How to Build Passive Income through Real Estate

The economic downturn highlights the importance of creating passive income.
Here’s why you should look at real estate.

How to Build Passive Income through Real Estate August 12, 2020

Most people make a living based on the work they produce or the services they render. When they stop working, they stop receiving this income. Passive income is earnings through an asset where the owner is not actively involved. This is where your money works for you and that’s the only way to achieve financial freedom.

Real estate has proven to be a great investment opportunity for investors. There is a common misconception that passive income real estate requires no effort. However, depending on the type of rental strategy you implement, asset owners need to lay the groundwork to start generating income. Once you have the rental up and running, your space will provide residual income without having to participate in regular work.

Consider your investing options

Renting out your home to long term tenants

Many owners have accumulated substantial wealth through traditional rental strategy. Investors purchase homes and rent them out. As a landlord, you earn recurring income every month. 

Renting out your home as a short term rental

If your property is located in a tourist location and can be positioned well as an alternative to a hotel, short term rentals are the way to go. Investing in short term rentals can generate much higher rental income out of the same space on a long term rental basis. While you’ll spend more time managing and maintaining your property, you can always hire a property manager to do it for you.

Commercial real estate

Commercial real estate (CRE) refers to non-residential property used for business purposes such as office buildings, retail spaces, warehouses. CRE investors make money through property appreciation when they sell but most returns come from rental income. Commercial real estate offers higher returns and capital appreciation than a residential property.

How to invest in real estate

Direct Ownership

Traditionally, direct ownership has been the main way investors acquire real estate. This involves sourcing and evaluating the opportunity, keeping in mind the type of rental you are investing in. While this method is best suited for individuals who can dedicate a large amount of capital, it also offers a high level of asset control and low fees to owners. 

Crowdfunding

Real estate crowdfunding is a way of investing where a pool of individuals contribute a small amount of capital towards a specific real estate deal. As an investor, you can either invest your funds through equity or debt. The major highlight of crowdfunding is that it allows small investors to participate in high-income real estate projects. 

Real Estate Investment Trust (REIT)

A real estate investment trust is a company that owns and operates income-generating assets. REITs make money by leasing or selling the properties they own. Buying REITs is like a mutual fund for real estate. A huge sum of money is invested from thousands of investors and professional managers decide how to invest it. The only REIT available in India is Embassy Group

Now, crowdfunding and REITs may look similar but they are very different. With crowdfunding, you are collectively investing in a particular property of your choosing while with REITs you invest in a company (and its complete portfolio) that in turn invests your money into properties. 

For many, the ultimate goal is to create sustainable income streams that would lead to financial independence from their job. Real estate used to be available to wealthy investors but models like crowdfunding are opening up investment opportunities to small investors.