Passive income is any income you earn that requires little or no time investment from you
Real Estate
Real estate is one of the classic forms of passive income: you own an asset — such as a home or commercial building — that someone else wants to use, and you rent it out to them at a fair price.
And though there are many ways to go about investing in real estate, I get into the most common and easily accessible ways below.
Do any of these strategies appeal to you? Let me know in the comments!
1. House Hacking
In my twenties, I was fortunate enough to have a decent job as a CPA as well as a good credit score, which allowed me to purchase a four-unit property in the Los Angeles area where I live.
Naturally, I “house hacked” this property, living in one unit and renting out the other three.
I also rented out the single bedroom in my own unit for extra cash flow, while I slept on a mattress in the living room.
Here are the numbers on my house hack deal:
- Purchase Price: $435,000
- Monthly Rents (Including Bedroom in My Unit): $3,155
- Monthly Payment: $3,000
Now, that $155 of monthly “cash flow” would get eaten up by maintenance and repairs, so at the end of the day, I was breaking even.
But I was living for free while my tenants were paying down my mortgage, while most of my peers were shelling out well over $1,500 a month for Los Angeles rent.
And now that I’ve moved out of this property and raised the rents, I now gross over $4,000 monthly while my monthly mortgage payment has remained the same.
House hacking can be a great strategy to earn passive income, so if you have any questions about my house hacking journey, be sure to ask me in the comments!
2. Private Lending
Flipping houses is definitely not passive, but providing funding to house flippers is.
And if you’re looking in a truly passive way to invest in real estate, this is it.
Although I live in California, I’ve loaned money to flippers in both North Carolina and Tennessee.
You want to make sure you dot your i’s and cross your t’s when it comes to the legal agreement(s) between you and the flipper, of course.
This would typically mean having a lawyer draft the following documents for you:
- Promissory Note
- Deed of Trust
Of course, I lent directly to flippers, but sites like Yieldstreet allow you to participate in a loan portfolio secured by multiple properties, thus spreading out your risk.
3. Turnkey Rentals
Buying a single-family home and renting it out is perhaps the classic form of investing in real estate.
The only problem is that there are certain parts of the country where the property values are so high that would-be local investors are either not able to invest because they lack the funds for a down payment or they are not willing to invest because the cash flow would be so poor.
This is where turnkey rental companies come in. Turnkey companies buy in cash properties at a deep discount, rehab them, and then sell these rent-ready properties to investors, typically from high-cost-of-living areas.
Be warned, though — some turnkey companies are on the shady side.
Think about it: An investor from California, Hawaii, or New York — where $500,000 will get you a very “average” home in many parts of the state — might think that being able to buy a rental property for $50,000 is a bargain in any market.
But the reality is that the property is in far worse condition and in a far seedier area than the turnkey company claims and in reality probably isn’t worth more than $30,000.
And to make matters worse, because the property is in a worse area than the turnkey company let on, vacancy rates are high, and the investor can’t even make the property cash flow (despite the pro forma showing a 10% “cash-on-cash” return).
Then, when they try to get out of the deal by selling the property, they find that the have to sell at a huge loss because they overpaid in the first place.
Of course, I’m not saying to avoid turnkey rentals — I’m just saying to do your due diligence and make sure that the turnkey company you work with has a long track record working with happy investors.