Earning money while you sleep – that’s the dream, right? It’s all about passive income, the secret sauce of personal finance and investing. When you’ve got enough passive income, you don’t need to work anymore because your investments cover your bills. This is what we call financial independence, but most folks only get there when they retire.
Now, when you think of passive income, you probably think of bonds and dividends from stocks. As people get closer to retirement, financial advisors usually suggest they focus more on income-oriented investments like these. But there’s a hidden gem that too many investors overlook – real estate.
Real estate isn’t just a source of income, it’s also less volatile than stocks. So, you can create multiple streams of passive income from real estate and reduce risk in your portfolio without sacrificing returns. Here are 10 ways you can start investing in real estate to diversify your passive income.
-
REITs: Real Estate Investment Trusts (REITs) are a popular choice for diversifying into real estate. You can buy REITs through your regular brokerage account, IRA, 401(k), or other retirement account. They’re publicly traded, regulated by the Securities and Exchange Commission (SEC), and provide a ton of information to help you make informed investing decisions. They’re also highly liquid, meaning you can buy and sell instantly. Plus, they make diversification easy, as you can spread your investments among hundreds or even thousands of properties and real estate projects worldwide.
-
Real Estate Crowdfunding: Crowdfunding is a newer way to indirectly invest in real estate. While many crowdfunding websites still only accept money from accredited investors, these services have increasingly opened their doors to middle-class investors. This means you can get started with less than $1,000 and invest like your wealthier counterparts.
-
Rental Properties: Owning rental properties comes with its own unique pros and cons. When you buy a rental property, you can predict the cash flow, or return on investment (ROI), with great accuracy. You also control the investment. You choose the property, the tenants, and the management practices.
-
House Hacking: The idea behind house hacking is simple: You bring in other people to pay your mortgage for you. You can even use Airbnb to house hack by periodically using your home as a vacation rental for guests.
-
Airbnb/Vacation Rentals: Short-term rental properties require much more work, from cleaning units between guests to marketing to coordinating entry and ongoing communication with guests. In essence, you’re running a hospitality business.
-
Wholesaling: Wholesaling properties involves finding a great deal, putting it under contract, and then selling that contract to another investor with a profit margin. You never take title to the property; you merely connect an eager seller with a willing real estate investor.
-
Flipping Houses: Flipping properties requires a ton of work on your part, but in return, you can expect extraordinarily high cash-on-cash returns. And as with rental returns, experienced investors can predict these returns accurately.
-
Syndications and Silent Partnerships: In real estate syndications and silent partnerships, you put up money but don’t actually do any of the work of finding deals or managing properties. Instead, the principal partner or “sponsor” does the work and gets an extra cut of the profits for their trouble.
-
Private Notes: Instead of going in as a silent partner with a real estate-minded friend or family member, you could just lend them money. It offers you even fewer protections, since your name isn’t on the deed with them. But it also means no liability and no obligations whatsoever.
-
Opportunity Zone Funds: At the obscure end of the real estate investing spectrum lie Opportunity Zone Funds. These funds were introduced by the Tax Cuts and Jobs Act of 2017, which specified roughly 8,700 Qualified Opportunity Zones to target for economic stimulation.
So, there you have it. There are plenty of ways to create income streams with real estate. Some are completely passive, such as REITs and crowdfunding investments. Others require minor labor on your part, such as rental properties. And a few, like flipping houses, are labor-intensive but lucrative. If you want to reach financial independence and retire early, you need multiple sources of income. And real estate offers a range of options, regardless of your current wealth, to create passive income streams and gradually replace the income from your 9-to-5 job.
