There’s really nothing better than making money while you sleep.Passive income investments allow you to collect financial returns with little or no effort on your behalf — perfect for real estate investors who have day jobs or other time commitments.
Rental income is an ideal form of passive income. However, if you already own at least one rental home — or something more complex like an apartment building — you’re well aware that such investments require a certain amount of active involvement, like routine maintenance, rent collection, and tenant management.
If you want to benefit from real estate’s healthy returns without having to do any work at all, there are a number of channels that allow you to reap the rewards without getting off the couch.
Here are several passive real estate options worth looking into.
Real estate crowdfunding is exactly what it sounds like: groups of investors joining forces to purchase commercial properties, apartment complexes, and single family home portfolios.
Mostly managed and executed through online platforms, real estate crowdfunding allows you to own a piece of a profitable building or cluster of homes with just a few taps on the screen.
Example: Online crowdfunding platforms like Fundrise, PeerStreet, and RealtyMogul offer casual investors the chance to join multi-million dollar real estate ventures. These companies tend to be very selective with property purchases, thoroughly vetting them and providing revealing data and reports.
Users simply create online accounts, upload their funds, choose an investment, and watch their money grow.
- You can start small: Many real estate crowdfunding sites require low minimum investments.
- It’s very hands-off: No lightbulbs to change or lawns to mow.
- Easily diversified: Crowdfunding minimizes risk by offering several different asset classes, like multi-family, land, and commercial real estate.
- Location flexibility: This service also allows you to increase cash flow by playing in hotter markets.
- Smaller returns: Your income won’t be as high as if you owned a rental property outright.
- Not easy to opt-out: Many real estate crowdfunders require locking in a time commitment for your investment, making it difficult to cash out at a moment’s notice.
- Less control: The fund managers make the calls when it comes to buying properties, locations, etc.
REITs (Real Estate Investment Trusts) are like mutual funds that invest exclusively in real estate. Like crowdfunding, REITs allow passive investors stakes in large real estate deals without the high barrier to entry. They differ from crowdfunding, however, in that their portfolios include a broad range of properties at once, rather than individual properties to choose from.
There are three types of REITs:
- Exchange-traded: These are registered with the SEC and listed on exchanges like the NYSE.
- Non-traded: Though registered with the SEC, these REITs do not trade publicly.
- Private: These are neither registered with the SEC nor traded on exchanges.
Example: REITs can be general or specific. Some invest exclusively in cell towers and data centers. A typical REIT might use its resources to buy large apartment complexes in major cities, simultaneously building value for shareholders while also managing the individual properties and tenants. Investors can buy shares in REITs through standard exchanges as easily as buying shares in stocks and funds.
- Less risk: A well-managed REIT mitigates risk by including large conglomerates of properties rather than individual properties.
- Multiple income streams: REITs deliver annual dividend income in addition to long-term appreciation.
- Portfolio diversification: Some real estate investors use REITs as a third investment option after stocks and mutual funds.
- Market volatility: REITs are tied to exchanges. If the NYSE has a bad day, it can take REITs down with it.
- Lower returns: REITs are required to distribute 90% of their profits annually, which is good in the short-term but leaves less for the trust to reinvest.
- Less control: Similar to crowdfunding, you don’t have a tangible asset or the ability to control the investments as you do with direct ownership.
When homeowners fail to pay taxes, county governments place a lien on their homes. In order to recoup the lost tax income, the county often auctions off the tax liens to investors who collect interest from them.
Example: If you win a tax lien auction, you earn interest until the homeowner pays off the outstanding taxes. When the homeowner sends the county a tax payment, you receive your share and accrued interest.
- High interest: Tax liens can yield upwards of 12% or more in interest, meaning that ownership of a few liens could result in some decent passive income.
- Acquiring ownership: Though rare, foreclosure can proceed when taxes are unpaid for a specified duration. In such a case, the tax lien holder could acquire the deed at a deep discount.
- Ease of use: Tax lien auctions are sometimes conducted online, making them relatively easy to participate in.
- Due diligence: Tax liens involve a little research — e.g., title history, other liens on the home — and some states require tax lien holders to notify the property owners regularly that they hold the lien.
- Burden of foreclosure: Though buying a home for pennies on the dollar is appealing, tax lien foreclosures are rare and cumbersome.
- Not passive enough: For some investors, holding the lien on someone else’s home could seem way too involved, not to mention a possible can of worms.
Remote real estate ownership is an ideal blend of direct property ownership with true passivity. This is when a property investor uses an online platform like Roofstock to find, research and purchase out of state rental properties with tenants and property management already in place.
Some property owners rarely — or never — actually visit the investment property they own. They simply let the property managers do their jobs and collect rent month after month.
Example: A San Francisco resident wants to build a portfolio of single family homes but lacks the capital to do that locally. Remote real estate platforms allow the out of state investor the opportunity to own turnkey rental properties in more affordable markets with more room for appreciation.
Almost like shopping on Amazon, the investor can scroll through a selection of properties, add them to an online cart, submit an offer, and close.
- Higher returns: Unlike crowdfunding and REITs, remote real estate investing offers you full ownership in a property. This means all the rent (minus expenses) and appreciation go into your pocket.
- Accessible data: Roofstock, for example, provides a vault of key stats, data, and information on each home to help investors make a smart purchase.
- Location Diversification: Remote real estate investing makes it easier to diversify ownership across multiple areas to reduce the risk of a downturn in a particular market.
- Distance from property: Some property owners might feel skittish about buying a home sight unseen.
- Tenant reliability: A careful application process can weed out difficult tenants, but there’s always the chance one might be late on rent, difficult to communicate with, or move out suddenly.
- Time to Sell: No property owner can predict how long a property stays on the market when it comes time to sell. Delays can be costly. However, most remote real estate services make it easy to sell your property back through their systems to buyers who want tenants in place, meaning that you can keep earning income while you wait for the sale.
BONUS: If you're interested in remote ownership, check out this webinar we recently recorded that'll walk you through how to build an effective investment plan:
Have the cash for a fix and flip project but not the time for all the labor involved? Hard money lending is another passive real estate avenue. In these situations, you can carry the note — or cover the down payment — for a renovation / quick sale project completely managed by someone else.
Example: Sometimes, professional fix and flippers juggle several projects at once. If they find a great opportunity without the ability to borrow more, they can turn to hard money lenders to help them cover the sale. These loans are often shorter term and higher interest than conventional loans.
- 100% passive investment: You’re vested in a labor-intensive real estate project without lifting a finger.
- More money: Cash-strapped remodelers will borrow at a higher interest rate, meaning bigger returns for the investor.
- Quicker turnaround: Considering that these projects often wrap up within a year, you could get your money back faster.
- Less control: Unless you have strict contractual terms, someone else will be in control of the renovations, fixtures, and design.
- Higher risk: Even the best-laid fix and flips can go awry. If the project loses money or the borrower defaults, it’s a lost cause.
- Rules and regulations: Hard money real estate lending rules vary from state to state. You’ll need to check those out ahead of time.
BONUS: Fractional Ownership
Companies like Roofstock are now offering investors the opportunity to buy shares of fully managed investment properties, starting at $5,000. Check out our new offering for accredited investors here.
Clearly, real estate offers casual and serious investors plenty of passive income options. Your cash on hand, appetite for risk, and need for hands-on involvement will dictate which direction you take.
Curious about how to earn passive income through remote real estate investing? Roofstock connects investors across the country with turnkey rentals in thriving out of state markets. Check out this simple diagram on how our process works.