Passive real estate investment is an attractive proposition for 2022. Passive income can be a great addition to your current income. It can also provide more financial streams when it comes to securing your retirement. Many successful investors create a steady revenue from their rental income and, by making improvements to the property, they simultaneously increase its value.
The term “passive real estate investment” can be slightly deceiving. It indicates that it requires little to no work. However, those who are interested in creating a passive income with real estate, should, in fact, take an active role – as you would with any business. Owning passive income properties does require a certain level of involvement. This is especially true for those who are seeking to maximize their profits.
What is Passive Real Estate Investing?
Passive income is money that you earn without investing your time on a daily basis. Passive real estate investing certainly involves work and time upfront, but it allows you to reap the financial rewards over the years. One of the best ways to create a passive income is through rental properties. Passive investments can also be a great way to diversify your investment portfolio. Those that provide cash flow, in particular, can be extremely lucrative.
To benefit from a passive income, it’s important for any passive investor to properly evaluate the merits and risks associated with the investment opportunity by carrying out thorough due diligence.
There are many things to consider when thinking about a passive real estate investment, but here are our top 4 steps for you to begin creating that passive income.
Always investigate the demographics of the area you’re looking to invest in before you go into any new venture.
Check for the local crime rates and employment figures to find out if this is the best area for you. Location is one of the most important factors in any real estate investment. Look at the infrastructure of the local area:
- Are there any schools and hospitals?
- What are the local transport connections like?
- What new development projects are planned for the area?
- Is this an area where you feel confident you could rent your property securely?
The information you collect from the real estate market will help you choose the best possible market in which to hold a passive income property, as well as identify property listings that promise good cash flow.
Calculate Returns and Profit Splits
Many experienced passive investors will say no to a passive opportunity unless it includes a preferred return for investors. A preferred return ensures that investors will receive the first portion of any profits available before splitting it with property managers, for instance. The most common preferred return is 8% and beyond.
Profit splits are one of the biggest factors that will determine the return on investment (ROI) and must be reviewed before considering a passive real estate investment opportunity.
Both preferred returns and profit splits are based on the level of experience and the responsibilities of the property manager – if you decide to contract one (see our next point). The maximum profit split you should consider is 50/50. It’s unlikely you’ll be able to agree on a better profit split than 80/20 (in favor of the investor). Be sure the passive income opportunity can provide such favorable profit splits.
Consider Hiring a Trusted Property Manager or Becoming a Landlord
Hiring a manager
For a truly passive real estate investment, hiring a trusted property manager allows you to reap the financial rewards without investing so much of your time – once your property is ready to go on the rental market, of course.
If you decide on this step, make sure to evaluate the level of experience of the manager(s) when you approaching property management companies. This is to ensure they have enough accumulated expertise for your business strategy. Usually, the more experience a manager has, the higher the probability of success.
The best recommendation is to meet the manager in person. In this way, you get to know the person you’re entrusting with your passive real estate investment. Another recommendation would be to carry out a background check to be 100% sure that you can trust them.
Becoming a landlord
On the other hand, many new passive investors decide to be the landlord of their rental properties. It’s important not to underestimate the amount of work it takes to be a landlord. If you go down this route, understand that you should approach managing rental properties as if it were a small business.
Being a landlord is certainly an active role in a “passive investment.” However, it does give you full control of
- who you lease the property to,
- collecting rent on time, and
- ensuring the property is maintained and cared for regularly.
Work on Your Business Plan
After the research phase, you will transition into the execution phase. This is when you’ll need to implement a strategy for how you, the landlord, or the manager will vet and manage tenants, finances, paperwork, and the property itself.
An experienced manager may propose a business plan and strategy to you. But be sure to take the time to review their plan and make sure it corresponds to the demography of the local real estate market where your passive income opportunity is based.
Proper management of a rented property can
- help reduce tenant turnover,
- improve property value, and
- prevent avoidable repair costs.
For this reason, it’s crucial to construct a business strategy that can fulfil these goals. If not, you risk wasting your money and your time instead of seeing your money multiply passively from your real estate investment!
The Bottom Line
Overall, to create a passive income through real estate investment, you need to buy a property and rent it to reliable tenants. Research is vital from the very beginning – find out what the local rental prices are so you can gauge the rent you can charge and if it will generate sufficient return to make your investment worthwhile.
Once you secure the property that you believe, after due diligence, will generate a passive rental income, you can then approach a property management company. Or, if you prefer, continue as the property landlord and begin selecting the best tenants for your space and generating your passive income.
At Realty Capital Partners, as a REIG we’re always ready to answer your queries and deliver the market insight and expertise you deserve. Contact us here to learn more about our investment opportunities.