Here’s how to use passive real estate investing in your portfolio. Investing in real estate can be a smart decision …
Here’s how to use passive real estate investing in your portfolio.
Investing in real estate can be a smart decision if you want to create new sources of income. âReal estate can be a great way to generate passive income that isn’t dependent on your main job,â says Rick Myers, founder and president of Integrated Financial Services in Grand Rapids, Michigan. As a landlord, you can benefit from the double benefit of added value on your investment and continued rental income. This can help ensure a more comfortable retirement or keep you afloat if an economic downturn results in the loss of your main job. If you want to use passive real estate investing strategies in your portfolio, here are seven rules to follow.
Choose your game plan.
Investing in real estate for passive income is not a one-size-fits-all solution. Before you jump in, first determine which strategy is right for you, says Colton Brausen, business broker for Kris Lindahl Real Estate in Minneapolis. For example, ask yourself if you are more interested in owning an apartment building or multi-family home to generate passive real estate income than a commercial building in which you deal with commercial tenants. Also, think about how you want to be involved when it comes to collecting rent or handling repairs, and whether you’d prefer to outsource those tasks to a property management company. “There is no right answer,” said Brausen. âIt depends on you as an investor and how comfortable you are. “
Passive does not mean no hands.
Generating real estate income passively can help you earn money while you sleep, but it does require working upstream to get that income flowing. âToo many people are passive about the investment decisions themselves, which can lead to very active headaches,â says Adam Kaufman, co-founder and COO of ArborCrowd, an investment firm real estate. While there are many opportunities for creating passive income, rental property investors cannot ignore due diligence. Kaufman says investors should be proactive in researching investment property thoroughly. This means asking questions about the property and the seller before committing to the purchase. And if the answers you get leave you with even more questions, you should probably move on, he says.
Diversification matters as much as location.
When using real estate for passive income, it’s important to consider the level of diversification in your portfolio. âInvesting in a portfolio that is diversified by property type, tenant mix and geography will dramatically increase the likelihood that it will provide a stable and predictable long-term income stream,â said Scott Bennett, real estate advisor at Wells Fargo Private Bank. . Depending on how much you have available to invest in passive real estate, this may mean owning multiple rental properties. Or you can choose to split your investment dollars among different real estate mutual funds, real estate investment trusts, or crowdfunded rental properties. Diversifying real estate income streams is key to balancing risks and rewards.
Pay attention to trends in the real estate market.
Certain segments of the real estate market may perform better than others during times of market volatility or broader economic changes, such as a recession. For example, Jeff Holzmann, CEO of IIRR Management Services, points out that the multi-family sector is potentially more resilient than commercial properties such as hotels or office buildings in difficult economic environments. Although multi-family dwellings are not completely risk-free, they may offer better return opportunities if the demand for rental housing remains high. Learning how different parts of the real estate market react to changing economic conditions can help you find the best opportunities for passive real estate income to continue to be generated consistently when the country is experiencing a downturn.
Choose the right sources of capital.
When buying real estate for passive income, taking out a loan is an obvious choice, but don’t overlook the benefits of leveraging retirement assets to create rental income. âA self-directed IRA gives you the ability to make investment decisions in areas based on your knowledge and expertise,â says Kelli Click, president of Strata Trust. You can use a self-directed individual retirement account to purchase residential rental properties, commercial rentals, or even land to generate passive income. Leveraging IRA assets can help you avoid going into debt and having loan interest payments hurt your returns. You must follow certain IRS rules when taking this route, which is why Click suggests hiring a third-party property manager to avoid overages.
Know your time horizon.
Passive real estate investing is something you could include in your portfolio for years to come, but knowing your time horizon is important when deciding which properties to invest in. âHigh-quality real estate is more illiquid in nature and designed for the long term,â says Peter Brunton, chief investment officer at Strategic Wealth Partners. This means that if you anticipate needing the money you plan to invest in a rental property over the next five to ten years, you will need to think ahead of how easily it will be to unload that asset. . Again, this comes down to doing your due diligence and studying market trends so that you get a feel for the demand for the property down the line.
Professional help can make passive real estate investing easier.
Whether you are investing in real estate for passive income for the first time or have several years of experience owning rental property, consider bringing in the professionals for help. It starts with connecting with an experienced agent who can walk you through the pros and cons of different investment options, explains Brausen. Once you find a rental property for passive income, your team can expand to include a property manager, real estate attorney, and contractors to rehabilitate or maintain the property. Some of your profits will go towards paying for them, but it can be worth it if you are able to generate income from real estate without doing a lot of work yourself.
Seven rules for using real estate investments for passive income:
– Choose your game plan.
– Passive does not mean no hands.
– Diversification matters as much as location.
– Pay attention to trends in the real estate market.
– Choose the right sources of capital.
– Know your time horizon.
– Professional help can facilitate passive real estate investment.
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