Passive income real estate investing was once reserved for the elite ruling class. But advances in property technology (proptech), and changes in legislation to enable crowdfunding, have made real estate passive income accessible to investors at every level.
Before we explain how to create passive income from real estate, let’s define passive income. Passive income is money you make even when you’re not actively working. Rather than trading your time for wages, as with traditional income, passive income comes to you regardless of what you're doing. You could earn passive income while you’re sleeping or on vacation. Or if you've maxed out your work schedule, you can funnel your income into passive income investments to continue growing your net worth without working additional hours. You earn passive income without active involvement.
And real estate is an ideal investment for earning passive income. With a single upfront investment, you get the potential for competitive returns on your investment when you flip it. Or you could even create ongoing monthly income from collecting rents while benefiting from the long-term appreciation of the property.
In this article, we’ll show you:
1. Ways to earn passive income through real estate
2. Several passive real estate investment opportunities through syndication
3. How to get started
Here’s what you need to know about how to create passive income from real estate.
Earning passive income through real estate
Here are seven ways to earn passive income through real estate.
1. Long-term rentals
Long-term rentals are the classic method for generating passive income in real estate. You find a tenant for your property, the tenant moves in, and they start paying rent. Assuming you made a smart investment property purchase, the rent should cover any mortgage payment and all your ongoing expenses. And there should be enough left over for you to pocket some passive income every month.
The big benefit of long-term rentals is the potential to grow your income in multiple ways. You get:
- Monthly cash flow from incoming rent.
- Long-term appreciation as the value grows.
- Renters to pay down your mortgage debt.
- Substantial tax breaks.
But there are a few downsides to long-term rentals as well:
- Your investment is tied up for years or even decades.
- You need to be prepared for large, often unexpected maintenance expenses.
- Unless you hire a property manager, there will be some active work required for this mostly-passive income stream (like finding tenants or handling maintenance requests).
Long-term rentals can be applied to any property type, including single-family homes, multi-family buildings, office space, retail shops, industrial property, etc.
2. Short-term rentals
Short-term rentals work the same way as long-term rentals, but with a different duration in tenancy. Short-term rental tenants are most often vacationers, looking to rent a place for anywhere from a few days to a month.
You enjoy the benefits of higher per-night rates than long-term rentals with all the other benefits of long-term rentals.
But you have to deal with negatives like higher vacancy and greater expense turning the unit between renters.
With the high tenant turnover, short-term rentals require far more active involvement than long-term rentals. The only way to make this real estate investment passive is to hire a property management company with the capacity to handle short-term rental tenants. So don’t forget to include property management fees in your ROI calculations.
3. Note Investing
Private notes are an alternate form of real estate funding. Rather than getting a conventional bank loan, buyers can get a private note. And these notes are regularly traded on the secondary market.
You can invest in notes and collect the monthly payments from the property owners. If the owners were to default on the note, you would have the option to foreclose on the property and add the asset to your portfolio. The benefits to note investing:
- As long as the owner makes payments on schedule, the investment is entirely passive.
- If the owner defaults, you have the option to foreclose and acquire the property.
The downsides to note investing:
- It requires a large upfront investment.
- It ties up your capital for the long-term.
- If your borrowers don’t make their payments, the foreclosure process could be messy.
4. Hard money loans
Hard money loans are direct, private loans given to real estate investors. Unlike notes, which are typically set in standard mortgage durations of 10 or 30 years, hard money loans are short-term, typically maturing in under two years. For this reason, hard money loans are well-suited to fix-and-flip situations. You lend cash to a flipper who repays you upon completion of the project.
The benefits to passive income through hard money loans:
- High interest rates.
- No need to tie up your capital for too long.
But there are a few downsides to hard money loans:
- Comparatively high risk of losing some or all of your investment.
- Because hard money loans cover both the property purchase and the renovation costs, you end up putting a large sum into a single project.
For more of a set-it-and-forget-it passive income, consider REITs (Real Estate Investment Trusts). REITs are essentially real estate mutual funds; they are pools of shares in real estate companies. This option allows investors to buy a sliver of several shares at once, creating an automatically diversified real estate portfolio.
REITs are a classic form of real estate passive income because they issue dividends to investors. You can accept the dividends as cash flow or reinvest them in your REITs to help your overall investment grow faster.
The key benefits to REITs:
- REITs provide purely passive real estate income.
- They are automatically diversified among multiple real estate companies, to give you better protection in a volatile market.
- And they require minimal upfront investment since you can choose your REIT funds and the number of shares to purchase.
The downsides to REITs:
- You have no control over which projects your money gets invested in.
- You own a share in the real estate company, not the underlying real estate.
Crowdfunding is the general term for when funds are pooled from multiple investors to finance a real estate deal. The structure of a crowdfunded real estate investment can vary widely from one deal to the next. Some deals use equity funding, in which each investor owns a stake in the underlying real estate, but most use debt funding, making investors more like lenders than owners. The amounts and timeframes required also vary greatly between projects.
All crowdfunding opportunities provide these key benefits:
- Flexibility. You should be able to find a project that works for your budget and desired time frame.
- Leveraging the buying power of lots of investors to finance a deal that would be unattainable to individual investors.
- Diversification potential. With low minimum investment amounts for many projects, you might be able to afford to invest in multiple deals at once.
- Passive income can be paid in a lump sum if the project is sold or paid in small, periodic payments if the project is held and generates ongoing income.
But there are a few downsides to general crowdfunding as well:
- The modern iteration is fairly new and doesn’t have a long track record yet.
- If an ownership share in the underlying real estate is important to you, you may have to shop around to find a deal that offers equity funding rather than debt funding.
Real estate syndication is a specific type of crowdfunding relationship between investors and a fund sponsor. With syndication, all the investors for a specific project join together to create a legal entity, which will own the property. So the investors get to choose their specific projects and own equity in those properties.
Real estate syndication benefits include:
- All the benefits of general crowdfunding including the flexibility, leverage, diversification potential, and passive income.
- The power to choose your specific projects.
- Equity ownership in the real estate project.
The downsides to real estate syndication are:
- The lack of extensive history since this is a comparatively new method (although private groups of wealthy investors have been structuring deals similarly for over a hundred years).
- Most syndicates require members to be accredited investors, which can be a hurdle to less sophisticated investors.
Passive investment opportunities available through syndication
With housing markets booming nationwide, residential real estate is among the best passive investment opportunities available through syndication. You just need a real estate syndication company with a proven track record and flexible options that meet your unique investment goals.
Gatsby Investment is a premier real estate syndication company that offers high-quality residential investment projects throughout Southern California. With competitive returns, low minimum investment amounts, and diverse investment options, we're ready to show you how fun and stress-free real estate investing can be.
We proudly offer four options for investing in housing through a real estate syndicate.
1. Single-family home flips
Get the financial benefits of a fix-and-flip without the time, skill, experience, and knowledge, it would take to flip a home on your own. With a single-family home flip syndication, you and your fellow investors will invest in a house, and monitor the progress as an expert team of architects, contractors, and designers renovates the home and sells it.
This is an ideal option for investors who want to get in and out of a deal in 6-12 months and want a low investment minimum.
2. Multi-family developments
Multi-family development syndications are a little more involved and a little more exciting than single-family flips. With a multi-family development, the syndication purchases a single-family home lot that can be zoned for multi-family. Then Gatsby's award-winning architects create a custom property design to make the best use of the lot. Our experienced, skilled construction team builds the structure, and our design team gives the space a cohesive, polished finish that will appeal to income property buyers.
The entire process typically takes between one and two years from purchasing the property to completing the sale of the property. Investment minimums are still a comparatively low $25,000.
3. Multi-family rentals
Multi-family rentals work similarly to multi-family developments, but instead of selling the property upon completion of construction, the syndication holds the asset.
This passive investment opportunity is ideal for longer-term investors who want to create ongoing cash flow in the form of rents collected from the property’s tenants. In addition to the rental cash flow, multi-family rental investors also benefit from appreciation as the property grows in value over time.
Multi-family rentals are best for investors who can afford to tie up their funds for around five years in exchange for monthly passive income.
4. Luxury homes
For investors who want to break into the luxury housing market, but aren’t willing to pay the high cost alone, luxury home real estate syndication gives you a chance to leverage cash from multiple investors to gain access to deals that would otherwise be out of reach.
For an investment of around $100,000-$150,000, you can buy into a multi-million dollar luxury estate. There is high demand in Los Angeles for luxury homes up to $15 million, making this the perfect market for luxury construction.
Our team of experienced luxury real estate professionals handle every aspect of the deal from scouting locations to designing and building the structure, then selling the property to a qualified homebuyer. The process typically takes 3-4 years.
How to get started
Whether you decide to invest in single-family, multi-family, or luxury properties, you can start earning passive income from real estate syndication in a simple five-step process:
1. Explore the different investment opportunities currently available.
2. Sign up. It takes only two minutes to create an online account.
3. Complete the accredited investor application through Verify Investor, a third-party service that can confirm your status as an accredited investor in one to two business days.
4. Select your investment project(s) from the available opportunities you explored in Step One.
5. Wire the investment funds.
At that point, you’ll officially be a real estate syndication investor, and you’ll be on your way to creating passive income from real estate. From there, Gatsby investors get to track the progress of each of their investments through a convenient online portal, which will provide status updates so you can look forward to collecting your returns.
If you’re looking for a fun, stress-free way to create active income through passive real estate investing, sign up for Gatsby Investment’s real estate syndication service today.