One popular way to make passive income these days is through real estate investing. And you might be surprised to learn something. You don’t have to own a brick and mortar property to be a real estate investor.
Yes, that is an option. And owning traditional brick and mortar properties can be a passive income source if you do it right. However, there are also other ways you can make passive income via real estate investing.
Making Passive Income with Real Estate
The investment world has changed regarding real estate investing. That means that you are not limited to owning residential or commercial rental properties firsthand. If you want to make money with real estate investments, there are other choices.
Owning real estate rental properties outright can be very time-consuming. This is especially true if you don’t do it with a passive income method in mind. However, you do have less time-consuming options for investing in real estate.
Later we will talk about owning rental properties directly. This can be one source of passive real estate investment income. But first, let’s talk about other options for passive income via real estate investing. One such option is crowdfunded real estate investing.
Note that crowdfunded real estate investing is available to two groups of people. Those groups include accredited investors and non-accredited investors. You may be wondering what the difference between the two is.
What is an Accredited Investor?
Some investment firms only allow accredited investors to participate. An accredited investor has to meet certain financial criteria. These companies are more strict about who they allow to invest with them. To clarify, they want to protect investors.
Accredited investors must meet one of two criteria:
- They must have a single income of at least $200,000 or a joint income (with spouse) of at least $300,000. The income minimums must have been met for the last two years, and be expected to continue in the current year.
- The investor must have a net worth of $1 million or more, excluding their primary residence. Their net worth figure can be sole savings and investments or joint with spouse.
If you meet one of the two criteria detailed above, you’re considered an accredited investor. If you don’t, you’re considered a non-accredited investor.
Non-accredited investors don’t have as much money as accredited investors. Therefore, an investment loss would be much more impactful. So this is why some investment companies only allow accredited investors.
But as I mentioned, real estate investment options are available to both accredited and non-accredited investors. Next, we’ll talk about four different crowdfunded real estate investment companies. Each company works a bit differently. And all have distinct criteria for investors to meet.
Crowdfunded Real Estate Investment Companies and Minimums
These four crowdfunded real estate investment companies are among the most experienced. They each have different minimum investment quotas for investors.
- Fundrise – $500 minimum
- Realty Mogul – $1,000 minimum
- Rich Uncles – $5 minimum
- Equity Multiple – $5,000 minimum
Here are more details for each of these companies:
Fundrise is an online real estate investment platform that was founded in 2010. Fundrise has a minimum investment requirement of $500. They focus on commercial property investment in the form of what they call eREITs. An eREIT is a hybrid of an exchange-traded REIT (real estate investment trust) and a non-traded REIT.
We’ll get more into detail about REITs later on. For now, the important thing you need to know about Fundrise and its eREITs is the cost savings. The Fundrise eREIT has low fees. And that is one of its main benefits to you as an investor.
Traditional REITs can come with really high fees, sometimes as high as 15% or more. However, Fundrise’s eREIT comes with an annual management fee of just 1%.
And like many non-traded REITs, Fundrise’s eREIT doesn’t fluctuate with the stock market. This makes it less vulnerable to stock market fluctuations. Sometimes those fluctuations have little to do with the real estate market in general.
How it Works
Investors who want to invest with Fundrise get to browse through their list of eREIT investment funds. They can choose which one(s) are most suitable for them.
Fundrise’s eREIT offerings have a goal of offering successful REITs for every investor. Also, they work to cut out the middleman. Middlemen such as stockbrokers make money by charging investors fees. Instead, Fundrise makes sure that their REIT profits go directly to the investor.
Who Can Invest with Fundrise?
Fundrise is different from some real estate crowdfunding companies in one major way. To explain, you don’t need to be an accredited investor to invest with them. Also, they have a minimum investment threshold of $1,000. This amount is lower than some companies. So it’s affordable for almost every level of investor.
What Else Should I Know?
When you purchase an eREIT product from Fundrise, you’re not going through a broker. Instead, you’re purchasing directly through the issuer of the trust.
This is what allows Fundrise to charge such low fees. They describe each offering in detail on their site. Also, investors get notified when new assets are added to the eREITs they are invested in. They have three different eREITS currently available for new investors.
- West Coast eREIT
- East Coast eREIT
- Heartland eREIT.
As a part of the Fundrise investor team, you can invest in one, two or all of the eREITs the company offers.
Crowdfunded Real Estate is Like Peer-to-Peer Lending
Crowdfunded real estate companies like Fundrise are similar to today’s peer-to-peer lending companies. Like Lending Club and Prosper, they offer a platform that matches real estate investors with investment choices. They help people looking to invest money in real estate in a passive manner. Also, investors can avoid bargaining with sellers. No need to get involved in the transfer of ownership and management of those properties either.
Crowdfunded platforms such as these are a great way to make passive income in real estate. You can do so without investing hundreds of thousands of dollars as the sole owner of a property. In addition, you forego the time-consuming work that direct property owners often have to do.
2. Realty Mogul
With Realty Mogul you typically invest in real estate by purchasing shares of stock in one of their LLCs. The LLC then invests in another LLC that holds title to the property. Realty Mogul runs the business in this manner to minimize overhead. It also provides investors with access to more investment choices.
They have a minimum investment requirement of $1,000.
How it Works
As I mentioned, you’re typically buying stock shares with Realty Mogul. They have a wide variety of investment properties they buy, including:
- Multi-family dwellings
- Office buildings
- Self-storage facilities
- Medical buildings
- Industrial sites
- Single-family investments
And more. Realty Mogul offers loan investments as well as equity investments. The term on loan investments generally runs 6 to 12 months. Conversely, equity investments are longer term – between 3 and 10 years. These types of investments are available to accredited investors.
The company also offers REITs that non-accredited investors can participate in. One of the Realty Mogul REITs focuses more on multi-family dwellings. The other offers a variety of commercial properties.
Who Can Invest with Realty Mogul?
Realty Mogul allows accredited investors as well as non-accredited investors. Note that non-accredited investors can only invest one of Realty Mogul’s REITs. They have MogulREIT 1 and MogulREIT 2 to choose from if you’re a non-accredited investor.
As an accredited investor, you can invest in any offering you choose.
What Else Should I Know?
Account fees with Realty Mogul run between 0.30% and 0.50% per year. Profits get distributed monthly or quarterly. Realty Mogul has a complicated vetting process. And they end up approving only about 10% of the deals they’re offered. In other words, they won’t lend money to just anyone. This is good for investors like you and me.
3. Rich Uncles
Rich Uncles is another way to get started in crowdfunded real estate investing. With Rich Uncles, you can buy shares of a REIT for student housing for as little as $5.
This low investment amount makes it easy for almost anyone to get started investing.
How it Works
Rich Uncles uses crowdfunding to make real estate investments available to everyone. They have commercial properties and student housing properties in their REIT choices. You can choose to invest in one or both of their two REIT choices.
The Student Housing REIT
Rich Uncles’ Student Housing REIT focuses on student housing. They buy properties to house college students. The company chooses properties located within a one-mile walking distance of major universities. Also, the minimum to invest in the student housing REIT is just $5.
The National REIT
Rich Uncles’ National REIT works a bit differently. First of all, it requires a minimum investment of $500. This REIT focuses on office buildings, industrial properties and some retail properties.
They lease these properties to tenants with strong financial statements. Bonus: there are no fees with Rich Uncles. They’ve cut out the middleman to save you money.
Who Can Invest?
You don’t need to be an accredited investor to invest with Rich Uncles. However, Rich Uncles does ask you to agree that you have a minimum $75,000 family income or $250,000 net worth.
What Else Should I Know?
Investing with Rich Uncles can save you money over other forms of investing because there are no broker fees. Also, dividends get paid on a monthly basis. You can take them as cash or reinvest them; the choice is yours.
Rich Uncles can be a great choice for the beginner real estate investor because of its low minimum investment. And the “no fees” feature is attractive as well.
4. Equity Multiple
Equity Multiple helps investors take part in professionally managed commercial real estate. They offer privately held REITs to accredited investors.
How it Works
As I mentioned, you must be an accredited investor to invest with Equity Multiple. Their minimum investment amount is $5,000. They typically look for properties that are:
- Commercial properties in thriving markets with current cash flow
- Short-term loans and preferred equity investments
- Value-add projects with construction components and more aggressive business plans
They select less than 10% of the deals they’re offered. In addition, they perform full due diligence before offering deals to investors.
Who Can Invest?
Again, only accredited investors can open an account with Equity Multiple. And you must have a minimum deposit of $5,000 to invest.
What Else Should I Know?
Equity Multiple charges a 0.5% annual service charge fee. Also, they take 10% of all profits. They also have a 24/7 customer service center for investors. Their investment properties are large commercial properties they find through experienced lenders with low default rates.
Now let’s talk a little bit more about what these companies invest with: REITs.
A REIT (real estate investment trust) is a type of passive real estate investment income. A REIT is similar to a mutual fund. It houses a variety of different investments within each fund. The difference is that REIT investments are all encompassed in real estate.
For instance, a REIT might include ownership of several different investment types:
- Commercial office buildings
- Shopping malls
This is just to name a few. There are many other types of real estate properties the REIT can house. It’s riskier to invest in just one single real estate investment, such as owning a rental home. So the variety of investments in REITs means less risk for an investor. With the REIT, you don’t have all of your eggs in one basket.
As I mentioned earlier, REITs can be exchange-traded, non-traded or private. You can purchase exchange-traded REITs through any broker. They’re registered with the SEC (Securities Exchange Commission). And they file regular reports with the SEC. Also, they’re listed on national securities exchanges such as the Nasdaq or the NYSE.
But there is one downside to the exchange-traded REIT. Chiefly, its performance can mimic the performance of the exchange it’s listed on. For example, let’s say a REIT is listed on the NYSE. If the NYSE plummets, the REIT value could plummet too.
A non-traded REIT works a bit differently. Like an exchange-traded REIT, a non-traded REIT is listed with the SEC. It also files regular reports with the SEC. However, non-traded REITs are not listed on an exchange and are not publicly traded.
This makes a non-traded REIT what is called an illiquid asset. An illiquid asset is tougher to liquidate than a non-traded REIT. However, both types of REITs are indeed passive forms of real estate investing.
Private REITs are a third option. These investments are not listed with the SEC and do not file reports with the SEC. They can be riskier than the other options simply because there are no connections with the SEC.
Traditional Real Estate Ownership
Traditional real estate ownership can also be passive – when done right. When you own traditional real estate, you typically have two choices. You are generally choosing to own either residential real estate rentals or commercial real estate rentals.
However, you could also own farmland, timberland or other types of real estate you can rent out.
If you choose to own traditional real estate directly, know that someone will have to manage the properties you own. Tenants will call, having questions about the house. Or they might call to notify you of necessary repairs.
You’ll need to perform maintenance and upkeep on the property. And tenant applications will require your attention. Background checks and employment checks will have to be done. Plus, you’ll need to collect and deposit rent money.
Using a Property Management Company
As you can see, traditional real estate ownership can be far from a passive income source. But you could make it more passive by choosing to hire a professional management company. They do the work of finding and managing tenants. Also, they collect rent checks and repair and maintain the property for you.
Good property management companies are available in most major urban areas. If you can find one, it’s a great way to turn a directly owned real estate investment into a passive income source.
However, it’s important to know that management companies will charge a fee to manage your property. There are lots of property management companies in the major urban area where I live. But they generally charge ten percent of the monthly rental income to care for and manage the property.
In other words, let’s say the rental rate you charge for the property is $1,200 per month. You can expect to pay a property management company $120 per month. This is their fee to help make your investment a passive income investment source.
It’s important to know the amount of money a property management company will charge each month. Check that out before you purchase a real estate investment property directly. Reason being is because that expense will impact your bottom line. It affects what – if any – profit you will make each month on the property you purchase.
Does Your Property Cash Flow?
Know what your exact bottom line profit could be to make sure your property cash flows. A property “cash flow” is when the incoming rent outweighs the outgoing expenses. Expenses on rental properties include taxes, repair, maintenance, property management fees, etc.
One factor that helps determine whether an investment property is a good investment is cash flow. If you have a positive cash flow each month after expenses, the property is less risky.
There is a variety of different options out there for real estate investing. So this means nearly anyone can become a real estate mogul.
Learn to know the details of the different real estate investment options available to you. Work through those options to decide which one is best for you. By doing so, making money through real estate is a viable investment choice.
Have you decided after thorough research that passive real estate investing more suitable for you? Is it a better fit than traditional ownership and management? If so, consider one of the options listed above as your potential source for passive investment income.
Thanks to today’s crowdfunding companies, you can invest in real estate on almost any budget.
For example, a three-year $10,000 loan with a Prosper Rating of AA would have an interest rate of 5.31% and a 2.41% origination fee for an annual percentage rate (APR) of 6.95% APR. You would receive $9,759 and make 36 scheduled monthly payments of $301.10. A five-year $10,000 loan with a Prosper Rating of A would have an interest rate of 8.39% and a 5.00% origination fee with a 10.59% APR.
You would receive $9,500 and make 60 scheduled monthly payments of $204.64. Origination fees vary between 2.41%-5%. APRs through Prosper range from 6.95% (AA) to 35.99% (HR) for first-time borrowers, with the lowest rates for the most creditworthy borrowers. Eligibility for loans up to $40,000 depends on the information provided by the applicant in the application form.
Eligibility is not guaranteed, and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. Refer to Borrower Registration Agreement for details and all terms and conditions. All loans made by WebBank, member FDIC.