One popular way to make passive income these days is through real estate investing. You might be surprised to learn that you don’t necessarily have to own a brick and mortar property in order to be a real estate investor.
Yes, that is an option (although owning traditional brick and mortar properties is only 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, and 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.
On top of that, owning real estate rental properties can be very time consuming if it’s not done with a passive income method in mind.
We will talk about owning rental properties directly as one source of passive real estate investment income, but you can also consider other options for passive income via real estate investing.
Crowdfunded Real Estate Companies and Minimums
Here is more details for each of these companies:
Realty Shares is an online investment platform that brings investors, borrowers, and sponsors all together in one online place. It helps them work together to offer real estate investments.
Whereas some online real estate investment platforms specialize in larger real estate projects only, Realty Shares offers a wide variety of property investment choices for investors to participate in, from single house flips to small apartment buildings to larger rental complexes.
How it Works
The process Realty Shares uses to determine a viable project to offer to investors is intricate. But, you’ll never know that because a lot of the hard work is done by their investment team before a project is approved to appear on their site for investors to choose from.
Those wishing to borrow money to invest in real estate are required to apply online for the money needed to fund their real estate project.
After that, the Realty Shares team of expert investors that make up the Leadership Board at the company review each detail of the proposed property investment in the submitted application.
If the investment has the right qualifications, the team then acquires the appropriate financial documents from the applicant for verification and agrees to offer the project to their investors.
The project is then listed on their site, where investors can choose which projects they’ll take part in funding. When the project is fully funded, the borrower begins the hard work of renting the property, and investors sit back and collect any potential earnings.
You as an investor choose which properties you wish to invest in, whether it be a single property or a group of properties. Keep in mind there are risks, so make sure to review the full offering documents. We also have an affiliate relationship with RealtyShares.
Who Can Invest with Realty Shares?
Only accredited investors can invest with Realty Shares. An accredited investor must meet certain financial qualifications such as:
- An annual income of $200,000 for an individual or of $300,000 for a married couple. The investor must have earned this level of income for the past two years if they are a married couple (and the past three years if they are an individual) and be expected to earn the same level or more in the coming year.
- Or, an investor is considered accredited if he or she has a net worth of at least $1 million either individually or with a spouse
If you meet one of the above criteria, you qualify as an accredited investor and can potentially invest with Realty Shares.
What Else Should I Know?
Other things to know about investing with Realty Shares? As an accredited investor, you can invest as little as $5,000 in a Realty Shares investment project. Investors can choose to fund either real estate loans that borrowers use to purchase properties, or equity investments, meaning they invest in existing properties and can earn money off of the potential increasing value in the property.
Also, although there are no fees for signing up with Realty Shares, the company does charge a 1% fee annually for managing your investments after you choose to invest with them. The company uses an SSL with 128-bit encryption to protect their clients’ information, which is similar to the security standards that most banks use, so you can be pretty confident that your private information should be secure with Realty Shares. Also, the holding period for investments through Realty Shares varies with each investment opportunity, from under six months to several years.
Fundrise is another online investment platform, however, it works a bit differently than Realty Shares. Fundrise has a minimum of $500 and focuses on commercial property investing in the form of what they call eREITs. An eREIT is sort of a hybrid of an exchange-traded REIT (real estate investment trust) and a non-traded REIT.
We’ll get more into detail about REITs in the next section, but for now, the important thing you need to know about Fundrise and its eREITs is that the main benefit for you as an investor is lower fees.
Whereas traditional REITs can come with really high fees (sometimes as high as 15% or more), 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, making it less vulnerable to stock market fluctuations that have little to do with the real estate market in general.
How it Works
Investors wanting to invest with Fundrise get to browse through their list of eREIT investment funds and choose which one(s) are most suitable for them.
Their eREIT offerings were created based on the goal of creating successful real estate investment trusts for every investor, and making sure that the REIT profits that often go to the middlemen in REIT investments would go directly to the investor instead.
Who Can Invest with Fundrise?
Fundrise is different from Realty Shares in that you don’t need to be an accredited investor in order to invest with them. Also, they have a minimum investment threshold of $1,000, which is 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, but instead going directly through the issuer of the trust.
This is what allows Fundrise to charge such low fees. Each offering is described in detail on their site, and investors are notified when new assets are added to the eREITs they are invested in. They have three different eREITS currently available for new investors: the West Coast eREIT, the East Coast eREIT, and the Heartland eREIT.
As a part of the Fundrise investor team, you can invest in one, two or all of the eREITs the company offers.
Both Realty Shares and Fundrise are a sort of crowdfunded real estate investing option.
Similar to today’s peer-to-peer lending companies like Lending Club and Prosper, Realty Shares and Fundrise offer a platform that matches those wanting to become hands-on real estate investment owners with people looking to invest money in real estate without doing the hard work of finding and analyzing properties, bargaining with sellers, and being directly involved in transfer of ownership and management of those properties.
Crowdfunded platforms such as these are a great way to make passive income in real estate without investing hundreds of thousands of dollars as the sole owner of a property and without having to do the time-consuming work that direct property owners often have to do.
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 makes it easy for almost anyone to get started investing!
Each month property managers collect rent from students or their parents and you get paid dividends on your investment.
Investing with Rich Uncles can also save you money over other forms of investing because there are no broker fees.
A REIT (real estate investment trust) is another form of passive real estate investment income. A REIT is similar to a mutual fund in that it houses a variety of different investments within each fund, the difference being that REIT investments are all encompassed in real estate.
For instance, a REIT might include ownership of commercial office buildings, of shopping malls, of timber land and of warehouses. The variety of investments in REITs means less risk for an investor than if they invested in just one single real estate investment, such as timber land.
As I mentioned earlier, REITs can be either exchange-traded or non-traded. Exchange traded REITs can be purchased through any broker, are registered with the SEC (Securities Exchange Commission), file regular reports with the SEC and are listed on national securities exchanges such as the Nasdaq or the NYSE.
One downside to the exchange-traded REIT is that its performance can correlate closely with the performance of the exchange it is listed on. In other words, if a REIT is listed on the NYSE and the NYSE plummets, the REIT value could also drop dramatically as well.
A non-traded REIT works a bit differently. Like an exchange-traded REIT, a non-traded REIT is listed with the SEC and 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. This means it is tougher to be able to liquidate a non-traded REIT. However, both types of REITs are indeed passive forms of real estate investing.
Traditional Real Estate Ownership
Traditional real estate ownership can also be passive – when done right. When you own traditional real estate, you are generally choosing to own either residential real estate rentals or commercial real estate rentals.
However, you could also own farm land, timber land, or other types of real estate that can be rented out.
If you choose to own traditional real estate directly, know that someone will have to manage the properties that you own. Tenants will call, having questions about the house. Repairs will need to be done.
Maintenance and upkeep will be needed. Tenant applications will need to be handed out and reviewed, background checks and employment verifications will need to be performed, and rent checks will need to be collected and deposited into the bank.
As you can see, traditional real estate ownership can be far from a passive income source – unless you choose to hire a professional management company to do the work of finding tenants, managing tenants, collecting rent checks and repairing and maintaining the property for you.
Good property management companies are available in most major metropolitan areas and if you can find one, it’s a great way to turn a directly owned real estate investment into a passive income source.
It’s important to know that management companies will charge a fee to manage your property or properties. The property management companies in the major metropolitan area where I live generally charge ten percent of the monthly rental income to care for and manage the property.
In other words, if 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 to help make your investment a passive income investment source.
The amount of money a property management company will charge each month is important to know before you purchase a real estate investment property directly because it will impact what – if any – profit you will make each month on the property you purchase.
It’s important to know exactly what your bottom line profit could be in order to make sure your property cash flows. A property “cash flows” when the incoming rent outweighs the outgoing expenses such as taxes, repair, maintenance and property management fees.
One of the factors that helps determine whether or not an investment property a good investment is if you have a positive cash flow each month after expenses.
Thanks to the variety of different options out there for real estate investing, nearly anyone can become a real estate mogul.
By knowing the details of the different real estate investment options available to you, and working through those options to decide which one is best for you, making money through real estate is a viable investment choice.
And if you’ve decided after thorough research that passive real estate investing is better for you than traditional ownership and management, you can consider one of the options listed above as your potential source for investment income.
Thanks to today’s crowdfunding companies, you can invest in real estate passively 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.