For many people, the goal of financial independence is to earn passive income. This means creating a stream of income that doesn’t require active work on your part. One popular way to do this is through real estate investments. By investing in property, you can generate a steady stream of cash via rent from tenants and/or profit from property appreciation without having to put in long hours at a job.
Most people don’t have enough money to buy rental properties outright, but guess what? You don’t have to! You can start investing in real estate right now even with any of the apps below, and you only need a couple of dollars for most of them. So you can start generating passive income the way so many of today’s millionaires do without having to be one.
If you have any questions that come up as you read, scroll down to the FAQs section at the bottom of the page.
Confused about some of the terms in this post or just have some unanswered questions about investing in real estate? Search no more. Below is a cheat sheet of some of the most common investing terms, with definitions and examples.
This is income that is acquired and maintained through minimal, if any, labor. Once the passive income source is established, you don’t need to tend to it every day like you would with a regular 9-to-5 job. It is oftentimes supplemental income to a primary source of income. Income earned from real estate rentals is considered passive income.
This is the increase in the value of a property over time. A few things contribute to a property’s appreciation, like inflation, an increase in property demand, or a housing shortage. So let’s say you bought a house worth $250,000 at time of purchase, and over the last few years, its market value has increased to $300,000. That means your house has appreciated by $50,000. To find the percentage of appreciation for this house, you need to divide the change in the home’s current market value ($50,000) by the home’s original value ($250,000). This equals 0.20. Multiply that by 100 to get the percentage number for how much the property has increased. In this case, it’s a 20% increase.
This is the difference between a property’s current market value and how much of said property its owner owns outright. So if you bought a property with the help of a mortgage, whatever you paid as a down payment, plus whatever you’ve paid off on the mortgage thus far, that is the amount of equity you have in your house. For example, let’s say you bought a house with a market value of $250,000, made a down payment of $23,000 and took out a mortgage of $227,000 to cover the rest of the cost. The equity you have in the house is just the $23,000 down payment. As you pay off the mortgage, the equity you have increased.
Real estate crowdfunding is similar to investing in a start-up. The owner of private property is opening up equity shares to the public to raise capital to fund the maintenance and growth of a real estate project. The great thing about this kind of real estate investment is that it doesn’t take much money for the investor to get in on it.
A single-family rental is a free-standing residential building that is built to house a single family, while a multi-family rental is built to house multiple families in separate housing units, like duplexes, apartment buildings and townhouses.
This is real estate that is used exclusively for business purposes. Storefronts and shopping centers, office space, health facilities, warehouses, hotels and resorts, and more are examples of commercial real estate. Basically, if you can make money from leasing the property for business purposes, then it is considered commercial.
Residential real estate are properties that are built to be living spaces. Single-family homes and small multi-family buildings with up to four rental units are considered residential real estate. If a residential building has more than four units, then it’s classified as a commercial property.
REIT stands for real estate investment trust. It’s a company that owns, operates or finances income-producing real estate on behalf of its shareholders. The types of properties in an REITs portfolio can includell sorts of commercial real estate, like office buildings, warehouses, storefronts and shopping centers, apartment buildings and more. They are publicly traded — making them the most liquid form of real estate — and have been known to deliver competitive returns. They are just one of the many ways to invest in real estate.
This is the length of time that an investor holds onto the property they own — as in the time between purchase and sale — to see what returns they earn or what losses are incurred. For many crowdfunded real estate investment platforms like some of the ones above, holding periods can range between 3 to 7 years.
This is a predetermined window of time during which an investor is prohibited from selling their shares immediately. This is done to give the market for an asset time to develop and stabilize. This can help to reduce an asset’s initial volatility. This kind of contractual agreement is often implemented for IPOs and the lock-up period is usually only a few months.
When an asset is illiquid, it cannot be easily or readily sold or exchanged for cash. Historically, real estate investments are highly illiquid. While it may be obvious that the property you’ve invested in is valuable, you cannot access its cash value on a whim. Historically, real estate is a very illiquid asset class. However, some real estate investment platforms have made it somewhat easier to exit your holdings.