Earning Passive Income With Real Estate Investing

Illustration: The Money Manual
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Most people are familiar with how to use the stock market to generate passive income. Fewer people, however, fully understand the potential of real estate investing.

That’s likely because for so long, access to real estate investments was limited for the average investor. It has long been a popular way for institutions and the ultra-wealthy to earn passive income, but for the average investor, it was time-intensive, costly, and had a high barrier to entry. Thanks to crowdfunding platforms like CrowdStreet— which allows individual investors to compare, review, and invest in commercial real estate projects online— that is changing in a big way.

Now it really is possible to invest in private equity real estate (meaning it’s not available to trade on public markets). We are going to break down why real estate can be a great form of passive income, along with how to get started doing this.

First: Understand What Real Estate Passive Income Is

So, what’s the deal with passive income? Given that there are only so many hours in the day to work and generate income, passive income can be an incredibly important piece of the puzzle when it comes to building your long-term wealth. This isn’t your salary, it’s money you can earn in your sleep (often literally).

The stock market has traditionally been a great example of this – by investing in the stock market you are allowing your money to potentially make you more money. One dollar today has the chance to turn into $100 down the road.

But as with many things, you shouldn’t put all of your eggs in one basket when it comes to investing. Diversifying your portfolio outside of the stock market with alternative investments, such as real estate, can help your money ride out market shifts and keep you earning passive income even when your other investments might underperform.

There are a multitude of real estate options that you can use to generate passive income, including buying and managing rental homes, investing in commercial properties, or investing in public REITs.

As a real estate investor, you’ll typically earn passive income in one of two ways:

  1. Regularly paid distributions, also known as cash flow, which are a pre-set percentage of your original invested capital. These terms, if applicable, will be outlined in the business plan of the real estate investment.
  2. Your share of the total sale price if/when the property sells. These tend to be larger, one-lump sum payouts that come several years after your initial investment. The amount is driven by how much the building appreciated over time.

Next: Figure Out How Much Money You Can Afford To Invest

Your first step towards potentially earning passive income through real estate investing is to figure out how much you can afford to invest.

Spend some time considering your current (liquid) cash situation. Real estate investments are considered illiquid, which means that you don’t have the flexibility to access your money freely once it’s invested–you can’t sell your share when you want. Instead, you have to wait until the project completes its full cycle and the building ultimately sells. Hold periods for these types of investments can range anywhere from 2 to 10 plus years.

Do you need your investment to be liquid (turned back into cash) in a relatively short amount of time? Where are you holding the bulk of your wealth, in general? Depending on the business plan of a real estate project, some target more regular distributions, while others won’t payout at all until the building sells. What kind of passive income do you want to try to earn? These are all things to consider during this stage.

Most importantly, keep in mind that all investing involves risk, including the possible loss of some or all of the money you invest, and past performance does not guarantee future performance. Never invest money you can’t afford to lose, no matter how compelling the potential upside may be.

Choose How Involved (Or Not Involved) You Want To Be

Not all real estate investing is created equal. Some real estate investing requires a lot of work, some doesn’t at all. You are probably going to want to pick an approach that maximizes your return and minimizes your time. Do you really want the headache of being a landlord?

For most of us, the answer is probably not, which is part of what makes CrowdStreet so appealing. When you invest in a project with CrowdStreet, you’re not expected to interface with the building’s tenants or handle the day-to-day property management, but you are still poised to benefit from owning a piece of the property. Since the platform specializes in commercial real estate, the projects (and potential upside) tend to be bigger as well.

When you decide you’re ready to take a crack at real estate investing, there are several different property types (also known as asset classes) to consider, including:

  • Industrial spaces (warehouses and last-mile distribution centers)
  • Multifamily (apartment) buildings
  • Life sciences buildings (lab space for medical research & development)
  • Senior housing
  • Office buildings
  • Retail buildings
  • Build-to-rent homes
  • Hotels
  • Self-storage

Each property will have its own unique business plan, with its own potential risks and opportunities. For instance, a new apartment building in a town that’s booming, population-wise, is probably going to lease up quickly. That same building in a smaller town might not attract as many tenants or might have lower rent rates–all of which can impact the total passive income you may earn.

Similarly, a hotel in Orlando is probably going to attract tourists all year round, while a hotel near Aspen, Colorado, is likely to be booked out all winter, but not nearly as full come June. Even though you’re not the landlord, it’s important to understand the business plan behind the project as that directly influences the long-term success (or failure) of your investment.

Whatever you ultimately choose should take into account that all investments carry risk, including the loss of investment. Make sure to consider how much you can afford to invest, how much time you want to put towards the investment, and how liquid you need the investment to be. It’s also worth considering working with a professional advisor when trying to decide if an investment is right for you and your financial goals.

Real Estate Investing Platforms Can Help You Get Started

The barrier to entry into real estate investing used to be really high – that is until the JOBS Act of 2012 made it possible for online real estate investing platforms to provide direct access to institutional quality real estate deals.

Take CrowdStreet, one of our favorite platforms to compare, review and invest in real estate deals that have the potential to generate passive income.

Their online marketplace allows individual accredited investors to fund private real estate projects throughout the US. A mix of individual deals, real estate funds, and vehicles are all available.

Utilizing CrowdStreet, people can compare and review commercial real estate projects, view financial documents related to deals, submit investment offers, and more – entirely online. Just imagine what this process would look like without a platform like CrowdStreet.

CrowdStreet has a pretty incredible record having facilitated more than $2.8 billion in investments. The average rate of return on investments on the platform has been 18.6%– much higher than the historic rate of return of the S&P 500.

Get Started Earning Passive Income Via Real Estate

If you are considering investing in real estate—and you should be – you should give CrowdStreet a solid look.

To start investing with CrowdStreet:

  1. Head to CrowdStreet and click on “sign up today.” It’s easy to sign up – you can use your Google or LinkedIn profile or manually do it.
  2. You’ll need to answer the question of “are you an accredited investor.” This is a rule from the SEC, and you’ll need to earn more than $200,000 in each of the last two years (or more than $300,000 together with your spouse) or have a net worth exceeding $1 million (excluding the value of your primary home) to qualify. If you aren’t an accredited investor, you will likely not be able to invest in projects, but you can still create an account.
  3. Complete your profile by adding your personal information and documentation to validate that you are an accredited investor.
  4. Choose whether to activate a two-step verification in the security settings to protect your account.
  5. That’s it, you’ll be signed up! From there you can start to figure out how you want to invest, choosing between individual deals, real estate funds, or by creating a tailored portfolio with an advisor.
  6. CrowdStreet members are alerted to new deals regularly via email and participation is on a first-come, first-served basis. There is usually a window to submit an offer in the CrowdStreet portal to participate in investments.
  7. When you are ready to pull the trigger on an actual investment you must complete the vetting process to confirm you are indeed an accredited investor. CrowdStreet makes this process very easy, walking you through each step.
That’s it, it’s a seamless process, and you’ll be well on your way to potentially earning passive income via real estate.