Active income is the money earned on work that is performed on a daily basis. Some people have the ability to produce passive income, also referred to as residual or recurring income. Passive income is money you continue to earn after the initial work is completed. The goal for many investors and entrepreneurs is to keep earning money after the heavy lifting is done, with a stream of income outside of their regular paycheck.
Danielle Bulla Isenhour, a co-founder of Coastal Property Doctors, LLC, is no stranger to passive income. “The biggest pro to real estate investment for our business is setting up our members for early retirement from passive income on rentals, and a steady income on rehabbed and/or re-sold properties,” said Isenhour. “If done properly, the pros are: steady income, long-term financial security, and tax benefits.”
Isenhour also adds that there are downfalls to real estate investment, if you don’t do the research. “Some of the cons are: not estimating repairs, re-sale or rent properly, not researching the market time of the estimated completed renovations and sale, cost of regular maintenance and management, not assessing potential liabilities, and/or not hiring the right team of contractors, realtors or property management company.”
One of the biggest misconceptions about passive income, especially when it comes to real estate, is the idea that you must be extremely wealthy. Both residential and commercial real estate is an excellent way to produce a residual streamline of income. And thanks to new investment methods, investors do not necessarily need a large upfront down payment.
The alternatives have varying stakes and required components. Here is the breakdown:
- Investment Properties – a real estate property with sole purpose of earning revenue. The property can be leased to others. A great example is a commercial rental property that leases out office space to other businesses or even an apartment and/or condo building that leases living quarters to tenants.
Typically, you will need a large upfront capital to acquire an investment property. There are a lot of risks because there are a lot of variables, as well as unexpected and costly liabilities. In fact, most investors and entrepreneurs will hire a manager to oversee the facility because it is a big job to manage the upkeep, customer service issues, and other contractual requests that may arise.
- Private Equity Funds – a collective investment fund that pools the money of multiple investors to invest in real estate. In order to create diverse investments, multiple investors are needed. You’ll find that most of the investors involved in private equity funds are real estate experts who are extremely knowledgeable on real estate trends.
The majority of these investors are high net worth individuals who are comprised of institutional investors.
- Real Estate Investment Trusts (REITs) – large portfolios of income-producing real estate investments. Congress passed a law in 1960 that created REITs. The law requires investors and entrepreneurs to have REITs in order to distribute 90% of its earnings to the investor. According to a statistic published by Fundrise, an estimated 70 million Americans invest in REITs.
As you may have assumed, REITs must adhere to a very strict compliance standard which requires a quality standard to be met. There are two main types of public REITs: traded and non-traded. Publicly-traded REITs can be quickly turned to cash as needed, because it is traded openly on a stock exchange. This results in a liquidity premium, which usually leads to a lower return for investors. It’s also important to know that most publicly-traded REITs are associated directly with the fluctuation on how the stock market is performing.
In 2018, public non-traded REITs are the most popular REIT investment. While the large required upfront fees are charged to investors, the potential double-digit dividends are the reward.
- Private Placement Memorandum (PPM or Private Fund) – a private securities offering, usually to a small number of investors. In real estate investment, a PPM or Private Fund can involve a direct investment with a hard money lender, where a financial investor provides capital that is used to make short-term loans to qualified real estate investors and developers working on an investment project. Returns on these types of Private Funds can vary (ours are generally 8-9%), but the real benefit is working directly with a company you trust, while receiving steady returns that require none of the stress that comes with owning a property outright.
Creating a passive income with real estate requires a great deal of strategy. Some investments are better appropriated for a specific investor/entrepreneur because of the approach and process. Before you begin earning a passive income, talk with other investors, determine the pros and cons and identify your return dividend goal.
Each investment is based on the asset class you fall into; however, that doesn’t mean you can’t work your way up to the top. Every goal takes time. Ultimately though, every investor has the same general aim, according to Isenhour: “The real estate clients that I have, who are also investing in real estate, all want the same thing – a secure retirement without the risk of losing it all in the stock market."