Not all real estate investors use the same strategy to generate passive income, but the majority of investors across all sectors say that real estate is the key to their passive-income strategies. According to a Business Insider survey of financial planners, “clients overwhelmingly turn to one source for passive income: real estate.”
The survey yielded interesting results about how investors got started in real estate and how they continue to generate passive returns. Many investors own traditional rentals, of course, but many also reported getting started by “house hacking.” This strategy involves buying a home with either fully separate living units or rentable rooms and renting that space out while living in the property as well. As the process continues and the client begins to generate returns, they reinvest in other properties and real estate-related assets.
Some planners noted that real estate investors who do not mind having their money tied up for a relatively long period of time (12 months or more) may invest in real estate syndications or real estate investment trusts (REITs). One planner reported his clients to prefer REITs that offer monthly distributions and allow investors to share in the appreciation of the property. REITs and syndications enable investors who do not want to be involved in the management of a project or even own real estate directly to still generate real estate-related passive income.
When it comes to owning rental properties, many real estate investors who seek truly passive income are currently worried that such an investment might require too much personal intervention in light of the COVID-19 pandemic. While many rental owners are thriving (and the majority of renters are still paying on time and in full), real estate investors who have these concerns can benefit from making private loans to other investors who are acquiring real estate. While interest rates are low for traditional home-buyers, they can be much higher for investors with multiple properties already in a portfolio since they may not be able to obtain bank financing. In our experience, private lenders can generate healthy returns on real estate-backed loans without ever having to own the property themselves.