Building your wealth while maintaining a personal life can be a huge challenge. For this reason alone, investing in passive income properties has become increasingly attractive to investors.
It’s no secret that many wealthy people hold multiple investment properties to create a steady cash flow that supplements their regular monthly income. There are various options in the real estate market for both the passive and active investor, ranging from mutual funds to tax liens to turnkey properties.
The passive investor puts in less effort and gains bigger returns. Many investors opt to create passive income to efficiently manage their investments. Active real estate investing is more hands-on, tapping into markets such as stocks, bonds, and mutual funds.
If you are ready to start investing your money safely, look no further than our comprehensive guide on passive real estate investing options to gain the skills and knowledge you need to grow your wealth.
What Is a Passive Real Estate Investment?
In a passive real estate investment, an individual or a group of investors attempts to generate profits without engaging in the day-to-day management of the property. They provide finance but do not make decisions about the property nor deal with the tenants.
Passive investors are not responsible for managing the property, however, they can receive ownership of the property by making an upfront capital investment.
Types of Real Estate Investments Which Make Passive Income
NNN Lease Properties
The NNN lease is a common commercial real estate (CRE) investment. The NNN stands for net, net, net. By signing this lease, a tenant agrees to pay most of the expenses, such as taxes, insurance, and building maintenance.
This leasing deal is a win for investors, landlords, and tenants. It is easy for tenants with a triple net lease to get tax benefits for their business by billing the property tax expenses as business expenses.
If you do not want to be weighed down by the endless duties of a landlord, but want to preserve wealth by creating a passive income stream, an NNN lease investment might be just the thing for you.
This is also an ideal investment strategy for investors participating in a 1031 exchange, where property owners exchange direct ownership of their property for another. In this way they can often avoid paying capital gains taxes.
You can find your NNN lease investment the same way you can find any other commercial property: via a CRE broker, financial advisor, or online listings. NNN Deal Finder has worked with investors all over the country to find stable, long-term NNN investments from reputable companies with little risk and large returns, making it a great place to find the right NNN lease for you.
Real Estate Investment Trusts (REIT)
By investing in REITs, investors can get high returns on the money invested without having direct ownership of a physical property.
REITs are legally obligated to pay 90% of taxable income to investors (keep in mind that dividend yields of +5% are common.) As the underlying assets appreciate, REITs have the potential for capital appreciation.
You can set your own goals with the help of professional advisors, such as brokers, financial managers, and digital calculators, such as a robo advisor. If you are looking for appreciation potential, tax breaks that will supplement income, or a cash flow that leads to financial independence, then direct real estate investing may be a good option for you. This way, you have more control over investments.
One notable con is that REITs can be very sensitive to interest rate fluctuations, and rising interest rates are bad for REIT prices. In general, REIT prices and Treasury yields (a percentage representing US debt obligations) have an inverse relationship: When one rises, the other falls.
REITs are ideal for people who do not want to become a property manager, those who struggle with mortgage financing, or those who can’t get a commercial loan to finance an investment. It is a great way for beginner investors to gain experience before delving into other real estate investment opportunities.
Crowdfunding Real Estate
Another proven strategy to get a high return on investment (ROI) is real estate crowdfunding. This is when investors pool their money to assist a landlord or real estate agent in renovating a rental property and selling it.
In the modern tech age, entrepreneurs are making the most of crowdfunding due to the accessibility and vastness of social media platforms and crowdfunding websites. As the pool of investors expands from the traditional circle of owners, relatives, and venture capitalists, the potential for entrepreneurship also expands.
Most crowdfunding platforms assert certain restrictions on who can invest in new businesses and how much they can contribute. These platforms can restrict inexperienced or non-wealthy investors from putting too much of their savings on the line without proper counsel or due diligence.
Making your project visible on the internet is a great way for you to grow your potential customer base and receive the funding you need, all the while gauging public opinion on your eventual real estate products or services.
Turnkey properties are newly finished or renovated homes or apartment buildings available for immediate purchase or lease to an investor.
Often, a property management company that specializes in rental property renovation purchases a turnkey property. Some of these firms allow buyers to take advantage of their services, saving the time an investor would put into maintaining certain real estate operations.
These deals may occur under a single-tenant net lease (STNL), a term in passive real estate investing which means the property is leased to one tenant only.
Hiring property managers to take care of the rental property allows consistently high returns and minimal effort from the investor. The most work you would have to put into a turnkey property is arranging electrical, plumbing, or flooring repairs when necessary.
Buying is cheaper than renting by 30% in most areas, and in many lower cost-of-living areas, the margin is even bigger. By buying a property that requires little investment in renovations, you can start generating revenue as soon as the property is sold.
With remote real estate investing, a property owner owns and manages a property remotely, overseeing any on-site agents. These operations can be conducted by phone, email, or video conferencing.
Most real estate investors adhere to the 1% rule, which states that monthly rental income should exceed the monthly mortgage expense – allowing the investors to at least break even on their investment property.
Remote ownership allows investors to find properties that follow the 1% rule without being constrained to their local market. By not having to travel a far distance from your home base, you can save a lot of time and money buying a property remotely.
Most large investment trusts – REITs, for example – utilize remote investment. Regardless of where the business is headquartered, professionals all over the country can help with management from anywhere. This provides a unique opportunity to minimize risk by varying your asset class by location and market, thus diversifying your portfolio.
Your portfolio is much safer when you invest in real estate across multiple regions, making you less vulnerable to economic shifts and natural disasters.
Comparing Returns Across Passive Real Estate Investing Options
“Better safe than sorry” is a phrase near and dear to experts in the world of passive real estate investing, although it is often overlooked by others. Evaluating returns is relatively easy, but knowing the risks associated with a potential property is more difficult.
So, let’s sum up the expected returns from each of the passive investment strategies listed above.
The average ROI percentage in long-term real estate investing is based on the area of concentration the properties lie in within the sector. The S&P 500 Index, as of May 9, 2019, reports real estate investment trusts (REITs) come in with an average annual return of 10.5%.
As for real estate crowdfunding, the average investor is expected to receive a return of 8.8% annually. This number is lower than returns offered by venture capitalists.
With turnkey real estate, your interest and your manager’s interest are significantly misaligned. Property managers will not go out of their way to save you money, as rent payment does not offer them much in the first place. They’re too busy trying to break even with management fees.
For tenants, landlords, and investors, triple net leases offer the best benefits. You can realistically expect to earn between 5-8% annually. A tenant is allowed to create the space they want for the property without investing capital in buying it. The lease offers them more freedom. Investors receive optimal returns, and landlords have fewer fees to pay on the property.
More advantages to the NNN lease are caps on tax and insurance increases, guaranteeing more flexibility. The lack of overhead costs makes NNN leases the most reliable option for real estate passive income.
Other Benefits of Investing in Real Estate
Much Less Volatile than Stocks
While stocks are probably the most well-known investment option, not everyone knows that buying real estate is also considered an investment.
It’s your personal choice to invest your money in anything you want. However, we believe the best way to invest safely is in commercial real estate, which offers lucrative returns, relatively low risk, and the possibility of immense diversification. By contrast, if you are not carefully following market trends, you could lose money on stocks in an instant.
Over the past 30 years, a number of recessions have proven the extent to which returns on stocks depend completely on the state of the economy.
Real estate investing can also be volatile, but property values do not shift as rapidly as stock prices. Real estate is a steadier investment, as it is backed by a physical asset, making it much less likely for your investment to evaporate when a financial crisis hits.
Tax Breaks and Deductions
Depreciation is when a given asset loses its value, and if it happens to a property you’re investing in, you might be in luck come tax season.
By charting the decrease in the value of real estate assets, depreciation reduces the amount of taxes real estate developers and investors pay via tax deductions.
Incentivized by the IRS tax code, this tax loophole encourages investors to bring safe and low-cost commercial infrastructure to struggling communities. When an asset or property value depreciates, the taxable earnings are reduced, thus reducing the taxes owed.
Appreciation is when a given asset increases in value.
While it is a risky game to play, appreciation can be a great benefit when it happens. That said, you should never invest simply for the sake of appreciation, as it’s not really reliable. On the other hand, on average, residential real estate appreciates 3% each year, increasing the value of your investment.
Diversify Your Portfolio
What makes real estate such a unique investment is the diversity in asset classes. CRE allows you to invest in a variety of business types, such as shopping malls, government buildings, self-storage facilities, industrial spaces, among many others.
Real estate is everywhere. This means that once the market starts slowing down in one area, you can relocate your investment pool to another location where it might be booming. By having multiple investments in different geographical locations, you can prepare for shifts in various markets as opposed to just placing your bets locally.
Furthermore, including both active rental properties and passive real estate investments in your portfolio can be a great way to diversify. And with your own rental properties, you manage the asset and business plan yourself.
Finally, you can also diversify your portfolio by being involved with a mix of active and passive individual and group investments (or real estate fund/syndications). You can reduce the energy you put into investments by opting out of individual ownership and opting into passive income real estate.
As an investor, there are many types of passive real estate investing to choose from, making the decision to invest in real estate an exciting and rarely disappointing one. However, it does require wisdom and attention to the potential risks at each step of the process.
Various types of real estate create various rates of return. Investing in rental properties is one option, involving developing apartment complexes and collecting rent payments, which exposes you to fewer risks.
A central factor in investors flocking to commercial properties, as opposed to residential, is the high return projections. While the return rate from residential investment property ranges from 1-4%, the average commercial rate is somewhere between 6-12%.
NNN lease investing brings a whole set of different strategies and options and for a beginner, wrapping your head around the different operations can be a daunting task.
If you enter the real estate investing game without being well informed, you could fail to generate a profit. This can be particularly dangerous with residential real estate, where brokers represent the seller’s – but not necessarily the buyer’s – best interest.
NNN Deal Finder has all the information you need, as well as lists of NNN properties up for grabs. If you are ready to start building your wealth with a team of trustworthy market experts, start by getting your tailor made list of the most lucrative NNN properties for sale today!