Real estate is a profitable investment, but it’s no secret that it is incredibly hands-on. Whether you flip houses or rent out a multifamily property, it takes a lot of hard work to benefit from this type of investment. But it is possible to earn passive income from real estate.

Passive income from real estate is a great source of additional revenue. It is a powerful way to make your money work for you.

Passive real estate investing also gives investors security in retirement, which also makes way for financial freedom. However, this is not the right fit for every investor. You need to understand how it works so you can see if passive investing is the right strategy for you.

Here we will cover the benefits of passive real estate investing, as well as the different types of passive income in real estate.

What is Passive Income in Real Estate?

Passive income real estate is a strategy wherein an investor can create earnings without having to be involved actively. In the context of real estate, “passive income” is used loosely because some of these investments still require a certain level of activity, depending on the investment type. [1]

Passive income refers to earnings derived from a limited partnership, monthly rent, or some other enterprise wherein the investor is not actively involved. Just like active income, passive income is usually taxable. However, the Internal Revenue Service (IRS) usually treats passive income differently. [2]

The IRS has a specific set of rules that determine whether or not a taxpayer was actively involved in business, rental, or any other income-producing activity. A taxpayer is able to claim a passive loss against income-generated from passive investments.

Passive income real estate is also a great way to add to your residual income, which refers to the income that remains after all debts and expenses have been paid. [3]

Benefits of a Passive Real Estate Investment

With the right passive investment, investors could enjoy their free time and earn money without having to work for it actively. It can help you pay off your debts, build up your children’s college funds, create your retirement fund, build your savings, and achieve financial freedom. [1]

The biggest benefit of having passive income from a real estate investment property is that you can potentially make money while you sleep. You will be reaching your financial goals and building up your savings without putting in work. You just do your due diligence, sign the paperwork, and wait for your investment to be processed. You then become an equity stakeholder in your chosen real estate venture and start earning passive income.

Additionally, passive real estate allows tax-deferred cash returns in an equity-structured investment. This means you get to keep more of your earnings.

On top of these benefits, having a true passive real estate investment means you do not have to deal with the responsibilities that are normally associated with real estate, particularly being a landlord. If you are a passive investor, you don’t have to worry about tenants or any emergencies related to the real estate property. It is not your responsibility to call the handyman for emergency repairs, etc. You can avoid the hassles of day-to-day management completely. [3]

How to Earn Real Passive Income through Real Estate Investing

There are several ways to invest in passive income real estate. You may purchase stock in publicly-traded businesses that are related to real estate such as real estate development companies or construction companies. You can also go for Real Estate Investment Trusts or REITs, which are companies that pool together investors’ capital in order to invest in larger real estate deals. [3]

Some passive investments are more involved than others. Rental properties produce passive revenue through rental income. However, they require the investor to become a landlord and manage the property in order to keep it going. On the other hand, there are real estate investments that are truly passive, meaning you do not have to get involved in the property itself. One good example of this is multifamily syndication, which we will discuss more of later on.

It is important to know your personal investment goals so you can choose the appropriate strategy. If you want passive income through rent and are okay with managing a property, then a rental unit may be the best choice for you. If you have no time or interest in being a landlord, you may have to look for other investment opportunities that are truly passive.

In terms of rental properties, you have to put in a lot of work: screening tenants, collecting rent, handling emergencies, and addressing repairs. It’s no surprise that a lot of investors who go this route hire a property management company to do all of the work for them. This is especially suitable for multifamily real estate properties that bring in enough income to justify this added expense. [1]

Even then, this does not make it a fully passive type of investment. You still need to make a lot of decisions and get involved in the property to maximize your profits.

Examples of Passive Income in Real Estate

The benefits of having passive income from a real estate property are hard to ignore. This may leave you wondering how you can find a strategy that works for you. A passive income real estate investment may look different for everyone. But knowing the examples of passive real estate income may help you determine which one is right for you. Here are some of the paths you can take that will lead you to passive streams of income.

Single-Family Properties

Single-family units are a good example of a real estate investment property that generates passive income but requires a bit of involvement on your part. It may be easier to manage since there is only one unit to take care of, and only one family of renters to communicate with. But one potential drawback of this investment is that your cash flow may be disrupted if the unit becomes vacant since there is only one unit to rent out. On the positive side, single-family units are generally more affordable and therefore easier for a lone investor to acquire. [1]

Multifamily Properties

Multifamily real estate is any real estate property that has more than one unit that can be occupied by different families. This includes duplexes, triplexes, condominiums, and apartment complexes. They can be a little bit more difficult to manage since these properties are larger and have more units. They are also harder to acquire for a lone investor because they are generally pricier. However, this also means they generate more income on a monthly basis.

Multifamily properties are less concerned about vacancies. Your cash flow will not be completely halted even if one or two units become unoccupied. You can still earn money from the remaining units while looking for new tenants to move in. In terms of cash flow, multifamily properties are more consistent and reliable. [1]

If you invest in something that has five or more units, you should consider hiring a property management company so that it is easier to handle the day-to-day responsibilities such as repairs, maintenance, and rent collection.

Commercial Buildings​

Investors may also earn rental income passively by leasing space in a commercial property to businesses. Ideally, the monthly rental payments would allow you to make monthly payments on the loan used to purchase the commercial building, with enough money left to make a profit. [4]

The risky part is that commercial tenants are a bit harder to replace. Investors should therefore prepare for longer vacancies. This is offset by the fact that commercial properties tend to be leased to retail tenants with long-term leases. This creates a more stable stream of income.

Another possible drawback is that tenants in commercial properties tend to customize the property extensively based on their business’s needs. This means you will have to spend more on remodeling these spaces once the tenant leaves. [1]

Self-Storage Facilities

Self-storage facilities continue to be in demand, so investors should consider this approach for their passive investment. With online shopping being more popular than ever, consumers are going to need more space for the things they have collected. Self-storage facilities let them free up space in their home. Investing in self-storage facilities can potentially offer large income with a low overhead. You do not need to deal with tenants or other facility-related emergencies. When a storage unit becomes vacant, the turnover can be done very easily. It’s just a matter of cleaning up the place for the next tenant. [5]

The facility costs and vacancies can also be spread across multiple units, meaning this investment offers a low per-unit cost. Do keep in mind that these facilities require a management and customer service team, who will be staffing the premises for extended hours. Investors also need to take note of security and insurance expenses. [1]

Land Lots

Investing in land itself is a unique approach for real estate investors. It can be effective if the investor finds a plot of land in an area that will soon be in development. They can then sell it for a profit. Other than that, it is hard to produce a passive income off of an empty plot of land.

Investors can still take it as an opportunity to build whatever it is that will make the most profit in that area, whether it is a parking lot, a storage area, an apartment complex, etc. Some people lease their land to cell phone companies for cell towers.

Owning land can provide many different opportunities for passive real estate income.

Real Estate Investment Trusts (REITs)

A REIT is a company that owns, operates, and finances an income-generating real estate property. REITs are modeled after mutual funds. This type of investment involves numerous investors who pool their capital to purchase real estate. This is a completely passive type of investment. The investors don’t need to buy, manage, or finance the properties themselves. This frees them from the usual responsibilities that are given to the landlord. REITs typically target high-end properties. [1]

REITs have low correlation to other stock market sectors because they are real estate investments. So they are unaffected even if the overall market is tanking. REITs are also strong performers in the long term, providing stable and consistent income for all investors involved. [6]

Multifamily Syndication

Multifamily syndication is another form of real estate investment that we can consider a “real” passive investment because it does not require a ton of work from its investors. It is actually similar with REITs in the way that it involves multiple investors pooling their resources together in order to purchase a single asset.

Syndication can be done for any type of real estate property, but multifamily syndication is the most popular. This is because multifamily properties such as apartments are generally too expensive for a single investor to buy. Syndication allows investors to acquire properties that are too expensive for them to buy on their own. These properties also generate a larger income on a regular basis, which make them more attractive for investors.

A syndicator, also known as a sponsor, puts the deal together. They look for an investment property, secure the financing, and then look for passive investors who will participate in the syndication. Passive investors will then provide most of the capital and earn money from the cash flow and the equity. [7]

While it may share some similarities with REITs, multifamily syndication has some distinct characteristics. For example, you are unable to choose which properties to invest in under a REIT. But with syndication, you get to decide which syndication deal to join based on what property or Fund the syndicator is offering.

REITs and syndications also differ in terms of ownership. With REITs, you are buying shares in a company, meaning you do not actually own the underlying real estate—instead you own shares in the company that owns those assets. On the other hand, with syndication, you and your fellow investors create an entity such as an LLC that has direct ownership of the asset. [8]

Syndication deals may differ from one deal to another. Most of them are only accessible to accredited investors, while others are open to the public. Regardless, this type of real estate investment is a great source of passive income. The syndicator handles property management, so there is no need to worry about becoming a landlord.

Mistakes Investors Should Avoid When Pursuing Passive Income

With the right investment strategy, you can enjoy passive income through real estate. Passive income is an important wealth-building tool. Avoiding common mistakes can help investors generate consistent income without running into any trouble.

The number one mistake investors make when it comes to passive income is not having enough cash flow. Any real estate professional would tell you that “cash is king” and that your property needs to gain appreciation while you are earning steady cash flow. With a fluctuating market, your appreciation can be affected, which means you have to rely on cash flow as your main source of income. [1]

You need this income not only to build up your wealth and savings but also to take care of your property and keep it running smoothly.

Whatever type of passive income strategy you choose, you always need to make sure you are screening your tenants carefully. To get the best possible income from your real estate property, you should only lease or rent your units to the best possible tenants. Having a bad tenant can actually be more expensive than a vacancy, and you could end up spending more on repairs, a lengthy eviction process, or even a lawsuit. It pays to screen your tenants carefully. Check their records and references thoroughly. [1]

If you are interested in purchasing a single-family or a multifamily rental property, make sure you are prepared to be a landlord. Some investors fail to realize that this is an important part of the job. Newbie investors, for example, might go for this type of real estate investment not realizing that it is not a fully passive source of income. Being a landlord without prior experience is tough, and it is certainly not for everyone. This job should not be taken lightly—it needs to be approached as if it were a business.

More experienced investors choose to hire a property management company. And while this is a good way to save time and energy, real estate properties still demand your active involvement in terms of management. This means that even if you have a property manager on the job, you still have to provide regular care and maintenance of the property. Doing so will reduce tenant turnover and even improve your apartment building’s value. [1]

Finally, if you do take the route of being a landlord, you need to try and build healthy relationships with your tenants.  Keeping them happy will reduce turnover and ensure that they take care of the property. Even if they do move out, they will still leave positive reviews about your property online, which makes it more attractive to new tenants.

To do this, you need to ensure that all the needs of your tenants are being provided. Regular maintenance and repairs will ensure that the tenants are all satisfied with where they live. If they have concerns, it will be in your best interest to respond to them urgently. Some landlords even email their tenants regularly at least once a month to check in on them and make sure everything is in order. [1]

At the same time, you need to make sure all your tenants are following the rules, especially when it comes to rent. As a landlord, you need to hold them accountable when they don’t follow the rules. You need to collect rent promptly to make sure all your tenants are keeping up with their rent payments. Otherwise, delayed payments will hurt your cash flow.

Managing a rental property, whether it is a single-family unit or something as big as an apartment complex, is a big responsibility. It does provide passive income, but you really have to work to keep things going. If you are looking for a true passive real estate investment, multifamily syndication may be the best option for you.

Want Actual Passive Income from Multifamily Real Estate? Work With BAM Capital

If you don’t have the time, energy, or interest in becoming a landlord, you need an actual passive income from your real estate property. Multifamily syndication gives you all the benefits of owning a real estate property without the hassle of managing it.

Multifamily syndication solves a lot of the usual drawbacks associated with multifamily real estate investing. For example, buying an apartment is usually difficult because of the large barrier to entry. But in a syndication deal, accredited investors pool their money together to purchase a property they otherwise wouldn’t be able to.

Getting into multifamily syndication is easy if you work with BAM Capital. You can invest in multifamily real estate without the headache of running them yourself.

BAM Capital is an Indianapolis-based syndicator that has a strong Midwest focus, prioritizing Class A, A-, and B++ multifamily real estate properties. Their award-winning multifamily investment strategy minimizes risk for investors and creates forced appreciation. You can grow your wealth effectively through syndication. [9]

BAM Capital has a consistent track record and is known for providing safe and passive investments for their investors. In fact, they now have over $700 million AUM and 5,000+ units. BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. [9]

Accredited investors can schedule a call with BAM Capital and invest today.

Sources:

[1]: https://www.fortunebuilders.com/passive-income-real-estate/

[2]: https://www.investopedia.com/terms/p/passiveincome.asp

[3]:https://www.realtymogul.com/knowledge-center/article/investing-beginners-5-reasons-consider-passive-income-investing

[4]:https://www.boh.com/insights/generating-passive-income-with-commercial-real-estate-investing

[5]:https://www.dentaltown.com/blog/post/15888/how-to-create-passive-income-with-self-storage-investing

[6]:https://www.fool.com/investing/2022/02/02/6-reasons-reits-are-great-for-passive-income-now/

[7]:https://www.millionacres.com/real-estate-basics/real-estate-terms/investing-multifamily-syndication/

[8]:https://goodegginvestments.com/blog/reit-vs-syndication/#:~:text=Just%20as%20when%20you%20invest,a%20real%20piece%20of%20property

[9]: https://capital.thebamcompanies.com/