Is Real Estate Investment Considered Passive Income?

Real estate investing has long been considered a lucrative way to generate passive income. However, there are many different ways to invest in real estate, and not all of them can be considered passive. In fact, a lot of real estate investments require a lot of time and energy, which makes investors question if they can even be considered passive investments.

Generally speaking, real estate investing involves the acquisition, ownership, management, rental, or sale of real estate for the purpose of generating a profit. See the structure of a syndication deal to learn more. 

There are many ways to accomplish this. Some investors use residential properties like houses and apartments, others go for commercial properties such as office buildings and retail spaces. Meanwhile, some investors purchase industrial properties like warehouses and manufacturing facilities, or even vacant land. [1]

Real estate investors typically aim to make money through rental income, appreciation of property value over time, or a combination of both.

However, beyond the type of property, there are also several possible approaches to real estate investing. Some investors focus on buying properties and renting them out to tenants to generate a steady stream of rental income. Others engage in “flipping,” where they purchase properties, renovate or improve them, and then sell at a higher price for a profit.

Owning investment properties can help investors build wealth, diversify their investment portfolio, and increase their income. Just keep in mind that different investment strategies have different levels of involvement, and they may range from truly passive to somewhat time-consuming. [1]

Here we will discuss how you can earn passive income through real estate investing.

What is Passive Income?

First we will briefly discuss what passive income means. Passive income refers to earnings generated with minimal effort or active involvement after an initial investment of time, money, or resources. Some sources of passive income may require a lot of work to begin with, but they eventually earn money while the owner sleeps. [2]

Unlike active income earned through traditional employment, where you exchange time for money, passive income streams continue to flow even when you’re not directly working on them.

These can include rental properties, royalties from books or music, dividends from stocks, affiliate marketing, creating and selling digital products, or income from online businesses. The allure of passive income lies in its potential to create a more flexible lifestyle, allowing investors to supplement their primary income or even achieve financial independence by building streams of revenue that require less ongoing maintenance.

When it comes to wealth building, personal income is considered the greatest tool. Most people would welcome additional income as it provides many benefits. Additional income makes it possible to build wealth faster in order to take an early retirement. It even serves as a backup plan in case the person loses their day job. [2]

Investors often seek passive income as it offers a consistent stream of earnings with minimal ongoing effort or direct involvement. With passive income, investors are able to diversify their revenue sources, reducing reliance on active work or a single source of income.

There are many possible sources of passive income such as dividends from stocks or interest from bonds. But is real estate one of them?

Is Real Estate Investing Considered Passive Income?

Depending on the investment strategy, real estate investing can be considered a form of passive income. However, most real estate investing strategies have varying levels of involvement.

Rental properties, for instance, can generate passive income from its tenants. Real estate investors buy residential or commercial real estate and then rent them out in order to enjoy a steady stream of income. This revenue stream can help provide stable income, which is perfect for investors looking for an alternative source of income besides their investment securities like stocks and bonds. [1]

Real estate can be perceived as a hybrid form of income, combining elements of both passive and active investments. It is not usually categorized as purely passive income despite its ability to generate substantial returns and that’s because it demands plenty of active involvement.

Locating properties, conducting market research, negotiating deals, arranging financing, and managing renovations or property improvements require significant time, effort, and expertise.

Unlike truly passive income streams like dividends from stocks or interest from savings accounts, real estate often demands active participation, especially during the acquisition and setup stages.

Even when the rental property is ready for tenants, it still requires ongoing management. This is what blurs the line between passive and active income. This involvement can be considerably more intensive than other forms of passive income, where the investor has minimal to no involvement in the daily operations. [1]

Finally, the level of control and decision-making involved in real estate investment can be substantial. Investors often need to make strategic decisions regarding property improvement, rental rates, tenant selection, and when to buy or sell properties.

Real estate investment through REITs is generally more passive. Investors buy shares in a trust that owns and manages income-producing properties. The management team handles property operations, rent collection, and property maintenance, allowing investors to earn dividends without direct involvement in property management.

So while real estate investment can provide passive income, the level of passivity often depends on the chosen investment approach and the degree of involvement the investor decides to have in the management and operations of the properties.

The Challenges of Being a Landlord

Being a landlord comes with a multitude of challenges that can make the role quite demanding. Owning a rental property means taking on all the responsibilities that come with that title.

The responsibility of managing properties involves a diverse set of tasks. This includes property maintenance, handling tenant concerns, ensuring legal compliance, collecting rent, and dealing with unforeseen emergencies. Landlords often wear multiple hats.

Each of these tasks requires time, effort, and professional expertise. You need to navigate legal complexities, understand tenant rights, and manage the property’s finances.

The relationship between landlords and tenants can also be complex. While most tenants are responsible and respectful, conflicts can arise over various issues such as rental payments, property damages, or differing expectations. Resolving these conflicts requires effective communication, negotiation skills, and sometimes legal intervention.

Part of being a landlord is choosing your tenants wisely. To avoid the risk of vacancy, which may impact your cash flow, you need to avoid problem tenants. A bad tenant can be a financial drain and a headache. Some tenants don’t pay on time or pay at all, which could lead to a lengthy eviction process. Others trash the property, don’t report maintenance issues, or host extra roommates. [3]

All of these can be emotionally taxing. So while the property is generating passive income, being a landlord does not really feel like having a passive investment.

This is why many real estate investors seek alternatives that are truly passive—investments that do not drain your time, money, or energy. Some investors go for REITs, but accredited investors have an even better option: multifamily syndication.

Real Estate Investing Alternative: Multifamily Syndication

For investors who are interested in real estate but do not want to manage the property themselves, the best alternative is real estate syndication, particularly multifamily syndication. This investment allows investors to enjoy the benefits of owning an investment property without all the work that usually comes with it. Real estate investors can enjoy cash flow, tax breaks—and depending on the deal structure—appreciation, without having to become a landlord. [4]

Real estate syndication is an investment strategy wherein multiple investors pool their financial resources together to invest in a single real estate property. This approach allows investors to participate in much larger real estate deals than they normally would be able to as a lone investor.

A syndication deal typically involves a sponsor or a lead investor who identifies, acquires, and manages the property, while investors contribute capital.

The real estate syndicator, also known as the general partner, takes on most of the responsibilities in the investment. They are responsible for underwriting the deal, completing due diligence on the property, arranging the financing, building and executing the business plan, and finding investors to participate. When it is all said and done, the syndicator also takes care of property management. [4]

The syndicator will form a legal entity, often a limited liability company (LLC) or a limited partnership, where investors become shareholders or limited partners.

The investor’s role is only to provide a portion of the capital needed to acquire the property. In exchange, they own a portion of the property based on their contribution. This is a true passive real estate investment because the investors do not have any other responsibilities beyond that and paying a few fees.

Passive investors receive passive income distributions from the asset. These may be distributed on a monthly or quarterly basis. The profit split will be detailed in the private placement memorandum (PPM) or the syndication agreement, which investors may review before participating in the syndication deal. [4]

While this type of deal can be done with any real estate property, multifamily syndication is the most popular version due to several reasons. For example, most multifamily properties such as apartment communities are much more expensive compared to single family properties. They are larger and hold multiple units, so these properties are generally too expensive for a lone investor to acquire. But through multifamily syndication, these investment properties become more accessible. [5]

This collective approach also spreads risk across multiple investors and properties, providing a more diversified investment portfolio.

Multifamily syndication is also perfect for wealth building through passive income generation. Multifamily real estate properties have several units producing a strong and consistent cash flow. Even if one or two units become vacant, the monthly income is not severely impacted. Compare this with single family properties that stop generating income when they become vacant. Multifamily syndication is associated with a generally higher yield on investment. [5]

Syndication deals are also managed by experienced professionals who can handle operations, maintenance, tenant issues, and property enhancements. The syndicator will either take care of property management themselves or hire a third party property management company to take care of it. In any case, investors do not have to worry about the day-to-day operations of the apartment community.

This passive involvement appeals to those seeking a hands-off investment opportunity while still reaping the benefits of real estate ownership.

Keep in mind that each syndication deal is different. You still need to perform your due diligence and analyze each deal carefully before participating. It also helps to work with a syndicator that you trust.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

There are many ways to earn passive income through real estate investing. But if you do not want to take on the role of landlord and handle all of the responsibilities that come with it, then multifamily syndication may be the investment strategy for you.

Take note that most of these deals are exclusive to accredited investors. As you may know, real estate investments are generally illiquid and that also applies to multifamily properties. It is hard to access your funds once it is invested in a syndication, meaning investors have to be comfortable with that level of illiquidity when participating in a syndication. Accredited investors, unlike regular investors, have the income and net worth to protect them from the risks of multifamily syndication. After all, no investment is completely risk-free. Learn how to become an accredited investor

Multifamily syndication is comparatively lower risk when it comes to real estate investment opportunities. But if you want to lower your risk even further, then work with a trustworthy syndicator.

Work with BAM Capital

BAM Capital is an Indianapolis-based syndicator with a strong Midwest focus. Not only do they have a track record for excellence, but they are also considered leaders in their industry.

Accredited investors love working with BAM Capital because of its award-winning investment strategy that creates forced appreciation while mitigating investor risk. This syndicator prioritizes high quality multifamily real estate properties with proven upside potential and in-place cash flow. They only go for Class A, A-, and B++ multifamily properties. [6]

BAM Capital is also a vertically-integrated company, meaning they can guide you through every step of the syndication process, from property acquisition to management to renovations. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [6]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.

Sources:

[1]: https://www.investopedia.com/terms/i/investmentrealestate.asp

[2]: https://corporatefinanceinstitute.com/resources/accounting/passive-income/

[3]: https://www.investopedia.com/articles/investing/122415/why-real-estate-risky-investment.asp

[4]: https://www.forbes.com/sites/forbesbizcouncil/2021/10/26/a-guide-to-investing-in-real-estate-syndications/

[5]: https://insightssuccess.com/pros-and-cons-of-real-estate-syndication/

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