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Many people aspire to achieve financial freedom that would allow them to navigate through life as they please without having to worry about financial boundaries. To achieve financial freedom people often look to various sources for generating passive income simultaneously. In this respect, real estate is a popular and also common place to invest. It is very common among investors to own rental property through which they generate a passive income on a monthly basis. However, real estate investing is not limited to just purchasing rental properties. Real estate offers many opportunities to invest into that may involve owning the property directly or indirectly. Here are rules to keep in mind while starting off your investment journey to earn passive income through real estate.
Build Your Strategy
Before starting off, it is important to decide how you would like to get involved with real estate. Are you considering owning an apartment or multi family home to generate monthly rent, or own a commercial property and rent out to business tenants? Do you wish to earn passive income without actually owning properties? Assemble a list and a plan of action based on the type of real estate investment and the type of risk that you are willing to take.
You need to assess your current financial standing and where do you wish to reach in terms of your financial goals in the short and the long term. Therefore, make sure you have a thorough budget plan in place that will help you make better investment decisions. Furthermore, consider how hands-on you want to be with stuff like collecting rent and managing maintenance, and if you’d rather assign those tasks to a property management firm.
Do Not Be Too Passive
To ensure a steady and timely flow of income for real estate, it is important you put in considerable efforts to work on your investment. This is especially prudent in case of owning rental properties. Being too passive in your approach while dealing with rental properties could encourage significant delays and negligence from the tenants. The following the ways in which you can ensure due diligence on your behalf:-
- Try to find the right real estate asset that generates the highest ROI and value for you. Try to expand your search to beyond your neighbourhood.
- Get an inspection to understand the repair requirements of your property based on structural and safety concerns. Get an estimate on the various upgrades and renovations to make your property more attractive to bidders. It is crucial to make necessary repairs after a thorough inspection to avoid frequent maintenance of the property.
- Make efforts to screen your potential tenants before finalizing the deal. A bad tenant can end up costing you much more than a vacancy, whether it’s due to property damage or a lengthy, costly eviction process. Therefore, conduct due diligence while screening your tenants on the basis for their past records and references.
- Collect your rent promptly. Make sure you are aware about the prevailing rental rates and collect your rent on time each month to ensure a steady cash inflow.
Calculate Your Return On Investment
You want to make sure that the actual cost of your maintenance and purchases is less than the market value. You’ll have equity in the property this way. Bear in mind that the return on investment is key. This is not the house for you if the ROI doesn’t make sense. The return on investment is what will provide you with monthly passive income.
Diversification is Key
Investing in a portfolio that is diverse in terms of property type, tenant mix, and geography significantly increases the likelihood of a consistent and reliable stream of income over time. Moreover, depending on the amount of funds and time that you wish to allocate for investment into real estate, consider investing into a combination of direct and indirect forms of passive real estate investing.
- Under direct passive real estate investing, investors purchase a part or whole property and put it up for rent. Although it requires some level of participation from the investors, there is always an option to hire property managers who would look after the property and complete all the formalities on your behalf. Therefore, direct passive real estate investing is concerned with rental property as an income source be it, residential properties or commercial real estate.
- Indirect passive real estate investing allows individuals to earn profits without the hassle of managing the property. Therefore investors have the option to invest in REITs, real estate crowdfunding, real estate mutual funds (MF) and collect their passive income in the form of rents or dividends.
Stay Up-to-Date With Real Estate Market Trends
During periods of market uncertainty or broader economic changes, such as a recession, some segments of the real estate market may perform better than others. For example, during tough economic times, multifamily properties can be more resilient than commercial properties such as hotels or office buildings. When the country is going through a slowdown, knowing how different parts of the real estate market respond to changing economic conditions will help you find the best ways to keep passive real estate income coming in.
Decide Your Time Horizon
It is important to be clear about your short term and long term financial goals and needs. Most high quality real estate assets are illiquid and are suitable for long term investments. This is especially fruitful in the long term as the property appreciates due to increase in the price rates over the years. On the other hand, for investors looking for easy liquidity options where they can liquify their assets at any point in time to support their immediate financial needs, there are different ways of passive real estate investing. In most cases investors must be patient with their real estate investments, as these investments are said to be the most lucrative in the long term. Therefore, it goes back to your ultimate investment strategy and due diligence.
Seek Professional Help
If it’s your first time investing in real estate for passive income or you’ve owned rental properties for a long time, considering professional assistance is a smart idea. Connecting with an experienced agent who can walk you through the benefits and drawbacks of different investment options is the first step. If you’ve found a passive income rental property, your team could grow to include a property manager, real estate attorney, and contractors to help you get the property in shape or keep it maintained. Some of your earnings would go into paying them, but generating real estate income without having to do any heavy lifting yourself can be well worth it.
Analyse Your Funding Options
One of the most indispensable rules to follow is- to get your funding options in place before you start investing. Taking a loan is usually a common way to source funds. For this, you must first analyze your credit score and if in case you have a poor credit score, work towards improving your score by settling your ongoing debts and credit card bills.
If you’re looking for a steady way to develop financial independence over time, passive income real estate might be the right investment strategy for you. However, the essential take-away from this article is to follow certain rules to ensure that you are on track to receiving a stable passive income. Any investor should enter a deal determined to do their due diligence, ask the right questions, and have the degree of dedication and participation necessary to make that particular investment strategy successful.
Assetmonk is a unique online real estate investment platform that can help you on your journey to achieve your financial freedom. We offer products that are tailored to meet your personal financial needs. Assetmonk offers prime properties through due diligence in Hyderabad, Bangalore and Chennai. To know more about our offerings, click here!
Rules to Consider While Planning to Earn Passive Income From Real Estate FAQ’s:
What do you mean by passive real estate investing?
Investing in real estate without putting in a lot of work or being personally involved is known as passive real estate investing. There are no landlords in passive real estate investing. Syndications, online crowdfunding, private real estate funds, and real estate investment trusts are all options for investors. Passive real estate investment demands the least amount of expertise and commitment while ensuring greater diversification and liquidity.
What is an example of a passive real estate investment?
There are two types of passive real estate investing- direct and indirect. Direct passive real estate investing involves physically owning a property and earning income in the form of rent. This could either be a residential property or commercial real estate. On the other hand indirect passive real estate investing does not require investors to physically own an asset. Rather, they can simply co-own a part of a property with other investors or simply invest their money into companies that own several properties such as REITs.
As a beginner, how can one generate passive income from real estate?
Earning passive income through rental properties is one of the most common forms of real estate investments. If you find a valuable property that generates a decent ROI, you can ensure a steady passive income. Moreover, there are many different options to explore as well. Consider investing in real estate crowdfunding that offers you passive income in the form of dividends from the profits generated on your share of the property owned. Visit Assetmonk to know more about real estate crowdfunding.
Can small real estate investments generate decent passive income?
The real estate investment trusts (REITs), real estate crowdfunding, and partnering with an active investor to buy assets are the three key ways to invest passively in real estate with a small investment amount. These forms of investing require lower initial capital requirements and allow investors with lower funds to invest into real estate while offering great returns in the form of dividends and rent.
