Is Real Estate Really a Passive Investment?

Obtaining real estate has been dubbed as one of the oldest and most reliable paths to building wealth. It has been tried, tested, and proven to yield its results. Considering it's no surprise that there are platforms devoted to discussions focusing on all things real estate, especially buying, selling, and most popular, generating passive cash flow with real estate.

But, is real estate really a passive income?
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What Does Passive Investment Really Mean?

Passive income is typically described as earning money from an activity that requires minimal effort aside from the initial setup. A few common ways that make this possible are Real Estate Investment Trusts (REITs), Dividends, House Hacking, and Rental Properties.

‍REIT- Real Estate Investment Trusts (REITs) are similar to stocks. Individuals can buy shares of a company that owns, operates, or finances a real estate asset. The shareholders earn dividends, or payments from the income generated by the asset.

Dividends- Dividends are the actual payments distributed from an income-producing asset. Some REITs pay out dividends.  Other earning opportunities like syndications or crowdfunding, both of which are group investing, do as well.

House Hacking- House hacking became increasingly popular in recent years as the idea of homeownership, while generating another income stream, required a little more creativity. Podcasts like Earn Your Leisure shared massive insight into the strategy. House hacking, common in real estate assets such as duplexes, but essentially can be achieved with even a single-family home, involves living in one part of a property while renting out other portions to offset housing costs.

‍Rental Properties- Rental properties have been a source of a passive income stream since the beginning, and may be viewed as a quite solid strategy, as it is generally a little more long-term. It is owning property that is rented out to tenants in exchange for monthly payments.

‍Short Term Rentals - AirBnB, VRBO are platforms that allow investors or landlords to make a partial space (room rental) or full space available for renting on a short term basis for a fee.

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Defining Passive vs. Active Income

Passive income characteristics often include minimal daily management or regular effort. Common examples beyond real estate include stocks, dividends, and REITs. On the other side of the coin is active real estate investment. Active investing requires more involvement, daily management, and overall a more hands-on approach. Common examples include Wholesaling, Fix and Flip, and, in some cases, long-term rentals.

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Is Real Estate the Right Passive Investment for You?

Real estate, like other investments, comes with a set of risks, and generally, the bigger the risk, the higher the reward. Determining whether or not real estate is the right passive earning opportunity starts with a self-evaluation based on a few significant variables, such as:

Investment strategy - It's essential to know the type of assets, the amount of time that can be committed to development, managing, and other mandatory approaches.

Involvement Level - Is the goal to be hands-on or more hands-off 

Risk Tolerance - How much can be invested, and how much loss can be tolerated?

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How Can A Property Manager Help With Generating Passive Income?

If the goal is to make passive income, how can one switch from active to passive in terms of operation and still earn?

For starters, pursuing an opportunity that requires less of a hands-on approach is ideal. But, if you are building out a real estate investment business with the intent to grow a portfolio, becoming less hands-on is still very possible through leveraging resources specifically curated to onboard the daily operations of generating income and protecting the asset - a property manager.

Property managers are responsible for managing properties. Their tasks include:

Tenant screening- compile information for incoming residents, conduct screening process according to established guidelines. 

Rent Collection - Collect rent from residents, manage, and mitigate delinquency.

Maintenance Oversight - Oversee incoming service requests, negotiate with vendors, and dispatch repair orders.

Handling Disputes - Manage disputes in accordance with the lease agreement and property policies.

Legal Compliance - Maintain legal compliance, including annual inspections and other compliance, according to local and state laws.

Real estate can be a passive investment when handled accordingly. As an investor, the primary goal is to optimize the cash flow and reduce the hands-on aspects of the operation for it to become a true passive income investment. Outsourcing the daily onsite operations to a responsible property management team is the most effective way to achieve this. In addition to the daily operations, property managers are key to decreasing vacancy loss, managing turnover rates, and maneuvering the local market throughout market fluctuations.

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How Can NREMG Help You Convert Your Real Estate Into A Passive Investment?

While real estate can be passive if strategically structured, it often involves significant active involvement. Evaluate your investment style and explore income-earning real estate options to align your approach with personal and financial goals. For a truer passive approach, connect with an effective property management company that is knowledgeable of the local market and can implement a customized strategy geared towards preserving the asset while optimizing the cash flow.

If you are looking to take a more hands-off approach while scaling your passive earnings, contact National Real Estate Management Group and learn how our property management team can increase your cash flow.

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