The pandemic has had some grueling effects due to the unofficial pay cuts and rising unemployment. This has stressed the need for passive income. It has brought a change in the way people considered passive income generation earlier. It has indeed specified that passive income is mandatory to shield yourself during low times like these. Along with the protection, here are a few other benefits that make passive income generation essential.
Why Passive Income?
Passive income lends a helping hand to meet future demands and expenditures. Any unanticipated concerns that require heavy monetary resources can be addressed by liquidating your passive income assets.
It shields you during challenging times like Recession, Inflation during which the costs of living rise. Passive investments earn and support your income during these times.
Passive Income sources let you earn from anywhere as today’s technology works the best in favor of every investor through the various digital platforms. You can invest in a property, and the income flows into your account wherever you might be!
After knowing how passive income supports you, if you are pondering how to earn passive income, let me tell you Real Estate is the destination! Here are a few passive income investment options that you can try out!
Types of Passive Real Estate Investing
To put it in simpler terms, passive real estate investing is investing in real estate without much hands-on effort and work or active participation from the investor.
It is of two types – direct and indirect.
Direct Passive Investing
When it comes to this type of investing, an investor will have to purchase a property or portion of a property and give it on rent. Often, investors that purchase a property will hire a property management company to take care of and maintain their property. Post the purchase of property, hiring a property management company allows investors to be hands-off with managing the property. Hence, justifies the title ‘passive real estate investing.
Indirect Passive Investing
Whereas, indirect passive real estate investing is a process where individuals put their money in a Real Estate Investment Trust (REIT) or a real estate-related mutual fund (MF). Investors collect their passive income in the form of returns or dividends from funds. This investing is considered passive because there is no daily management needed and it’s considered indirect because it doesn’t deal with a certain specific piece of real estate.
Pros of Passive Real Estate Investing
The best part about passive real estate investing is that it yields passive income. Having money to work for oneself is always a big plus.
A few of the advantages this sector of real estate offers are :
Comparatively Safe
Passive real estate investing allows inventors to pool their money into a fund that will involve multiple properties. This diversifies investors’ portfolios and dilutes their risks. Investors can avoid the pitfalls of not being a professional in the real estate field by permitting experienced managers to handle the transactions like buying, leasing, and, overseeing operations as they will know better about the proper pricing for rentals and property sales.
Time Saver
This type of investing frees up an investor’s time to do whatever he/she does best. Once they get committed to an investment, they can simply relax.
Lower Investment Capital
There’s no other way to invest in multiple properties on a shoestring budget except for this part of real estate. And that’s being made possible as each investor shares the financing with others. This further gives them a chance to receive substantial earnings with a minimal cash output.
Cons of Passive Real Estate Investing
Passive real estate investing has its own set of concerns. But, some of them come with the realities of real estate investing. Here are a few:
Lack of Liquidity
Since passive investors will have no control over the sale of the properties, their money will not be available to them at their discretion.
Small Slice of the Profit
Out of the investment, active investors will always get the lion’s share of the asset earnings which includes the income from rentals and sales. On the other hand, REITs also take a 10% bite out of the properties’ taxable earnings. So, this makes it clear that passive investors would be receiving a smaller slice of the profit or the income from the total investment earnings.
Loss of Control
Passive investors will have no control over rental policy, renovations, tenant selection, or even the marketing of the investment property. They must have complete faith in the management team and even be able to accept the losses if incurred by the management company or the active player.
But it’s also not advisable to shun the option completely as it’s worth it all, because its earnings (including the rents and sale profit share) are not away from the best for a passive investment option.
Real Estate Investments for Passive Income Generation
Commercial Leasing
Commercial properties occupy a prominent place in the bucket list of investors owing to the high returns generated and the multitude of investment options they offer. There are various commercial properties available for you to invest in, like warehouses, office spaces, data centers, and so on.
Commercial properties offer a high Return on Investment (ROI) of approximately 10-12%, ensuring good returns. Commercial Real Estate assets have long-term leasing agreements as compared to other assets of real estate. This reduces the vacancy risk and provides a stable income flow, which is the prime motive of passive income.
Commercial Leasing demands attention and cares owing to the changing trends and demands of the markets. The property needs to be upgraded and renovated accordingly. The costs of maintenance and repairs are considerably high. These properties also require you to be in touch with the trends; else, you shall be left behind! So, if you are wary of these factors, there is another passive income source – residential property.
Residential Income
The very first investment option that strikes anyone when asked about passive income is residential properties. Residential properties are one of the best passive income-generating ideas. You can buy a residential property and rent it out to earn steady regular returns.
These properties offer you various advantages over commercial properties in terms of maintenance and repairs, up-grading the asset, and many more. The maintenance and repair costs are comparatively less for residential properties. Residential properties are the saviors amidst the challenges. In simple words, they help you cope with the rising expenditures during inflation.
Being the utility sector, residential real estate is deemed evergreen, and any falling trends are intermittent. Hence, they offer security against your investment along with passive income generation.
Though these stand at the pinnacle of passive income sources, these assets demand attention and care. The repair concerns have to be addressed at the earliest, and the tenants should be screened for hassle-free earnings. On account of vacancies, you have to hunt for new ones. In the busy world, you might want to avoid these minor hitches. If you want to avoid these, then proceed to the following smart passive income source.
Fractional Assets
Fractional assets are properties that are owned by multiple investors who have contributed to the investment. In fractional ownership, the investors with small ticket sizes gather the money and invest in the real estate properties to earn returns.
Fractional assets are the best passive income investments as they offer the investors every privilege possible. You can invest in institutional-grade assets with as low an investment as Rs. 5 Lakhs and earn lucrative returns. Often, the properties are high-performing assets like warehouses and high-end residential assets that offer fractional investments. Hence, they bring in high returns.
If you purchase a property, your property would be managed by the property manager, who the company will hire to vest your resources. Fractional assets offer investors multiple investment options ranging from residential to commercial support. Therefore, you can bag a share of your dream property and earn hassle-free income, which is the crucial feature of passive income.
Debentures
Debentures are debt instruments that help the developers pool the investments from various investors. The investors buy the company’s debentures and earn returns through the interests paid out by the company on the frequency of monthly, quarterly, or annually.
The earnings from debentures best define passive income as they let you earn without holding property and managing its concerns. Among the types of debentures, secured debentures offer the security of investment as the company assets back your investments. Under any circumstances like defaulting, you can liquidate the asset and earn back your investment. This seems to be the golden egg as the investment’s chief objective is to be safeguarded while making profits.
Peer-to-Peer Lending
Peer-to-Peer lending, commonly referred to as P2P lending, is a passive income-generating source where the developer seeks a loan from the individual. You, as an investor, give the funds to the developer. You get to earn through the interests paid by the developer. The developer does not have to go through the tedious processes of the financial institutions. You can make profitable returns through the stakes as the interest rates are comparatively higher owing to the risk.
Though it seems lucrative and straightforward, the risk factor involved in this income generation is high. If you are a beginner, you may try out other options mentioned above.
Real Estate Investment Trust (REIT)
The best way to invest in real estate properties through the stock market is to purchase shares of a REIT. Assume REITs like mutual funds – investors purchase shares in a REIT and the REITs further invest capital (the pooled amount) in a portfolio of commercial properties.
The best thing to know as an investor is that REITs must distribute at least 90% of their taxable income to shareholders, as directed by SEBI. So, this makes them excellent choices for income-seeking investors and long-term capital appreciation seekers. And since they are tradable like any other stocks, REITs present themselves as an excellent fit for retirement accounts like IRAs.
Real Estate Crowdfunding
Real estate crowdfunding refers to a cluster of investors who contribute money from each of their sides to become part of a real estate deal.
Sometimes crowdfunding also works to help a real estate investor who might be having a lead for a lucrative deal but not the funds to invest in it. This is where crowdfunding comes as a savior as other investors gather their resources and help the active real estate investor to complete a project and sell it, mostly at a high-profit margin.
Real estate crowdfunding is typically managed or operated through several online platforms where individuals can own property and also earn profits with only a few clicks. Investors visit the online platform and its offerings and browse through various opportunities that appeal to them. Once they are done selecting an investment that satisfies their requirements, their funds are summed with other investors and the investment deal will be closed. Investors then start to analyze the performance of their investment and collect the passive income it yields.
Real Estate Funds
Real estate funds are types of mutual funds(MFs) that invest exclusively in real estate. Many real estate funds put their money in REITs. They present certain benefits that may seem appealing to passive investors. Also, they offer greater diversification, which is intended to mitigate risk and create a higher potential for returns. A major part of a real estate fund is most often invested in commercial properties like apartment complexes, offices, retail shops, and land.
Collaborate with an Active Investor
Especially with a rental property, teaming up with an active partner can be beneficial to both- the investor and the active partner. This arrangement allows investors to get handsome returns on the invested money without having much work on their hands. The active partner generates more leverage with the extra capital i.e of the investors. The investor’s financial gain would be a certain percentage of the rental income and a share of profit from the eventual sale of the property. Also, investors’ risks are much lower because the active partner is completely responsible for all losses. Investors only stand to lose the money invested and nothing more than that.
Bottom Line
Passive income generation is always desirable, owing to the growing expenditure and cost of living. Passive income supports you under unforeseen circumstances and helps you meet your expenses. It wants to earn passively, and real estate has the most to offer you through various passive income investments like residential, commercial properties, fractional assets, and many more discussed in this article.
Real estate provides ample opportunities that are less risky as compared to socks and private bonds. The return offered by these investments is substantially high when compared to other market instruments. Every asset has its suitability range, and you can evaluate your obligations and aspirations before you invest in any property to avoid any setbacks.
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