Most people are familiar with active income strategies, which allow you to earn a living based on the work you produce (in the form of say a paycheck). So as it goes, when they stop working, they stop receiving a paycheck. The financially savvy person though, focuses on investing in passive income streams that allow them to continue to earn even after the work is completed. So how do I get started? We hear you asking. Let us show you.
Earning Cash-Money through Investments into Real Estate?
If given the choice, most of us would prefer to go with a passive income stream, then the question begs, why don’t more people pursue these types of investments?
Well, one answer is that most people think earning residual income is attainable only by the loaded. However, there are a number of ways for everyday investors to create residual income streams regardless of your net worth.
Some of those are investments into stocks or even financial instruments like CD’s or Bonds, however, your returns are generally relative to the level of risk you as an investor, are willing to take.
A well-known asset class, real estate—both residential and commercial—has become one of the most popular ways to produce passive income and tends to be less risk averse for the investor themselves as they are investing into an actual tangible real estate asset. Historically, creating a passive income stream through real estate investing has required a significant up-front investment, but thanks to new investment vehicles, those interested in earning passive income through real estate investments have several options.
Building Passive Income through Real Estate
A direct investment is an asset purchased with the sole purpose of earning you revenue. Income from an investment property can be earned through cash flow from the asset or an eventual sale. For example, a commercial rental property where businesses lease office space or an apartment building where tenants rent a home to live in.
In addition to the cash flow and profits earned for an eventual sale, you are also earning appreciation over the long-term and any direct tax benefits of depreciation. Acquiring an investment property often requires large upfront capital and lots of work. As with any investment, these types of investments carry the risk of unexpected and costly liabilities. Finally, you should know that an investment property is relatively illiquid—meaning you have limited options to sell if needed.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are large portfolios of income-producing real estate investments and is required by law to distribute 90% of its earnings to investors each year. Due to their special tax status, REITs must follow strict compliance standards and carry certain quality standards for both the vehicle’s investment strategy and the real estate experience of the managing team.
The liquidity premium results in lower relative returns for all investors, regardless of whether or not they choose to sell their shares. Also, publicly-traded REITs tend to be correlated to broader market volatility, meaning that the share value may fluctuate depending on how the stock market is doing, regardless of whether or not anything has changed with the underlying properties owned by the REIT. Most notable though is that when you invest in a REIT, you do not actually own real estate, you own a share of stock in a company.
Private Equity Funds
A private equity fund is a collective investment fund that pools the money of many investors to invest in real estate. These funds often consist of several different investments like direct investments and ground up developments, which increases diversification for investors. Additionally, these fund managers are often experts in real estate and have proper due diligence standards in place.
Traditionally, these private equity funds are illiquid and require a higher investment minimum. These funds are often formed by institutional investors and high net worth individuals and typically have a fee structure with a preferred return to the investor in addition to a split of the cash flows as well as profit from an eventual sale of the asset or portfolio of assets.
So, are you interested to take the next step towards creating a passive income for your future? If so, the first step would be to research a well reputed firm to work with. As a CRE firm we act as a fiduciary for you and are responsible to strategically execute asset business plans and management. We handle the hard work for you! Remember, not all CRE firms are created equal and selecting best-in-class groups can position investors for upside in a deal while mitigating downside risk. For more information or to create your own passive income stream through investments into real estate, contact the experts at MarketSpace Capital to learn more.