Dear valued investors and future investors,
It’s time once again for CPI Capital’s weekly news briefing. This briefing contains a mixture of updates, commentary and informative related articles about the lucrative world of passive real estate investment.
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This week we take a more detailed look at some of the top ways to earn income from passive real estate investing or, perhaps, to be more accurate “passive investing” and “semi-passive investing”, as some of the ways suggested do involve a modicum of effort!
We’ve talked about this before but just what is real estate passive investing?
Being a passive real estate investor is quite the opposite to being an active investor, but there are, clearly, some areas in between these extremes.
Passive investors are presented with REPE investment opportunities from active investors. They do not have to look for investment opportunities and are not responsible for any of the property’s day-to-day operational management or other issues such as changes in cap rates.
Once an investor invests capital with the entity sponsoring or promoting the investment opportunity, the next step is to await dividend pay outs and, hopefully, profits once the asset is refinanced or sold.
In short, the passive investor provides their capital to the active investor and reaps the investment returns with little to no effort.
According to the IRS, passive income is regular earnings from either:
- real estate and generated from rental activities and other real estate investments;
- a trade or business activity such as dividend income or royalties from a book(s).
So what are the top 10 ways to make passive income from real estate?
1.Real estate syndications
Real estate syndications enable an investor to become a limited partner (LP) in a single commercial real estate asset (such as a multifamily or BTR-SFR property, offices or even self-storage facilities). Alternatively, investors may invest in a private equity real estate fund managed by a qualified sponsor.
The LP shares in the passive income generated by the property or fund and can also enjoy capital appreciation when it’s time to sell the asset. Syndicated real estate investments also generally offer a higher income yield than publicly traded REITs.
Investors can participate in single real estate syndications and funds or directly with real estate deal sponsors or even subscribe through various online portals.
Some real estate syndications are only open to so-called “accredited investors” who must have a net worth of more than $1 million, excluding their primary home, or earn at least $200,000 pa.
2.Real Estate Investment Trusts (REIT)
REIT’s which trade on stock exchanges are one of the easiest and most liquid ways to invest in real estate and collect passive income. In order to maintain their tax-advantage status with the IRS, REITs must distribute 90% of their taxable net income to shareholders via dividends.
After the initial research and selection, REITs are a classic passive real estate investment as the work is all done by real estate professionals.
Many of the more than 200 publicly traded REITs in the US focus on specific property types, often institutional grade assets. These may include residential, retail centres, offices or industrial properties or the REIT may be active only in certain markets or regions.
REITs do have some exposure to stock market volatility and its share price may be affected in periods of economic downturn, depending which asset class it invests in, plus it may have to temporarily halt or reduce its dividend.
3.REIT mutual funds
REIT mutual funds are broadly similar to REIT ETFs as they, too, own shares in a basket of REITs, meaning that investors have broader exposure to their chosen sector. These mutual funds are actively managed, buying shares in REITs which are expected to outperform relative to a benchmark index.
REIT mutual funds usually have a higher expense ratio than REIT ETFs, as well as a higher minimum investment at or around $2,500.
4.REIT Exchange Traded Funds (ETF)
Another popular way to start generating passive income from real estate investment is through REIT ETFs which are essentially a “fund of funds”. These entities hold shares in a basket of REITs, which spreads risks and mitigates the chances of dividends significantly diminishing if one REIT is underperforming for any reason.
The entry cost to REIT ETFs is relatively low and the shares are making them highly liquid. However, as with public REITs, they may expose shareholders to stock market volatility.
5.REITs which are not publicly traded
As the name suggests, non-traded REITs are private investments and don’t trade on stock exchanges and investors acquire shares through a financial advisor or an online portal. In the past, these types of private real estate investments have offered a higher income yield than publicly traded REITs.
Non-traded REITs are relatively illiquid, so that it’s not always easy to buy or sell shares and shares may only be redeemed once a quarter and with a limit on the number of redemptions they’ll complete.
Passive investors: do you know how to vet a real estate investment group before making an investment?
Download and read our FREE e-book: 25 Fundamental questions to ask a Syndication Sponsor before making your investment
6.Real estate backed debt and debt-like investments
Getting involved with real estate-backed debt means lending money to finance the purchase, renovation, redevelopment, or ground-up construction of a property. Some key options include:
- lending funds for a development project or property with added-value potential
- buying mortgage notes
- investing in preferred equity or mezzanine debt or on a single asset syndication transaction.
As real estate debt is a fixed-income investment, it doesn’t offer any potential for capital appreciation, hence one of the reasons it is considered as a lower risk investment.
This really falls into the semi-passive (some might say the active) investment category but acquiring a rental property can be a way to generate passive income, particularly if you find a good long term tenant who doesn’t cause any problems and pays rent on time every month. A surprisingly large number of people own condos or single-family homes for rental and generate relatively steady rental income.
However, the income may fluctuate month to month depending on expenses, sometimes there may also be unexpected repair or maintenance costs. Then, of course, is the significant up-front investment cost.
8.Splitting one home into several units
Yet another way to generate income from a property; for example, converting a garage or basement into a small rental unit or building an extension or splitting one lathe hone into smaller rentable units. This can be to simply provide rental income or as a means to offset living expenses.
Again, as with rental properties this is not entirely passive income as there are repairs and maintenance to consider plus a large up-front cost to purchase the property plus possibly tax implications.
9.AirBnB or other short-term rentals
Over the last 4-5 years, this has been an increasingly popular way to generate passive real estate income, renting all or part of your home or another property on one of the popular online sites to mainly leisure travellers. Short-term rentals are usually higher than long-term rentals but, again, aren’t exactly passive since there’s a considerable amount of work involved in managing a rental, not to mention the high up-front cost.
Occupancy can also be variable with a longish period without occupiers.
10.Acquiring ground leases
Ground lease owners own the land underneath a building rather than the building. The land is leased to the building’s owner and generates regular passive lease income. Ground leases have a lower risk profile and, therefore, offer less income potential, but there is also a relatively high up-front cost to purchase the land.
CPI Capital understands that there are multitude of ways to generate passive (or semi-passive income) from real estate investments. However, there are several issues which often occur when investors lack the right experience, or attempt to become too involved with projects.
These may include not doing enough due diligence, taking on too much debt, underestimating operating expenses and net income and so on.
However, by investing with experienced professionals such as CPI Capital into syndicated multifamily or BTR-SFR projects means that the income received is truly passive. Accordingly, you know that you can simply look forward to a regular dividend without the hassles of being an active real estate investor!
CIO, CoFounder CPI Capital