Real estate investments held as rental properties are often considered passive income investments, but in reality, that’s not completely true. Over the course of rental property ownership, the demands on owner attention and involvement might range from quite low to fairly high.
Some investors regard the degree to which they need to be involved over time as the defining characteristic of a passive income investment. Aside from the efforts involved in keeping it as a successful rental and enjoying the income stream it provides (both of which can be minimized with a great property management company), rental properties provide equity growth and tax benefits, both of which could be considered passive income.
There will always be some level of personal involvement and work associated with real estate investments at the start, whether they’re day-to-day or periodic. The degree of intensity has a good deal to do with how you enter the field of property investment, which include:
You can purchase investment properties as a solo investor and the degree of passivity and return depend on the decisions you make about its price, condition and location. If you buy based on price, you may need to devote time and materials improving the property. This strategy works well for someone skilled in home repairs and remodeling, but if you have to pay retail for materials and labor, it may not have an immediate payoff.
Crowdfunding is a relatively recent way to pool your investment dollars with others to buy rental properties. It’s a good way to get into the field without having to save a down payment for a property and assume full financial and physical responsibility for it. Crowdfunding real estate investors hire property management companies for the day-to-day work associated with ownership.
When you get into crowdfunding, you can do it as a debt or equity investor. The latter takes more time to earn a return, but often it’s at a higher rate than as a debt investor, which provides monthly or quarterly returns.
The last way to enter the real estate investment field is through a professional property management company, also called turnkey companies. They are full-service real estate companies that find, purchase, improve and sell properties that have strong potential as rental units.
Not only do they sell these properties to investors, they also manage the units for them, from finding and approving tenants to taking care of move-out details. Letting a property management group do the legwork offers many advantages. Since they specialize in rental properties, they know the most lucrative locations for rentals and which improvements and tenants provide the best return.
The two aspects of property ownership that determine its passivity include its condition and the stability of the tenants, neither of which are issues for crowded funded properties or those selected and managed by property management firms.
Over time, a property earns income that defrays its upfront costs. Eventually, property investors whose portfolios have enough income can use some of it to hire a turnkey group to manage the property and take over tenant management.
Solo investors or those who use turnkey property management companies from the start stand to gain the most financially. They receive the rental income stream, the tax benefits and the equity when the property is sold, all of which help them achieve a realistic passive income.
Talk to one of our investment specialists to learn how JWB can help you earn passive income through long term real estate investing.