Have you ever thought about making passive income with real estate? Many successful investors use real estate to build a plush passive income portfolio.
Should you use real estate in your passive income plan? Can you? Believe it or not, you can add real estate to your passive income plan – even if you have little money to invest.
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You CAN Make Passive Income with Real Estate
Top investor and billionaire Warren Buffett invests largely in stocks. However, you may not know that his company, Berkshire Hathaway, also owns the largest residential real estate company in the U.S.: Home Services of America.
Why would someone like Buffett invest in real estate? Simple: Because it brings profitable returns.
But you might be saying “Well, yeah, Buffett’s a gazillionaire. I’m just a guy (or girl) trying to earn a living. I don’t have a gazillion dollars to start buying up ice cream stores and commercial rental real estate.”
You may not have Buffett’s billions, but you do have one thing: options. I’m going to show you five ways you can make passive income with real estate – even on a tight budget.
Ready? Let’s do this.
Crowdfunded Real Estate Companies
Crowdfunded real estate works similar to crowdfunded lending. You pool your money together with other “regular joe and jane” investors to purchase properties you could otherwise not afford to purchase.
Company experts find the properties, manage them and collect rent/build equity. After that, they split the profits among the pool of investors for that particular property.
You as an investor get the benefit of being able to earn profits off of the work of experienced big-time real estate investors – all while contributing only what you’re comfortable investing.
Here are some of the top real estate crowdfunding companies.
1. Rich Uncles
Rich Uncles is possibly my favorite crowdfunded real estate company – for one main reason: the minimum investment amount is affordable for just about anyone.
You can start investing in commercial real estate with Rich Uncles for as little as $5.
Yes, I said $5. With just $5 (one-time investment or $5 per month) you can start building your passive income portfolio.
I’ve been investing with Rich Uncles for over a year now, and I’ve been extremely happy with the results. I love getting my dividend payment notifications, which increase every month as I contribute more money automatically.
And I love that I can choose a monthly contribution that fits into my budget – even when it’s tight.
How it Works
Rich Uncles has three different investments for you to choose from.
- BRIX REIT
- NNN REIT
- REIT I
Note: A REIT is a Real Estate Investment Trust. The easiest way to explain an REIT is to say that it’s sort of a mutual fund for real estate investments.
As an investor, you can invest in an exchange-traded REIT, a non-traded REIT and a private REIT. More on that later.
Now, let’s get to the good stuff.
BRIX REIT
The BRIX REIT is the one you can join for a minimum of $5. This fund buys and holds primarily student housing and multi-family housing buildings.
It also owns convenience stores, fitness centers and quick-service restaurants. The fund will pay you dividend profits each and every month.
You can choose to take those profits as passive income in your pocket, or reinvest your dividends to build your portfolio up even larger.
Annualized dividend return: 6%
Non-accredited investors: Yes
NNN REIT
The NNN REIT focuses on single-tenant offices, industrial and retail properties leased to larger, nationally known companies.
You need a minimum investment of $500 to invest in the NNN REIT. However, the annualized return is higher.
Annualized dividend return: 7%
Non-accredited investors: Yes
REIT I
The REIT I is available to those already investing with Rich Uncles. This fund focuses on purchasing retail properties, office spaces and industrial properties.
You can learn more about that fund after you sign up to invest with Rich Uncles.
What Else Should I Know About Rich Uncles?
Although Rich Uncles doesn’t require investors to be accredited investors, they do ask that you meet one of two criteria:
- A minimum family income of $75,000
- A net worth of at least $250,000
There is no verification of whether or not you meet the criteria, but they do ask that you do.
Fees: Rich Uncles doesn’t charge any fees. Zero. Zip. Nada. Their low-overhead model allows them to cut out the middleman and give their profits to you, the investor.
2. Fundrise
Fundrise is another popular crowdfunded real estate investing company. The minimum investment with Fundrise is higher than with Rich Uncles; it starts at $500.
While $500 seems like a lot compared to Rich Uncles’ $5 minimum, $500 is still within a very affordable investment contribution rate for most people – even if you have to save for a few months to get to that $500.
How it Works
With Fundrise, you’ll be investing primarily in what the company calls eREITs. An eREIT is a combo exchange-traded and non-traded REIT.
Fundrise has four eREITs to choose from, based on your risk tolerance level:
- Starter Portfolio eREIT
- Supplemental Income eREIT
- Balanced Investing eREIT
- Long-term growth eREIT
As of 2018, Fundrise eREITS have an average annualized return of 9.11%. That beats the heck out of your high-yield savings account.
Of course, there’s more risk with a REIT or eREIT than with a high-yield savings account, but the benefits could far outweigh the less riskier choice of letting your money sit in a savings account.
Non-accredited investors: Yes
Fees: 1% per year (Note that other fees may apply. See website for details.)
3. stREITwise
stREITwise helps you get started in real estate investing for just $1,000. They’re the new kid on the block, opened in 2017, but they’ve done well the first couple of years with average returns of 10%.
In addition, stREITwise boasts an A+ rating with the Better Business Bureau. stREITwise’s three owners have a combine 40 years of experience in real estate investing.
How it Works
stREITwise uses a direct ownership approach where they purchase and manage their properties directly, passing a portion of the profits on to you.
stREITwise invests primarily in office spaces for retailers and businesses.
Note that as a non-accredited investor you can participate in stREITwise, provided they don’t invest any more than 10% of the greater of your net worth (not including real estate) or annual income.
Non-accredited investors: Yes
Annual fees: 3% up front and 2% annual management fee – much lower than many REITs charge.
4. Realty Mogul
Realty Mogul has been in business since 2012. CEO Jilliene Helman was working in the wealth management sector when she identified three key elements that separated her wealthiest clients from the rest of the pack.
- her wealthiest clients were invested in real estate
- their income was not correlated to their time spent working
- they focused on making money with passive income
Hmmm. Interesting! That’s what we focus on here! 🙂 However, Jilliene realized that real estate was THE ticket for her wealthiest clients.
And so, she started a real estate investment firm that could serve everyone – and not just the wealthy.
How it Works
Realty Mogul works a bit differently than the other companies mentioned here. Instead of investing directly in properties, you invest in an LLC that invests in another LLC that owns the properties.
Their LLCs purchase properties such as:
- self-storage properties
- multi-family dwellings
- office buildings
- industrial sites
- retail sites
And more. Realty Mogul operates this way in order to minimize overhead and help you maximize profit.
You can invest with Realty Mogul for as little as $1,000. The annualized rate of return on their REITs is between 4.50% and 7.81%.
Sign up with Realty Mogul now.
They’ve got investments with terms for as little as six months and as long as 10 years. You can choose from their two REITs, MogulREIT I and MogulREIT II.
Non-accredited investors: Yes
Fees: 0.30 to 0.50 per year
Traditional Real Estate Investing
Traditional real estate investing can be an avenue to passive income as well – sometimes. However, you have to have one key ingredient to ensure your direct ownership real estate is passive income as opposed to active income.
5. Buy Real Estate Rental Properties and Pawn Off Management of Them
Another way to make passive income with real estate is by purchasing rental properties directly.
Now, normally, owning real estate rentals yourself – whether they’re residential or commercial – isn’t passive income.
You’ve got to manage the properties, deal with tenants and repairs, etc. However, there is one way to make this type of real estate income passive, and that’s to have your properties managed by a property management company.
How it Works
When you own a rental property directly, you are responsible for purchase, funding, management etc. In order to make your direct purchase a passive income source, you’ll need to hire outside help.
Property management companies handle overseeing of rental management for property owners. They handle renters, collect rent, handle repairs, deal with new rental contracts, etc.
However, you will have to pay a property management company for this service. And that could take a pretty big chunk out of your rental profits.
What Do Property Management Companies Charge?
All property management companies work different. However, in my area they typically charge about 10% of your monthly rental income.
So, if you’re renting an apartment for $1,000 a month, the property management company will charge $100 per month to manage that unit.
That’s a lot of money to give away – in essence you can consider it a 10% annual fee on your investment.
You’ll Need a LOT of Money Down
The other “con” of owning real estate rentals on your own is that you’ll need to invest a lot more than $5 up front. Most banks want 20% to 30% down for rental property purchases.
And if you’re looking at multi-family or retail space purchases, that can run into the six digits in out-of-pocket cash. This is not doable for most of the population.
Know What Your Bottom Line is
If you choose to own rental properties directly and have them managed for you, you’ll need to know if you’re really going to make a profit after all expenses.
For instance, if your property’s mortgage payment is $1000 per month, and the rent you charge is $1200 per month, you’ve got a net profit of $200 per month.
However, if you pay a rental management company ten percent to manage that property for you, that brings your net income down to $80 per month.
Is $80 a month enough income to deal with owning a rental property directly on your own? Only you can answer that.
You do get the benefits of building equity in the home – provided you hold the property through the ups and downs of the real estate market.
And owning rental properties directly can have other benefits too. You can move into the house yourself if you need a place to live.
Or, you could rent it out to family members or friends in need of housing. Because people always need a place to live, direct ownership rental properties can be a great source of income – IF you’re willing to deal with the details or hire someone else to do it.
Bottom line: Owning rental properties directly is definitely a path to passive income with real estate – IF you have someone else manage them.
However, investing with crowdfunded real estate companies like Rich Uncles and Fundrise is a lot more affordable – and a lot less hassle – than owning properties directly.
Accredited Investor vs Non-Accredited Investor
I want to take a minute to talk more about accredited investors vs. non-accredited investors.
Some crowdfunded real estate companies only allow accredited investors for one reason: risk.
Investing – in real estate or anything else – does come with risk. Some investment companies and products are regulated by the Securities Exchange Commission (SEC) of the government.
Others are not. The government sought to protect inexperienced investors from non-regulated investments. For that reason, non-regulated investments can’t be invested in by non-accredited investors.
Here are the parameters for each type of investor.
Accredited Investor
An accredited investor must have an income of $200,000 per year ($300,000 joint) for the last two years. That level of income must be expected to continue in the current year as well.
You can also be counted as an accredited investor if you have a net worth of $1 million or more. These are the basic parameters for being considered an accredited investor, although there are others.
Non-Accredited Investor
A non-accredited investor is simply an investor that doesn’t meet the qualifications necessary to be counted as an accredited investor.
Some companies only allow accredited investors if they are offering investments not regulated by the SEC.
Other companies might offer only to accredited investors (even if they have regulated investments) simply because they’re looking to protect inexperienced investors.
Summary
Investing in real estate doesn’t have to be out of reach. In fact, as mentioned earlier you can start investing with Rich Uncles for as little as $5.
Investing in real estate can be a great way for you to start building – or add to – your passive income portfolio.
Have you ever thought about (or acted on) crowdfunded real estate investing? Or other forms of real estate investing?
