We have all heard stories from friends, family, or some mogul with a podcast and a series of books, about people going from barely paying the bills to living a life of abundance... in many cases, all thanks to real estate.
While it’s possible for anyone to build wealth through real estate investing, success requires education, minimizing mistakes, perseverance, patience, and the right strategy.
It's useful to know that most of the gurus selling books and driving luxury cars did not start with lots of money. They typically had to start small, creating a residual income with real estate, then often transitioning into full-time real estate investment professionals.
So whether your goal is to create residual income on top of your current career, diversify your portfolio from just stocks, or eventually become a full-time real estate investment professional, making residual income through real estate is a great option for anyone willing to educate themselves and do a little bit of legwork/research.
This is an especially exciting time to start your real estate investing journey, as you are no longer limited to the high barrier of entry that comes with traditional real estate investing.
New and innovative ways to enter the market are starting to be offered, and you might find that your building blocks to residual income are more accessible than you thought. We'll explore those options, what they are, and who they are and aren't for in this article, as well as discuss traditional real estate investing.
You'll learn actionable steps that you can take now for each strategy so that you no longer have to sit on the sidelines while seemingly everyone else is growing wealth through real estate investing.
Before we begin, let's explore a few basic building blocks.
Jump to a Section
What Is Residual Income?
Most people searching for residual income ideas are already familiar with the concept, but if you're just dipping your toe into the pool, residual income is income one continues to receive after completing the income-producing work. In addition to real estate, residual income could be interest, royalties, and ongoing sales of consumer goods, just to name a few.
Why Make Residual Income With Real Estate?
Passive income through real estate is a lucrative option for those who don't have the time or interest to be involved full-time with their investments. You may have to put some time in at the beginning, or do more, particularly if you decide to invest in more traditional real estate properties, but you'll still be able to keep a full-time job if that's what you prefer to do.
Additionally, even though real estate investors can run into bumps in the road during their investment career, real estate is still considered to be a dependable source of income if you're able to select your property (or properties or passive real estate investments) correctly and execute a sound investment strategy.
Why Is Real Estate Still a Good Investment?
As mentioned before, many investors, authors, and financial podcasters have built significant residual income streams from real estate investing. But in addition to that, we thought we would share these eight additional reasons from GeekWire about why real estate is a good investment.
You can leverage your investment. In other words, you can invest a fraction of what the asset is worth but still grow your wealth and earn residual income through it. That is not the case for traditional stocks.
You can accelerate asset appreciation. Not only does real estate historically appreciate three percent to five percent a year, but renovating or repairing a property will immediately increase its value.
You'll get tax benefits. For many people the tax benefit benefits of real estate investing are a huge plus - in addition to the residual real estate income.
You can earn regular cash flow. Using proven real estate investment strategies you can earn residual income from your real estate investments. There are smart ways to earn income from real estate investments through analysis of various passive real estate investment platforms/offerings, as well as with traditional real estate investing. Plus there are ways to leverage the power of other savvy investors’ knowledge and money to maximize your earnings and cash flow.
You can create financial wealth and security. Investing in real estate long-term can build wealth and financial security.
There are multiple ways to invest. If you're concerned about coming up with a down payment, increasing your credit, and jumping through all the hoops required for traditional mortgages, worry no longer. Keep reading to find out about non-traditional ways to invest in real estate with lower barriers to entry.
You can leverage equity to grow your real estate portfolio. Over time, your properties will increase in value and your debt will decrease as you continue paying it down. That creates equity that you can use to invest in more real estate, thus beginning a wash, rinse and repeat cycle toward real estate success.
You can pass real estate down to loved ones. Leaving real estate or real estate investment assets as a legacy for future generations is often considered one of the greatest accomplishments any of us can achieve in our lifetime.
Types of Real Estate Investing
Traditional Rental Properties
Traditional rental properties are a vehicle for creating residual income through real estate investing by buying one or more physical properties for the sake of renting out to tenants. Cash flow and residual income are created when the rent paid by the tenant is more than the mortgage paid by the owner. Owners typically are required to provide all or most of the maintenance, repairs, and upkeep of grounds and appliances, which takes those costs out of the property owner's pocket. Individuals investing in traditional rental properties can rent a single-family home or multi-family, it simply depends on the financial means of the investor and their investment preferences.
What investors should know before investing:
Traditional rental properties are a tried and true method for real estate investing, however, there is plenty of overhead and more time required of you, especially up front. Though there are creative finance options to help you acquire investment property, most people will need to come up with a down payment for a traditional real estate investment property mortgage.
Best suited for:
Traditional rental properties are best suited for people with significant capital and who either have access to a high-quality property manager or have the time to make repairs and tend to the tenant's needs themselves. This is also an ideal option for people who like to be more hands-on and involved with their investments and investment properties.
Real Estate Investment Trust (REIT)
What it is
A Real Estate Investment Trust, or REIT, is a company modeled after mutual funds that own, operate, or finance real estate that produces income. REITs leverage the power of multiple investors and pay dividends while investors are not required to manage the properties.
In 1960, Congress established REITs as an amendment to the Cigar Tax Excise Extension for the sake of creating a means for people to invest in commercial and high-value real estate, which was previously only available to high net-worth individuals.
Most REITs will specialize in a niche real estate sector, but others prefer to diversify. Investors are encouraged to find a REIT whose portfolio has properties that are fundamentally interesting and exciting to them.
There is nothing too complicated about REITs: the business model is to collect rent on properties and distribute that as dividends to shareholders. REITs are publicly traded like stocks and are therefore easy to invest inland sell.
What investors should know before investing
What differentiates REITs from a Real Estate Investing Group and other investment vehicles is they have to adhere to Internal Revenue Code stipulations. While we won't go into the details, the bottom line is that they are required to own only income-generating properties and to pay the shareholders.
It's also worth noting that collectively REITs account for $2.5 trillion of publicly traded equity.
Best suited for
REITs tend to be a good investment for highly risk-averse people. While they might not see significant and sharp growth, they are likely to experience steady year-over-year growth that could serve as a supplemental retirement source (as this method of investing will reward those who are ready for long-term investment).
Real Estate Investment Groups (REIGs)
What it is
Real Estate Investment Groups, or REIGs, are businesses with one or more partners whose majority of business is in the realm of real estate. Typically, a REIG will buy condos or apartments and deal in high dollar volume transactions. Once they've acquired the property, they then offer an opportunity to invest to their network of investors, giving them a chance to own a part of the property and earn cash flow from it. However, the investor holds no responsibility for administration and maintenance, making this strategy fairly hands-off. The REIG will be solely responsible for advertising, filling vacancies, property administration, maintenance, and management.
The entire goal of a REIG is to create cash flow from its property acquisitions.
What investors should know before investing
REIGs are not beholden to just real estate acquisition for their business operations and might participate in other types of business. REIGs can be structured differently and could have anywhere from one partner, to multiple partners. The founding partners typically have to invest more money in the funds in the beginning, but they ultimately see a larger return. Also, be aware of fees involved with REIGs.
Investors would be wise to do their due diligence on the founders of any REIG and speak to as many investors in the REIG as they possibly can. While putting your money to work for you in something possibly incredibly lucrative is tempting, it's always important that you know who you're doing business with and that their values are aligned with yours. By speaking to other investors, you can start to get a feel for whether the founders of the REIG operate with integrity or leave something to be desired in that department.
REIG cost of entry varies from group to group; some groups only allow high net-worth individuals while others encourage the participation of people with lesser means. The good news is that there are plenty of REIGs out there and a search on MeetUp, LinkedIn, or Facebook will yield lots of different options to start with.
Best suited for
Accredited investors who can perform thorough due diligence and have a greater tolerance for risk.
Fix and Flipping
What it is
It's hard to not have an idea of what the fix and flip strategy. HGTV has flooded the airwaves over the past few years with shows illustrating how to buy the ugliest house on the block and turn it into a neat little payday.
How it works
Making money on a fix and flip involves doing renovations or remodeling (often both) after buying a house, depending on the condition of the house in question. Once the work is done, the owners sell it, and hopefully for a profit (net of all costs).
There is tremendous potential for upside and plenty of investors have had success with this strategy. However, many residual income strategy investors can find it too time-consuming. On the flip side, some investors are looking for creative and physical outlets, and these types of projects can be a good fit.
What investors should know before investing
While this can be a lucrative real estate investing strategy, beginners should beware that home renovation and remodels can quickly go way over budget if not planned and project managed properly. If a renovation goes too long and the market takes a sudden turn, by the time you're ready to put the house on the market, the value might already be worth less than it was when it was purchased.
But for those who are particularly skilled at identifying a house in a market with the upside potential, and can manage and complete the project promptly on budget, this can be a highly lucrative way to generate income.
Best suited for
People who have time for an extra project and have a knowledge of remodeling and renovation.
Real Estate Limited Partnerships (RELPs)
What it is
A more specific form of REIGs, Real Estate Limited Partnerships, or RELPs, is made up of investors who have pooled their money together to invest in real estate. RELPs are structured as a limited partnership, meaning there is a general partner and limited partners. The general partner assumes all responsibility and liability, while limited partners are liable for a project only up to the amount they contribute.
The general partner is usually an individual or a company, likely structured as an LLC, with experience in real estate development or property management, and is looking for ways to acquire more assets. The general partner will identify a project, then contact potential investors who become limited partners. Since the general partner takes on the bulk of liability, they are usually the ones in the middle of project managing and handling day-to-day operations.
RELPs tend to be more narrowly defined than REIGs and REITs, but also fall under the umbrella of both. You can find RELPs to get involved with, by going to real estate networking events (check MeetUp and Eventbrite), looking on LinkedIn, asking your friends, or joining related Facebook groups.
What investors need to know before investing
RELPs can be lucrative entry point when you're wondering how to make residual income with real estate. Depending on which RELP you encounter, there will be different minimum buy-ins across a wide range. Investing in a RELP means your funds will be illiquid. The amount of time your funds are tied up varies from project to project. As a general partner, you are likely to have little influence or decision-making power, so if you like to be a part of the decision-making process, this is something to ask about when investigating different opportunities. Remember, there is no harm in trying to negotiate different terms, as long as you negotiate them in a way that creates a win for all involved.
RELPs serve as a tax haven, as they are not taxed.
Just like many other investment opportunities, the success of the project (and the return on your investment) rests heavily on the shoulders of the people who are in charge, and due diligence not just on finances, but also on team members is essential. The integrity and experience level of the general partner is just as, if not more, important as any financial reports and speculation, and speaking to references and investors of past projects if at all possible should be held in high priority. If the general partner is an LLC or corporation with multiple partners within that structure, ask for the company's track record and perform due diligence on all the partners. A lot of times participating or walking away comes down to is, do you like the people who will be handling the projects and do their values seem to align with yours? If not, it's always okay to walk away.
Best suited for
Typically for high net worth individuals who want to see their money be put to work for them in the real estate market, but don't have the time for management or repairs.
RELPs are suited for anyone who has the financial means, wants to make residual income with real estate and who are ready to put their money in the market, but still, learn from the sidelines.
If you're investing in a RELP, you also need to be comfortable with not having access to your money for a while and leaning on your general manager to make the right decisions.
Conclusion
The world of real estate investing is a vast one that can take anyone ready to go to places they could have never imagined. There is no "right way" to arrive at that destination, and if you're just beginning and worried that you're not going to make the right choice, we would encourage you to consider that not taking action is possibly costing you the opportunity for greater wealth and financial freedom. Due diligence, education, and investment strategy are important when determining what investment strategy you'll pursue. However, also important is your intuition, your personal interests and paying attention to what seems exciting while also making financial sense.
Today creating residual income is more possible than ever, and the need for you to come up with a down payment for a mortgage is no longer true: you now have numerous solid real estate investment options at your fingertips, many with a low barrier to entry.
The first step is taking the first step, and as long as you invest within your means (don't bet the kids' college fund) the worst that could happen is you learn a lesson or two along the way.
How Can EquityBrix Help?
Now that you know how to earn residual income from real estate investing, it's time to take the next step.
EquityBrix can help you grow your wealth through our fractional real estate investment platform. Our team marries the needs of investors and real estate developers by providing opportunities for above-market returns. EquityBrix is committed to creating high-yield investment offerings, and we can help guide you through the new era of real estate investing.
If you want more information about tokenized real estate investing go to EquityBrix or EquityBrix.com/Learn.
If you are looking to grow your wealth and diversify your investment portfolio by learning about innovative ways of investing in real estate go to EquityBrix, or contact us for more information, or sign-up for the EquityBrix Newsletter.
*Disclaimer: EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
Frequently Asked Questions
What do I need before getting into real estate investing?
The specifics such as the amount of money in hand, manager, to get incorporated, etc. all heavily depend on your goals and what strategy you decide to use. However, one thing that is constant across all real estate investing strategies is you should spend time researching the strategy you're leaning toward and finding as many people as possible to talk to about what they've learned and how it's working for them. You can easily connect with fellow investors in Facebook groups, on LinkedIn, or at live networking events.
What is the best real estate investment strategy for me?
With any type of investing, there is no one size fits all answer. While you're determining the best strategy for you, you'll want to keep a few things in mind:
How much risk can I tolerate?
Do I want to be a hands-on decision maker or am I comfortable with other people making decisions?
How much time do I want to devote to real estate investing?
Does it make sense to you? Do you have a firm grasp of the strategy?
Can you afford to lose your investment if things go south?
Even though real estate is usually a great investment, there is always risk involved. Do your research and connect with as many fellow investors as possible
Can I begin investing in real estate with no money?
Some methods involve creative financing that allows you to invest with no money, but these are time-consuming and difficult to break into and are not the best fit for people simply wondering how to make residual income.
How long does it take to see a return on investment?
This answer will be different for every strategy. Before signing any papers, make sure to find out how long your money will be wrapped with any project.
