There’s really nothing better than making money while you sleep.
Passive income investments allow you to collect financial returns with little or no effort on your behalf — perfect for real estate investors who have day jobs or other time commitments.
Rental income is an ideal form of passive income. However, if you already own at least one rental home — or something more complex like an apartment building — you’re well aware that such investments require a certain amount of active involvement, like routine maintenance, rent collection, and tenant management.
If you want to benefit from real estate’s healthy returns without having to do any work at all, there are a number of channels that allow you to reap the rewards without getting off the couch.
Here are several passive real estate options worth looking into.
Crowdfunding
Real estate crowdfunding is exactly what it sounds like: groups of investors joining forces to purchase commercial properties, apartment complexes, and single family home portfolios.
Mostly managed and executed through online platforms, real estate crowdfunding allows you to own a piece of a profitable building or cluster of homes with just a few taps on the screen.
Example: Online crowdfunding platforms like Fundrise, PeerStreet, and RealtyMogul offer casual investors the chance to join multi-million dollar real estate ventures. These companies tend to be very selective with property purchases, thoroughly vetting them and providing revealing data and reports.
Users simply create online accounts, upload their funds, choose an investment, and watch their money grow.
Pros:
- You can start small: Many real estate crowdfunding sites require low minimum investments.
- It’s very hands-off: No lightbulbs to change or lawns to mow.
- Easily diversified: Crowdfunding minimizes risk by offering several different asset classes, like multi-family, land, and commercial real estate.
- Location flexibility: This service also allows you to increase cash flow by playing in hotter markets.
Cons:
- Smaller returns: Your income won’t be as high as if you owned a rental property outright.
- Not easy to opt-out: Many real estate crowdfunders require locking in a time commitment for your investment, making it difficult to cash out at a moment’s notice.
- Less control: The fund managers make the calls when it comes to buying properties, locations, etc.
REITs
REITs (Real Estate Investment Trusts) are like mutual funds that invest exclusively in real estate. Like crowdfunding, REITs allow passive investors stakes in large real estate deals without the high barrier to entry. They differ from crowdfunding, however, in that their portfolios include a broad range of properties at once, rather than individual properties to choose from.
There are three types of REITs:
- Exchange-traded: These are registered with the SEC and listed on exchanges like the NYSE.
- Non-traded: Though registered with the SEC, these REITs do not trade publicly.
- Private: These are neither registered with the SEC nor traded on exchanges.
Example: REITs can be general or specific. Some invest exclusively in cell towers and data centers. A typical REIT might use its resources to buy large apartment complexes in major cities, simultaneously building value for shareholders while also managing the individual properties and tenants. Investors can buy shares in REITs through standard exchanges as easily as buying shares in stocks and funds.
Pros:
- Less risk: A well-managed REIT mitigates risk by including large conglomerates of properties rather than individual properties.
- Multiple income streams: REITs deliver annual dividend income in addition to long-term appreciation.
- Portfolio diversification: Some real estate investors use REITs as a third investment option after stocks and mutual funds.
Cons:
- Market volatility: REITs are tied to exchanges. If the NYSE has a bad day, it can take REITs down with it.
- Lower returns: REITs are required to distribute 90% of their profits annually, which is good in the short-term but leaves less for the trust to reinvest.
- Less control: Similar to crowdfunding, you don’t have a tangible asset or the ability to control the investments as you do with direct ownership.
Tax liens
When homeowners fail to pay taxes, county governments place a lien on their homes. In order to recoup the lost tax income, the county often auctions off the tax liens to investors who collect interest from them.
Example: If you win a tax lien auction, you earn interest until the homeowner pays off the outstanding taxes. When the homeowner sends the county a tax payment, you receive your share and accrued interest.
Pros:
- High interest: Tax liens can yield upwards of 12% or more in interest, meaning that ownership of a few liens could result in some decent passive income.
- Acquiring ownership: Though rare, foreclosure can proceed when taxes are unpaid for a specified duration. In such a case, the tax lien holder could acquire the deed at a deep discount.
- Ease of use: Tax lien auctions are sometimes conducted online, making them relatively easy to participate in.
Cons:
- Due diligence: Tax liens involve a little research — e.g., title history, other liens on the home — and some states require tax lien holders to notify the property owners regularly that they hold the lien.
- Burden of foreclosure: Though buying a home for pennies on the dollar is appealing, tax lien foreclosures are rare and cumbersome.
- Not passive enough: For some investors, holding the lien on someone else’s home could seem way too involved, not to mention a possible can of worms.
yZiGN Invest
yZiGN Invest is a new way to craft custom, passive real estate investment portfolios for investors. Investors can purchase shares representing ownership interests in curated, fully-managed SFR properties, or opt for broader diversification.
Its customizable experience lets investors choose their own paths. yZiGN Invest is an efficient alternative to direct investing that lets you diversify and tailor your portfolio based on your goals. Investors on Roofstock One can focus on the cities, regions, and investment strategies that appeal to them most.
It offersyZiGN Invest users passive investments, actively managed. We are a vertically integrated business with institutional-caliber property and asset management services all available in-house. It is this experienced team that professionally manages your investments — from ensuring the properties in your portfolio are properly maintained to making sure all taxes, insurance, and related HOA fees are paid. Investors need not worry about traditional landlord responsibilities, like managing renovation or tenancy issues, but they still have the opportunity to potentially benefit from the cash flow and asset appreciation.
Pros:
- Roofstock One provides an efficient alternative to direct investing (avoiding the need to be on title, secure a mortgage, deal with agents, supervise rehabilitation teams and property managers, and handle ownership and tenancy issues). Investors can instead focus on assembling targeted portfolios with allocations across markets, focusing on specific investment goals.
- As shares of Tracking Stock provide exposure to multiple properties, investors can also lessen the asymmetric risk of single-property ownership. Investors in shares of Tracking Stock receive pro-rata distribution based on the economics of the underlying properties. Investors in shares of Tracking Stock also benefit from potential long-term growth from home price appreciation.
Cons:
- While Roofstock intends to establish a secondary market for trading Roofstock One shares, an investment in Roofstock One currently has limited liquidity. As a result, Roofstock requires that investors in Roofstock One have an investment horizon of at least 5 years.
- Roofstock One is currently available only to accredited investors.
- The standard initial investment minimum is $5,000. After the initial investment, you can purchase as little $100 at a time.
Money lending
Have the cash for a fix and flip project but not the time for all the labor involved? Hard money lending is another passive real estate avenue. In these situations, you can carry the note — or cover the down payment — for a renovation / quick sale project completely managed by someone else.
Example: Sometimes, professional fix and flippers juggle several projects at once. If they find a great opportunity without the ability to borrow more, they can turn to hard money lenders to help them cover the sale. These loans are often shorter term and higher interest than conventional loans.
Pros:
- 100% passive investment: You’re vested in a labor-intensive real estate project without lifting a finger.
- More money: Cash-strapped remodelers will borrow at a higher interest rate, meaning bigger returns for the investor.
- Quicker turnaround: Considering that these projects often wrap up within a year, you could get your money back faster.
Cons:
- Less control: Unless you have strict contractual terms, someone else will be in control of the renovations, fixtures, and design.
- Higher risk: Even the best-laid fix and flips can go awry. If the project loses money or the borrower defaults, it’s a lost cause.
- Rules and regulations: Hard money real estate lending rules vary from state to state. You’ll need to check those out ahead of time.
This article, and the yZiGN Invest Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, legal, or real estate advice. yZiGN Invest is not your advisor or agent. Please consult your own experts for advice in these areas. Although yZiGN Invest provides information it believes to be accurate,yZiGN Invest makes no representations or warranties about the accuracy or completeness of the information contained on this blog.