One of the things that makes real estate such an attractive investment is that you can make money on a part-time basis and generate lump sums of money to pay down debts, fund other investments, or use to leverage yourself into larger real estate deals. While these points are definitely true and valid, there is another thing you must consider as you evaluate your investment strategy going forward.
It can be summed up in one word – income. Income, when generated passively, can get you out of the rat race.
Let’s face it. You cannot have financial freedom without having a steady stream of income. If all you do is rehab properties, or wholesale the contracts to other investors, you will not accumulate any passive income for your investment portfolio. If all you are doing is turning properties, what happens if you are no longer working or able to find the next deal to work on? You guessed it. There is no income coming in for you that will allow you to be free to do other things in life.
You want to have a long-term vision about what you are going to achieve as a real estate investor. Some of your time should be spent going after those deals that you can turn quickly for a profit. You should also spend time building your portfolio of passive income. The passive income is what will provide you with freedom to be a full-time investor, to travel, to start a business, or time to be with family. Passive income is what will provide you with time freedom.
Rental Properties As a Way to Generate Passive Income
Obviously one of the main ways to create passive income is through rental properties. This is the traditional concept of buying a property and renting it out for more than what the expenses cost. The extra income is your positive cash flow.
Some people do not want to add rental properties to their portfolio because of fear. They fear things such as bad tenants, unforeseen repairs on the property, and fixing the property at odd hours of the evening when a tenant calls.
In most cases, these fears are simply due to people letting their imaginations run wild. Do these kinds of negative things happen? From time to time, yes they do happen. But is that what happens all the time? Not by a long shot.
There are solutions to these circumstances such as properly screening tenants, having a cash reserve on hand to deal with issues, and the use of property management companies to free up your time. Educating yourself will provide you with solutions to these problems.
Why are rental properties so good? Because people need a place to live! Not only do they need somewhere to live, but rent has spiked in most areas of the country over the last few years. Properties are more affordable, mortgage rates are near all-time lows, and rents have increased. That is a great combination for people looking to add income properties to their portfolio. You may never see another combination like this again in your lifetime.
With a rental property, you have so many factors in your favor:
- Your investment is being paid for by the tenant
- When done correctly, you obtain positive cash flow
- Most properties will increase in value over time (appreciation)
- You get to take a tax deduction (depreciation)
There are so many advantages to investing in rental properties. If you have not added these to your investment strategy because of fear, then you need to take some time to educate yourself. Fear is just a lack of knowledge. And, in this case, your fear is costing you money.
Other Types of Passive Income
Rental properties are not the only way to generate passive income in real estate. There are other ways to add passive income to your property without worrying about tenant/landlord issues.
A great example is using seller financing on a property you want to sell. Instead of selling the property for cash, you can sell the property by providing the financing to the buyer and collecting their monthly mortgage payment. Since they are making monthly payments to you, you have generated passive cash flow without being a landlord.
Keep in mind that with an arrangement using seller financing, you will not have to worry about any of the tenant/landlord issues that could arise with a rental property. With seller financing, the buyer owns the property and is responsible for any maintenance that is needed on the property.
If you are really good at rehabbing properties, you may decide to sell one every now and then using seller financing instead of selling it for cash. This is a great way to start adding passive income to your portfolio of investments.
Lease options are another way of generating passive income. Although this is similar in nature to the tenant/landlord relationship in a rental property, there are differences. Under this scenario, you would collect an option consideration (non-refundable deposit) from the tenant at the beginning of the option, the rent from them during the rental period, and then be cashed out once the tenant decides to buy the property at the end of the option period. Many investors like this strategy because they get a small lump sum of money at the beginning, cash flow during the lease period, and then cash out after a couple of years.
Some investors only deal with paper assets. They will buy and sell notes as a way of generating passive income. A note is short for a promissory note. The note is the document that specifies the terms of repayment. It states terms such as the amount financed, the interest rate, the payment, and the period of time. Since these notes are a stream of income, it is something that has value and can be bought or sold.
When you use seller financing, notes are the document that is used to specify the terms of repayment.
Sure, you could hold on to the note, but you could also sell the note to a note buyer. Note buyers want the income stream and will pay a lump sum of money for the note (usually at a discount so that they profit as well).
Many investors do not know that they can sell a certain number of payments on a note to a note buyer. Let’s say you had a note for 20 years that someone was making payments to you on. You could sell five years’ worth of payments (60 payments) and then have the note revert back to you after that period of time.
This is very helpful to know so that you can take a note, convert it to cash if the need arises, and then get the payments again. You have many more options when you know what possibilities there are to add passive income to your portfolio.
Passive income is the king of the investing world. This is the type of income that will provide you with time freedom, get you out of the rat race, and allow you to live the lifestyle you choose. If you have not done so already, begin to identify opportunities for passive income in addition to what you are already doing as an investor.