The only three passive income property strategies that work
Property is NOT passive income…at least not in the way most videos make it out to be.
It might seem like an easy plan; buy a few houses, rent them out and let the tenants pay the mortgage…but that's not how it works in reality.
In this video, I’ll compare property investing against three other passive income ideas then reveal the only three forms of true passive income real estate investing.
We’re building a huge community of people ready to beat debt, make more money and make their money work for them. Subscribe and join the community to create the financial future you deserve. It’s free and you’ll never miss a video.
Is Property REALLY Passive Income?
It’s been a while since we did a real estate video on the channel but those of you in the community know, I’m all about property investing. It’s where I got my start as a commercial real estate analyst and then my first real experience building wealth through rentals.
But I get just a little batshit crazy when I see videos here on YouTube trying to make it out as this miracle passive income investment. I think…well maybe they’re just thinking about a different real estate investment than I know.
Because working 50+ hours a week analyzing and developing commercial real estate didn’t seem all that passive. Neither did using my weekend to fill up a 17-foot uHaul truck full of trash and all the shit tenants leave behind, then dumping it Monday before work…yeah, not that passive.
But there are ways you can make real estate as passive as possible so every once in a while, I’ve got to set the intertubes straight with a video.
In this one, I’m going to compare real estate against three other passive income ideas so you know what to expect. Then I’ll reveal three ways to make real estate passive income, ways to invest in real estate that really work to create income without the constant headache.
I’ll show you exactly how to set up those three passive income investments including a review of my newest real estate investment on Fundrise. I just invested $1,000 in a portfolio of 35 income properties with projected returns as high as 16% with a projected dividend return from 7.7% to 8.5% on an annual basis.
I’ll detail the portfolio as well as tell you how to get a 90-day risk-free trial on Fundrise. Invest now and if you aren’t totally satisfied after three months, Fundrise is going to refund your entire investment.
What is Passive Income Property Investment?
Now the definition of passive income is any income or return you get without having to do anything. So rather than actively managing your real estate, passive income would be collecting those checks without having to visit your rental 10:30 at night to light the pilot light on the water heater.
Yeah, had to do that one…a couple times.
But how does real estate investing, and here we’ll talk about residential rentals which is by far the most popular method, how does that stack up for passive income against some of the other ideas you see?
Let’s compare real estate as passive income versus three other ideas, then I’ll show you those three ways to make true residual income from property.
Real Estate vs Stocks for Passive Income
And the first comparison here has to be real estate versus stocks. Now I know a lot of you are thinking stocks are easily the more passive investment here but don’t forget the time you should be spending analyzing a company before you add it to your portfolio.
Now if you’re just talking about buy-and-hold, index investing then I would definitely give stocks the win on this one. Most real estate investments take a month or more to buy or sell versus that almost instant trade you can make in stocks. The analysis on real estate investments takes longer also just because you might have to physically visit the property and look up cash flow data.
Property vs YouTube for Passive Profits
Another favorite income idea here on YouTube is…well, making money on YouTube.
Now YouTube can eventually be a source of passive income. Here I’ve made just under $45,000 over the last year in ads and over $12,000 on a video I created 13 months ago. That video still makes over $60 a day and without having to do anything for it.
But I had to create more than 300 videos and am publishing three videos a week to keep up that growth and momentum. I’ve heard of YouTubers that stop doing videos and the money keeps coming in for a while but slowly trickles off.
With real estate, even if you’re doing the bare minimum, that property is still there earning rent and appreciating in price.
Property vs My Favorite Passive Income Source
Finally here before we get to those three passive income property strategies is real estate versus my favorite passive idea, self-publishing.
Those of you in the bowtie nation, you’re tired of me talking about self-publishing but this is easily the most passive form of income I’ve found. I’ve published 12 books on Amazon and make just over two grand a month.
It takes about three months to develop a book idea and publish but after that, it’s almost completely passive income so I definitely have to give the win to self-publishing over real estate on this one. Everyone has a book in them so give this one a try at least once and thank me when you’re collecting those checks.
Three Ways to Make Passive Property Income
Now let’s look at those three ways to create true passive income from real estate and we’re not talking telling your tenants not to call you after 9pm. I’m not going to stand here and try telling you that rentals or all these other real estate strategies are passive when they’re not.
These three strategies are the only ones that will create an income stream without having to do any work on your part.
Investing on Fundrise Portfolios
The first one here is investing on Fundrise and while I’ve known about the site for a few years, I only just started investing. The way Fundrise works, its team of property developers and analysts look at individual properties to include in portfolios.
The portfolios take either a debt or equity investment in the properties and then investors can buy shares in the portfolios. So you’re getting a diversified portfolio of different property types and in different regions, along with professional management.
Portfolios have returned between 9% to over 12% since 2014 and the site offers several choices for different investing styles. You’ve got the supplemental income portfolio which focuses on cash flow and a dividend yield as high as 8.5% a year. You’ve got the long-term growth portfolio here that focuses more on price appreciation, in the range of 8% a year but still provides cash flow of about 1.5% annually. Then you’ve got a balanced fund that provides both cash income and appreciation.
What I like about Fundrise and why I finally signed up is the complete transparency on all the investments. You can see how each property stacks up on risk as well as how many are debt investments and how many are equity.
You can click through to see individual properties like this commercial renovation in California. The platform is going to show you the project risk, what type of investment the portfolio has as well as a full market analysis.
And again, that diversification of property types is important here. You’ve got commercial properties like the office space we just looked at and residential space like this apartment project. You’ve got those debt investments that provide safety and income as well as the equity projects that help boost returns for the portfolios.
All-in fees for investors are 1% which is in-line with private advisory and way below what you pay on most real estate crowdfunding sites. One feature that really sets Fundrise apart is this 90-day trial offer and low $500 minimum. Invest as little as $500 in the starter portfolio and try it out for 90-days. If you’re not totally satisfied, you get your entire investment returned.
Investing in REITs for Passive Income
Our next passive income strategy is another one we’ve covered on the channel before and that’s investing through real estate investment trusts.
These are going to be a lot like investing on Fundrise with that idea of buying into a fund that holds many properties and spins off cash to investors. The difference here is that REITs are traded just like stocks so you can buy them in a regular investing account.
This graphic from the National Association of REITs shows the dividend and price returns over the four decades through 2013. REITs have provided an average total return of 13.5% over the period with about 8% of it from dividends.
What I love about REITs is that you can buy funds like the Vanguard Real Estate ETF, ticker VNQ, which itself holds almost 200 REIT companies or you can invest in the individual stocks that specialize in a property type.
I’ve got an IRA account that is almost completely invested in REITs with returns of between 11% to 52% since setting it up last year. In fact, the two worst investments in this account are the only two non-REIT stocks; Newmont Mining and Lending Club.
Using Lease Options for Income
Our final passive income real estate strategy, and this is also one of my favorite ways to invest with no money down, is the lease option strategy.
This strategy solves all the problems in real estate rentals by making it so the tenant cares just as much about the property as you do. No more late rent checks, no more evictions and no more filling up the truck with trash after they move out.
The way the lease option works is you rent out the property but the tenants sign a rent-to-buy contract where you’re providing financing. You get a down payment of maybe 10% plus monthly payments that cover rent and the purchase option on the house.
So let’s walk through an example, actually this is straight from one of the houses I’ve sold on a lease option. This was the second house I bought, a 768 square foot two-bedroom on Franklin Avenue. I got this one as a short sale from the bank so I was able to take over payments and put just $3,000 down.
I went in an changed the carpet, painted and put down tile floors for less than $2,000 and put it on the market. I had about $5,000 in the house and another $38,000 on the loan so I put it on the market for $50,000 and was able to sign a lease option to tenants within a month.
The tenants put down $5,000 so completely cashing me out what I put into the property. They paid $600 a month which included their loan and an escrow for utilities and property taxes.
Not only was I able to price the property for 16% more than what I paid but the interest rate on the lease option was 8.5% – and this was early 2000s so that was a few percent above rates on money I was borrowing at the time.
With the lease option strategy for investing in real estate, tenants pay all the repairs on a property because it’s their responsibility. They self-manage because if they don’t make those lease payments they’re going to lose everything they’ve put into it. Your vacancy drops to almost zero and you have no realtor fees.
Some lease options will close out, the tenant will refinance and take the house. Some the tenant will get tired of payments, leave and you get the house back. But any way you slice it, this is about as close to passive income you’ll get with real estate rentals.
You can make passive income from property investing but you need to know the pitfalls and mistakes most people make. Understand the strategies that make property as passive as possible and sit back to collect your checks.