Unearned income has become a big buzzword. The appeal of collecting a steady paycheck without working “actively” is stronger than ever.
One of the most popular ways to create a passive income stream is through real estate, at least in theory.
The process is something like this: Borrow money from the bank to buy property, tenants to pay off mortgages, and some more.As you accumulate more equity, repeat the process to buy more properties, scale up…and grow fast! real estate king.
However, the reality is different.
If you want to be a landlord, you’ll need to find reliable tenants, collect rent, and handle maintenance and repair requests (out of your own pocket).
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What about property managers?
A good property manager makes life easier, but personal finance expert Dave Ramsey points out that income isn’t as passive as it seems.
“Even if you manage a management company, they need to call you and approve a new heating and air system that exploded for $8,400. I broke down on one,” he says on a recent episode of The Ramsey Show.
Ramsey still favors real estate as an asset class, but warns that investors should know what they’re getting into.
“I love real estate. It means you are using it.”
So how do you invest in real estate? make it as effortless as possible?
Here we consider three methods.
REIT is an abbreviation for real estate investment trust. Own profitable real estate Condominiums, shopping centers, office towers, etc.
REITs can be thought of as giant landlords. REITs own a number of properties, collect rent from tenants, and pass that rent on to shareholders in the form of regular dividend payments.
To qualify as a REIT, a company must pay at least 90% of its taxable income to its shareholders in dividends each year. In return, REITs pay little or no income tax at the corporate level.
Of course, REITs can still go through tough times. Several REITs cut dividends during the pandemic-induced recession in early 2020. Their share price also fell due to the market crash.
On the other hand, some REITs offer any amount of reliable dividends. For example, Realty Income (O) pays dividends monthly and has increased its dividend 117 times since going public in 1994.
REITs are listed, so they are easy to invest in.
Unlike buying a home, which can take weeks or months to close, shares in REITs can be bought or sold at any time throughout the trading day. This makes REITs one of the most liquid real estate investment options.
Invest in online crowdfunding platforms
Crowdfunding refers to collecting small amounts of money from many people to fund a project.
Recently, on many crowdfunding investment platforms, Own a percentage of physical real estate — From rental properties to commercial buildings and land parcels.
Some options are aimed at accredited investors, with minimum investments reaching tens of thousands of dollars.
To become an Accredited Investor, you must have a net worth of at least $1 million in the past two years, or an income of at least $200,000 (or $300,000 with spouse).
If you are not an accredited investor, many platforms allow small investments on an as-needed basis.
Such platforms make real estate investing more accessible to the general public. Simplify processes and lower barriers to entry.
Some crowdfunding platforms collect money from investors to fund development projects. These transactions typically require a longer commitment from investors and offer a different set of risk and reward profiles than buying shares in established income-generating rental properties.
For example, development may be delayed and rental income may not be available in the expected time frame.
Sponsors of crowdfunded real estate deals typically charge investors a fee ranging from 0.5% to 2.5% of what the investor has invested.
invest in ETFs
Great care must be taken in choosing the right REIT or crowdfunding deal.if you are looking for Easier and more diverse ways to invest in real estateconsider exchange traded funds.
An ETF can be thought of as a portfolio of stocks. ETFs are, as the name suggests, traded on major exchanges, making them easy to buy and sell.
Investors use ETFs to Diverse PortfolioYou don’t have to worry about which stocks to buy or sell. There are ETFs that passively track the index, and his ETFs that are actively managed. All of them charge a fee, called an administration fee rate, in exchange for managing the fund.
For example, the Vanguard Real Estate ETF (VNQ) offers investors broad exposure to US REITs. The fund holds 167 shares and has a total net worth of $72 billion. Over the last 10 years, VNQ has achieved an average annual return of 6.2%. Management cost ratio is 0.12%.
You can also check out the Real Estate Select Sector SPDR Fund (XLRE), which aims to replicate the real estate sector of the S&P 500 Index. Currently, the company owns 31 stocks and the expense ratio is 0.10%. Since the fund’s inception in October 2015, it has delivered an average annual pre-tax return of 8.5%.
Both of these ETFs pay quarterly distributions.
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This article is for informational purposes only and should not be construed as advice. It is provided without warranty of any kind.