We often hear the terms “investments” or “letting the money work for you,” but it’s thrown around without context that it begins to lose its meaning. Of course, it’s not simply about putting money somewhere, and then it comes back tenfold. There’s more to it than that, although, from the outside, it might initially seem like that.
Real estate is among the most popular forms of investment, especially when talks of “letting the money work for you” are involved. This is because real estate is great when it comes to generating “passive income.” Many people have misconceptions about what passive income actually is. Let’s discuss that first.
What Is Passive Income?
In the simplest terms, passive income means making an income through investment without actively participating in income generation. Keep in mind, however, that “passive” might not be as passive as one would like- there are varying degrees of involvement. Some types require very little involvement (especially if you hire someone else to manage it for you), some require occasional interference, while some might sound “passive” initially but are actually very high-maintenance.
What Is It For?
Passive income is great for those who want to pursue other passions in life, whether it be a business venture or a personal goal, while still generating enough income to sustain their daily life. Of course, there’s the barrier of initial capital required. But once that’s overcome, passive income is a great way to either generate more resources for a college fund, retirement fund or to bolster your savings account.
Real Estate for Passive Income
If the thought of having a passive income piques your fancy, then here are some real estate types that make for great passive.
Single-family Rental Unit
A single home or condominium unit that can be rented out to a single tenant is one of the more common types of passive income real estate. This is good for longer-term tenants who take the time to be emotionally invested in their rented unit and take better care of it. A glaring downside of it, though, is when it’s empty, it generates no income at all while still requiring money for upkeep.
Apartments and Multi-unit Rentals
In contrast to a single-family rental, multi-unit rentals and apartment complexes can generate more cash flow coming from multiple tenants. You will have to be prepared to manage more, as multiple units and renters would call for more maintenance work. But this way, even when one unit is vacant, there will still be income generated from other units, so, in a way, it has its own merits.
Commercial Real Estate
One of the most lucrative forms of real estate is leasing commercial properties to retail tenants. Most commercial real estate normally requires a high initial investment but also comes with significantly high income. However, do keep in mind that commercial real estate involves multiple renovations as tenants will most likely customize and change the property for their specific business purpose. Remodeling or renovating the property between tenants falls under the property owner, which can be counted towards involvement.
Bed and Breakfast
If you have a property in a touristy part of town, consider a short-term rental that’s great for vacations. This is a good idea for seasonal passive income. Having said that, you will have to deal with lean seasons, constant scheduling during peak season, and of course, the inevitable cancellations. Another thing you’d have to think of is constant maintenance, housekeeping, and marketing for the property.
Buying a ramshackle house and renovating might not seem like the most “passive” of efforts, but if you have a penchant for fixing things and DIY, then this might be the one for you. You can even increase the resale value of the property by adding in value-increasing touches. Add a waterproof plywood deck, turn the attic into a loft space, or maybe even overhaul the new place to be a thematic location.
Warehouses and Storage Facilities
Residential properties are the most common and most popular form of real estate, but perhaps the one that makes the most income is industrial real estate. Renting out warehouses and industrial-grade storage facilities make for a good investment. Consider looking into it, especially if you have the resources that can satisfy its equally considerable capital.
Passive income sounds well and good, but it’s not without its difficulties and caveats. Like with all types of investment, it’s best to come into it with a better understanding of how things work. This way, you’re increasing your chances of success.