Passive Real Estate Investing: Build Cash Flow and Equity – without the Sweat!

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Real estate investing is perhaps one of the oldest side hustles in existence.

Buy a house, rent it out, and build wealth. It’s a tried and true formula, and certainly a way to stop trading time for money.

This idea was popularized by books like Rich Dad Poor Dad, explaining (often with real estate as an example) how you can “escape the rat race” when income from assets you control exceeds your monthly expenses.

But real estate investing comes in many different “flavors” — and some take more time and money than others to get started with.

real estate investing

Is Real Estate Investing Passive?

Investing in real estate certainly can be passive, but as many former landlords will tell you, it’s often anything but.

Tenants trash properties, toilets break, roofs leak, carpets need replacing, and buildings and landscaping don’t maintain themselves.

But those problems are all solvable, and when done right, real estate can be an extremely time-leveraged investment vehicle.

In fact, I consider real estate an important passive income investment for me — even though I happily rent my own home and don’t directly own any other properties.

How does that work?

Keep reading :)

Why Add Real Estate to your Portfolio?

Asset allocation experts recommend real estate make up 5-20% of your overall portfolio.

Per Robeco:

The largest institutional asset managers have long recognized the added value of real estate in their strategic asset allocation. For example, one of the largest global pension funds ABP – for government employees in the Netherlands, with €400 billion in assets under management in 2018 – allocates 11% to real estate. Other institutional investors allocate between 5 and 13% to real estate.

David Swensen, who runs Yale’s $27 billion endowment, has real estate pegged at 20% of his target allocation. He’s generated 13.5% annualized returns over the last 32 years — an incredible track record.

So why should you make sure to have real estate as part of your portfolio?

  • Cash flow – Earn continuous income from rent
  • Protection from inflation
  • Potential for capital appreciation as buildings or land increase in value
  • Potential tax benefits

Over the past several years, I’ve been strategically adding real estate to my own portfolio. I’ve done this primarily for diversification and cash flow.

According to my Personal Capital account, real estate now makes up about 15% of the overall pie (classified as “Alternatives” and “Unclassified” here):

personal capital real estate allocation

Pro Tip: Set up a free Personal Capital account of your own and link your investment accounts to get a similar portfolio snapshot. (The “Target Allocation” percentages are based on historical performance data and your unique investing goals.)

Just in terms of positive cash flow, my real estate holdings spin off several hundred dollars a month — and I’ve never re-tiled a bathroom or had a tenant call me in the middle of the night.

The Spectrum of Passive Real Estate Investing

As a general rule, the more “passive” a real estate investment, the lower the typical returns:

passive real estate investing options 2

It’s only fair, right? Active investors need to be adequately compensated for their time.

Here are some common examples:

  • Fix and Flips – Like you see on TV. Buy a run-down house on the cheap, fix it up, and re-sell it (or rent it out) for a profit. It can be time-consuming to source deals and manage the rehab work.
  • House Hacking – Buy a place that’s larger than you need, and rent out the excess space. “Typically you’re going to sacrifice comfortability with profitability,” pro house hacker Craig Curelop told me.
  • Land Flipping – Billed as “the best passive income model,” this actually takes a ton of upfront work in sourcing deals — usually through direct mail. After that though, you could collect checks relatively hassle-free for years.
  • Wholesaling – Find distressed properties and motivated sellers, get them under contract, and quickly sell them to other investors. You don’t need much capital upfront, just a lot of legwork to find deals and network with potential buyers.
  • Traditional Rentals – Build a portfolio of rental properties and live off the income, like Chad Carson. With “turnkey” platforms like Roofstock and solid property management, this can be pretty hands-off.
  • Online REITs – Online real estate “crowdfunding” sites like Fundrise make for very passive investments and have low minimums. In exchange for stronger returns, you sacrifice some of the liquidity you’d see with traditional Real Estate Investment Trusts.
  • Short-Term Real Estate Loans – Accredited investors can set up automated real estate loans through PeerStreet. According to my dashboard, my account has earned 6.9%.
  • Traditional REITs – These are perhaps the most passive real estate investment, and you can buy shares through any brokerage.

In choosing the real estate investments that are best for you, you need to take into account the time you have available, your existing handyman skills (or lack thereof!), and your available capital.

My real estate portfolio — that 15% allocation you saw above — is entirely in the last 3 options above:

  1. Online REITs
  2. Short-Term Real Estate Loans
  3. Traditional REITs

Assuming you’re short on time like me, let’s take a closer look at some of the more “passive” real estate investments.

Comparing the Most Passive Real Estate Investing Options

In this section, I’ll explore the pros and cons of several different real estate investing options, starting with the most passive and working my way up to those that take a little more time.

1. Listed Real Estate (Traditional REITs)

Listed Real Estate are publicly traded Real Estate Investment Trusts.

By law, these trusts must pay out at least 90% of their taxable income to shareholders. Woohoo for passive cash flow!

In other words, according to REIT.com: “The stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy, manage or finance property.”

Publicly traded REITs own (often) billions of dollars worth of office buildings, apartments, warehouses, hotels, shopping centers, and even ski areas. They collect rent and pass the profits along to shareholders like you and me.

You can buy shares in REITs through any brokerage.

Set up a free account at M1 Finance to get started!

m1 finance homepage

Potential Returns:

  • Typical yields of 3-6%
  • Possible share price appreciation (like stocks, bonds, mutual funds, and ETFs)

Don’t take this as investment advice, but I own VNQ, Vanguard’s REIT ETF. It has broad real estate exposure and low expenses.

At the time of this writing, the 30-day SEC yield is 3.33% and the fund has appreciated 8% annually over the last 5 years.

Pros:

  • Usually no minimum investment
  • Completely hands-off
  • Quick to liquidate
  • Instant diversification

Cons:

  • You may find better yields and more control elsewhere
  • You may want to concentrate your holdings in one area of real estate you believe will perform better

2. Short-Term Real Estate Loans

I run these loans through a platform called PeerStreet, which is currently only open to accredited investors.

peerstreet passive real estate investing

Essentially I’m lending money on real estate rehab projects. The property itself is collateral, and each loan has an equity cushion of at least 25%.

In return, the loans typically carry 6-10% interest.

The drawback is the minimum per loan is $1000, so if for some reason PeerStreet is unable to recover the principal, it would sting!

Potential Returns:

  • Typical annualized interest rates of 6-10%

According to my account dashboard, I’ve earned 6.9% so far. It’s purely a cash-flow play.

peerstreet returns

Pros:

  • Loans are backed by real property and have an equity cushion.
  • The automated investment feature makes totally passive.
  • Short-term positions, usually 1 year or less.

Cons:

  • $1000 minimums for single loans
  • Not a lot of diversification

3. Online REITs

Online REITs like Fundrise offer a compelling alternative to their publicly traded counterparts.

fundrise homepage

These funds aren’t as diversified as publicly traded REITs, nor as liquid. In exchange for that, you’re hoping to get better performance.

A lot of that comes down to trusting the vetting process and management of the REIT provider.

Potential Returns:

I’ve been a Fundrise investor (and affiliate) since late 2015. Since then, I’ve added to my position several times and have seen 6-8% annualized quarterly dividends:

fundrise returns

Pros:

  • Low $500 minimums to get started
  • Strong cash flow performance
  • Combination of debt and equity positions

Cons:

  • Harder to liquidate (don’t invest cash you anticipate needing anytime soon)
  • Diversification varies by provider, but not as strong as publicly traded REITs.

Fundrise Alternatives:

  • Diversyfund – A newer “eREIT” host that targets cash-flowing apartment complexes in need of upgrades. Diversyfund has seen 15%+ returns in its first couple years, and has just a $500 minimum investment. At press time, dividends are automatically re-invested.
  • RealtyMogul – Offers a pair of nationwide REITs with $5000 minimum investment.
  • YieldStreet – $5000 minimums, targeting 8-20% returns.

4. Turnkey Rental Properties

Several friends of mine have been investing in out-of-state single family homes to begin building equity and cash flow.

Platforms like Roofstock and Memphis Invest are helping make the acquisition and management of these properties easier.

I have yet to pull the trigger on this kind of investment for a few reasons. First, direct ownership has me a little scared as I’ve seen first-hand some of the unexpected expenses, or “joys of home ownership,” that can crop up.

For the amount of cash I’d be forking over as a down payment, I could gain much more diversification, professional management, and better yields through some of the other options mentioned on this page.

roofstock turnkey rentals

Still, Roofstock makes it easy to compare different investment properties all across the country. Many already have tenants and property management in place, making this about as passive as landlording can be.

roofstock properties

Potential Returns:

  • Cash on cash returns typically range from 4-12%.
  • Homes may appreciate over time.

Pros:

  • Platform makes it easy to find and compare out-of-state rentals.
  • Tangible, real assets are easy to understand.
  • Local property management reduces your time involvement.

Cons:

  • Difficult to diversify (unless you’re already loaded!).
  • High upfront costs; at least 20% down payment required.

What Are The Best Real Estate Investing Options if You Have No Money?

Like many other passive income ideas, it’s usually going to take either time or money to get started. If you’ve got more time than money to invest at the moment, and still want to get involved in real estate, your top options are:

  • “Free houses” – Use creative financing to secure properties with none of your own money. One side hustler shared how he built a $1.2 million portfolio with nothing out of pocket.
  • Land flipping – Send low-ball offers to tax-delinquent landowners, and re-sell the parcels. (Still requires some upfront investment for marketing and initial purchase(s).) A Side Hustle Show guest shared how he was cash-flowing $10,000 a month after doing this for a year.
  • Wholesale – Secure purchase contracts on distressed properties, and sell those contracts to other investors. One prominent real estate investor noted this his how he got his start–with less than $100.

Passive Real Estate Investing Conclusion

Like most investments, anything real estate-related helps to take a long-term view.

In many cases, you may not see amazing short-term results or liquidity, but over the long-run, real estate can be a real way to build wealth and passive income.

Which is these options appeal the most to you?

Pin it for later:

passive real estate investing pin

3 thoughts on “Passive Real Estate Investing: Build Cash Flow and Equity – without the Sweat!”

  1. The benefits of passive real estate investments are many and, frankly, wonderful when the investment works. You have the freedom to do whatever you choose to do without concern for your investment. You can travel and enjoy a relatively leisurely retirement secure in the knowledge that you have regular income coming from your real estate investments.

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  2. I’ve done both passive and active real estate investing, though as our kids get older we are shifting more toward the passive end. Another thing to add to your list is private equity investment (i.e. being a limited partner in a real estate deal). You usually have to be accredited and they come with high minimums, but the returns tend to be better than REITs (either public or private).

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