Real Estate Investors: How To Make Passive Income Through Investments

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It’s ideal to make a good salary or income through side hustles, but who doesn’t want to earn passive income, where you don’t have to do much or any work to reap financial rewards?

Real estate investors have tapped the vein of bringing in a steady flow of income without a consistent amount of work. While there’s always work to be done up front, once you put these strategies into place, you may be able to sit back and watch the money roll in.

Real estate investors explain how they make passive income through their investments.

Real Estate Is Your Best Investment

Rhett Wiseman, a real estate investor and the founder of Wiseman Advising LLC/Section8Coaching.com, said, “The best way to create passive income, without question, is through real estate. It’s the safest way and the easiest way and has the most opportunity regardless of where you stand financially.”

You just have to be careful which advice you listen to, he warned.   

“There are a lot of different kinds of passive income that real estate affords us, so as long as we stay in the right asset class.”

That means you need to know your risks.

Single-Family Home Rentals

“You go online and everybody tells you the best passive income streams are multi-family housing and apartment complexes,” Wiseman said, “and that is just not the case when we have extremely high institutional debt and interest rates.”

For the average investor, the cash flow from these investments may not be enough to service the debt.

Wiseman said, “The best way to make passive income right now for the investor who just wants to bring in a little extra is to buy a single-family home and rent it out.”

Due Diligence Required

Of course, buying a single-family rental just anywhere isn’t a great idea either, Wiseman said. It requires due diligence to seek out.

“[Choose] areas that are up and coming, where there is high rental demand,” he said, “and avoid some cities that have an extreme surplus of units.” 

For example, Wiseman said, avoid places with extreme development: Austin, Texas, and Nashville, Tennessee, are about to see tens of thousands of new units hit the market, which will drive rents down.

For people who might have the capital and the desire to buy more than one single-family home, he suggested you play it safe.

“Usually I tell my clients to buy one single-family home,” he said, “get it up and running and cash flowing; and, once you’re in the green, let’s buy another single-family home.”

Once you have “proof of concept” with one, then it’s time to buy another.

Reconsider Airbnb

A lot of people have made good money with Airbnb, but Wiseman warned that “Airbnb is down over 30% year over year in its highest grossing markets, so it’s too much risk.”

He said Airbnb owners are battling against an extreme surplus of units. “Demand is down, people aren’t traveling as much, and cities and local governments are creating new laws every quarter to combat it.” 

Real Estate Syndication

Another method for investing is a real estate syndication, where investors pool their money and co-invest in larger real estate projects.

It can be lucrative, but Wiseman said, “Syndications are all about who is running [them]. A lot of retail investors don’t understand the in-depth analysis that needs to go into putting your money in a syndication.”

The result, he said, is that “a lot of the time the only ones who get rich are the ones running the syndication.”

However, if you get in with the right group, you can make a lot of money and returns are great, he said. It’s just a matter of education, timing and luck.

“A lot of lower-entry-point retail investors don’t have access to the highest-quality syndications,” Wiseman said. “Instead, I recommend you buy something you can touch and feel and you have more control over.”

It is best to get with investors who are having success in those markets. Find people who are in your situation, investing in the same asset class, and get with them to see who they’ve used at every different step.

Real Estate Crowdfunding 

“One of the beautiful things in today’s world is crowdfunding and the ability to co-invest and collaboratively invest with others,” said Dutch Mendenhall, a real estate investor, founder of the Rad Companies and author of “Money Shackles.”

Crowdfunding allows you to take advantage of larger-scale investing without needing all of the money to do it yourself. You don’t have to join a syndication either, he said.

“There are crowdfunding sites where you can invest for as little as $100,” he said.

He said the JOBS Act of 2012 made it possible for non-accredited investors to invest in these ways and that people should take advantage of them.

The Economy Makes a Difference

Real estate investing does depend on certain factors in the economy, because, as Mendenhall said, “Different economies produce different results.”

Generally speaking, though, he said you can’t go wrong with buying rental properties to bring in passive income; it just may not be enough to build long-term wealth.

“It depends on what stage you’re in,” Mendenhall said. “If you’re a twentysomething looking to build wealth or a person facing retirement, these [are] all important factors, depending on what your goals are and [your] income level.”

FHA Loans Help You Start

For someone who has never purchased a home, an FHA loan can be a great way to get in on a property, Mendenhall said. 

“One of the great things you can do with an FHA loan, if you’re just starting and don’t have a personal residence, is to use an FHA loan to buy a four-plex, live in one unit and rent the other three out,” he said. “An FHA loan will give you the best terms and rates and make it easier for you to borrow.”

After You Buy

Judah Longgrear, CEO of JL & JM Capital, suggested that once you purchase a property with the goal of renting it out, you need to do three things quickly:

Rehab (or Renovate)

“After successfully buying the house, you need to renovate it and make it look attractive and habitable for renters,” he suggested. “Excellently renovated homes get swept off the market quickly, so you should aim to do a good job in this regard.”

Rent

You can choose to find tenants for your newly renovated house or work with Realtors, Longgrear said. Either way, renters are where the income builds from. 

He cited research that shows 50% of Americans under age 30 and earning $50,000 live in rented homes.

“As younger generations move out of their parents’ houses and the average income of under-30 adults hovers around $50,000,” he said, “there’s likely to be an increase in the need to rent homes.”

Refinance

Once you have made the property habitable, Longgrear said, you can get a new appraisal to determine its current market value, which should be higher than the purchase value because of the renovations.

“With a higher appraisal value, you can refinance the property by securing a new mortgage,” he said. “Typically, the loan from the refinancing is equivalent to the amount spent on purchase and renovation. This frees up some cash for you to invest in another distressed property whenever the opportunity shows up.”

Seek Out Mentors

Ultimately, what will make you successful in building passive income through real estate, Wiseman said, is “having the right team who is going to help you find the right property” and make it a “successful cash-flowing the property for a long time.”

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