Income that continues to be generated after the initial effort has been expended is called residual, or passive, income. As you can imagine, this type of income is highly sought after and something that many work hard to create for themselves and their families. After all, who wouldn’t want to continue earning from their hard work indefinitely, even long after that hard work is over?
One of the oldest, and most successful, methods for creating a residual income earning opportunity is through real estate. This method has been used by some of the world’s wealthiest people for centuries. There’s no doubt residual income through real estate can create massive wealth, but that won’t happen without knowledge and a good deal of up-front sweat equity.
Here are some tips to help get you off to a healthy start with using real estate to build residual income.
Different Types of Residual Income Real Estate
1. Rental Properties (Residential or Commercial)
A rental property residual income real estate business involves purchasing either residential or commercial property (or properties) in order to rent them out to tenants and then earning a monthly, recurring income. According to a recent Get Rich Slowly article:
One of the most popular ways to generate passive income is to buy (or finance) an income-producing rental property and become a landlord. And, according to a recent study from the Joint Center for Housing Studies at Harvard University, now may be the perfect time.
According to Harvard researchers, the percentage of households that rent is on the rise, up from 31 percent in 2004 to 35 percent in 2012. That may not sound like a giant surge, but it is when you’re dealing with the entire population of the United States. To keep things in perspective, the Harvard study claims that the total number of renting households surpassed 43 million in 2013.
Researchers blame the increase in renters on a convergence of factors, including a record number of foreclosures in 2008 and economic troubles caused by the Great Recession. However, it also points to certain benefits that make renting a popular option. Some of the benefits of renting named in the study: greater mobility, protection from fluctuations in the housing market, and freedom from home maintenance and repairs.
The fact is, renting has simply become the best option for many. In fact, recent reports show that rents have skyrocketed in many parts of the country due to increased demand, so much so that the cost of renting has moved out of reach for many middle-class families. And while that’s bad news for those who simply want an affordable place to call home, it’s a real estate investor’s dream.
Read more about the hows and whys of real estate rental properties in the article “The Pursuit of Passive Income: Is It Time to Become a Landlord?”
2. Flipping Houses
You can create a residual income stream by purchasing houses or properties in need of a little TLC (also known as “fixer uppers”), putting in some effort to remodel and improve the property (also known as “sweat equity”), and then selling for a profit.
Homes for flipping are frequently purchased from a state of foreclosure, which means they are bank-owned and frequently selling for much less than the assessed value of other properties in an area. However, these homes are often left in a state of disrepair and require massive effort on the part of the purchaser to take the property back to a saleable state.
Here is some more intel on purchasing real estate for the purpose of flipping from Street Directory:
The potential of income is limitless if you have more than one house in the remodel stage and one or more houses that have already entered the process of sales. When you purchase a home for an amount less than its cost price and sell it at higher rate, you definitely don't want to spend more on remodeling the house. The key here is to plan out everything accordingly. Start by making a list of area statistics and furniture that needs to be repaired, refurnished or replaced. This will give an idea of expenditures which you might incur for getting these done.
You should not unnecessarily spend on heavy duty replacements. There are lots of convenient stores that offer building and repair materials at a low price. Try to do most of your projects rather than hiring some one else for them. A project should be completed in weeks instead of months. The value of a house diminishes if it sits vacant in the market for a long time. It is extremely essential to pay attention to time line if you want to make profit from residual income through real estate.
Once the property is flipped and sold, you should immediately start looking for a new property. If you work as an individual then you shouldn't take more than one house at a time. But if you have other helpers, you can go in for more houses. However at no point there should be a lag in getting a property otherwise the profits will not be consistent.
Read more at “Flipping Houses to Make Residual Income Through Real Estate.”
3. REITs and Crowdfunded Real Estate Investments
REITs (Real Estate Investment Trusts) are large portfolios of income-producing real estate that are required by law to distribute 90% of its earning to investors each year. According to a Lazy Man and Money article:
Due to their special tax status, REITs must follow strict compliance standards and thus carry a certain quality standard for both the vehicle’s investment strategy and the real estate experience of the managing team.
Today, an estimated 70 million Americans invest in REITs.
There are two primary types of public REITs: traded and non-traded. Traded REITs offer the benefits of being traded openly on an exchange, giving investors liquidity. However this liquidity is likely to be priced into the value of the shares, resulting in a “liquidity premium”, or lower relative returns for all investors, regardless of whether or not they choose to sell their shares. Furthermore, traded REITs tend to be correlated to broader market volatility, meaning that the value may fluctuate depending on how the stock market is doing, regardless of whether or not anything has changed with the underlying properties owned by the REIT.
On the other hand, non-traded REITs have become more popular because of the perceived consistent double-digit dividends. However, non-traded REITs have recently come under heavy scrutiny because of the large upfront fees often charged to investors -- and dubious practices around the disclosure of those fees.
On the other hand, the pervasiveness and popularity of crowdfunding has given rise to a number of platforms that allow individuals to invest in real estate properties with the crowd. These platforms open up the potential of lucrative real estate investments to both average citizens and accredited investors. The low barrier of entry (as small as a $1,000 investment mark with platforms such as Durise) makes investment possible with properties around the world as well.
In conclusion, the potential to build residual income through real estate is nearly limitless. Choose one of the 3 options discussed above, learn all you can, and get started. Your bank account will thank you!