Is real estate investing really passive?

Is real estate investing really passive?

Who doesn’t like passive income?

The idea of earning without working sure is appealing to everyone who spends most of their day hustling for active income.

When most millennials hear about passive income, they immediately start thinking about real estate! There are tons of people out there doing real estate and sharing their knowledge and experiences on YouTube and other social media platforms. They make it seem so easy, like anyone can do it without experience whatsoever. Well, I hate to be the one to break it to you, but doing real estate is no child’s play.

Real estate requires tremendous research. Don’t just enter, thinking that owning an extra house and collecting rent are the only tasks that you need to do. Do research, read books, do whatever you can to educate yourself. Also, remember that real estate is all about looking around and finding the best deal. There is more work involved than you think.

 So, this begs the question: Is real estate really passive?

Paperwork is the first out of many things you have to worry about while buying a house. To do this, you may have to find an agent. But he won’t do everything for you. You still have to sign contracts, and occasionally sign a few documents. For more information, head over to homelight.com. They have mentioned the 11 key documents that you need to pay attention to, from pre-approval letters to property surveys. Before proceeding to the next step, you need to know that there are two types of real estate investing; Direct and indirect.

Direct real estate investing

In direct real estate investing, you collect rent from the property you own. You have full control over your investment, which means that you get to decide what the rent is!

Investopedia has wonderfully explained the other advantages of direct real estate investing by saying:

“One benefit of investing in physical properties is the potential to generate substantial cash flow—as well as the ability to take advantage of numerous tax breaks to offset that income. For example, you can deduct the ordinary and necessary costs to manage, conserve, and maintain the property. Another large tax break is for depreciation, in which you deduct the costs of buying and improving a property over its useful life (and lower your taxable income in the process).

Of course, there’s also appreciation. While the real estate market fluctuates like the stock market does, property prices generally increase over time, so you may be able to sell later at a higher price.”

Unfortunately, as the property is yours, you also have to take care of maintenance. This becomes a huge burden if you’re a direct investor. Regular inspections and collecting feedback from tenants are extremely exhausting and you may end up quitting for these exact reasons. You also have to take care of the finances of course, and this may be a problem if your secondary house still has its mortgage to be paid off. Is there any solution to this?

Real estate can’t be that big of a hassle, right? Fortunately, there is another type of real estate investing. However, if you do plan to stick with direct investing, I suggest contacting a good property manager. This takes a lot of weight off your back. So, when you get your tenants, you’re basically on autopilot.

Indirect real estate investing

In simple words, investing in a REIT (Real Estate Investment Trust) or a mutual fund related to real estate is known as indirect real estate investing. The fund manages everything from the finances, operations to even collecting feedback from tenants. And let me tell you, you don’t even need to own the property.

Yieldstreet.com sheds light on the same, by saying:

“REITs give investors the option of investing in real estate without the expense of purchasing and maintaining an actual property. REITs generally have wider diversification, lower risk factors, and potential appreciation so they may be potentially beneficial additions to an equity or fixed-income portfolio.

This may work well for those looking to be passive investors because REITs are traded like a stock and one of the other potential benefits is the lower investment cost—as low as $500 for the price of one unit of a share.”

If you want to attract wealthy tenants (especially immigrants), you need the house to look attractive and fix whatever is broken. Finding tenants is a breeze while investing indirectly, but as I said in the beginning, it’s not as simple as it seems. Indirect real estate has its disadvantages too, ranging from high taxes to low returns. Furthermore, you have zero control over your investment and you barely get to make any decisions.

To learn more about real estate investing, I recommend reading Secrets of Millionaire Landlord:

Conclusion:

Whether or not real estate is really passive, depends on your strategy, way of investing and management. If you spend very less time on the tasks mentioned above, then yes, it is indeed passive. But if you’re breaking your back and spending no less than 5 hours a week, then you really need to switch to indirect investing.

FAQ

Is real estate easy?

There are tons of people out there doing real estate and sharing their knowledge and experiences on YouTube and other social media platforms. They make it seem so easy, like anyone can do it without experience whatsoever. Well, I hate to be the one to break it to you, but doing real estate is no child’s play. Real estate requires tremendous research. Don’t just enter, thinking that owning an extra house and collecting rent are the only tasks that you need to do. Do research, red books, do whatever you can to educate yourself. Also, remember that real estate is all about looking around and finding the best deal. There is more work involved than you think!

What is direct real estate investing?

In direct real estate investing, you collect rent from the property you own. You have full control over your investment, which means that you get to decide what the rent is! Unfortunately, as the property is yours, you also have to take care of maintenance. This becomes a huge burden, if you’re a direct investor. Regular inspections and collecting feedback from tenants are extremely exhausting and you may end up quitting for these exact reasons.

What are the downsides of indirect real estate investing?

Indirect real estate has its disadvantages, ranging from high taxes to low returns. Furthermore, you have zero control over your investment and you barely get to make any decisions.

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