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

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.

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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 don’t directly own any buildings or land outside of my own home.

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. Real estate can generate cash flow, appreciate over time, be a hedge against inflation, and offer potential tax benefits.

Consider these datapoints.

Per Robeco (article no longer online):

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.

A 2018 study of over 200 institutional investors found an average target allocation of 10.6% to real estate.

David Swensen, who ran Yale’s $42 billion endowment, had real estate pegged at 20% of his target allocation. He’s generated 13.7% annualized returns over 36 years — an incredible track record that more than doubled the performance of the broad S&P 500.

Benefits of Real Estate Investing

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

The biggest reasons are:

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

How to Tell How Much Real Estate You Already Have

If the pros recommend 5-20% of your overall portfolio in real estate, the next question is to find out how much real estate you already have. (Not counting your primary residence.)

My favorite tool to do this is Personal Capital. It’s free to set up an account and you can connect all your various banking and investment accounts.

Once you’ve done that, you can check under Investing > Allocation to see your current breakdown.

(The “Target Allocation” percentages are based on historical performance data and your unique investing goals.)

My biggest beef with Personal Capital?

They lump Real Estate into the “Alternatives” category, which in my account also includes Gold, Commodities, and the super-descriptive “Other.” If you click on Alternatives, it will give you the more detailed breakdown:

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 10.93% of the overall pie.

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 Real Estate Investing: 9 Ways to Get Started

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

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

Here are some common examples:

1. 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, so I wouldn’t consider this very passive at all.

2. 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,” house hacking pro Craig Curelop told me.

He described a few examples, including:

Buying a duplex, living in one unit and renting out the other unit either on Airbnb or as a long-term rental.
Buying a 5-bedroom house, living in one room and renting out the other 4 individually.

This seems most doable for younger professionals and couples who don’t need as much space, and can be a way to save big on housing —what’s typically your biggest expense.

One alternative that doesn’t involve any bathroom or kitchen sharing is Neighbor, the “Airbnb for storage” platform. The site aims to match you up with people who need a place to store their stuff. Top hosts report earning up to $10,000 a year.

This could be a way to reduce your housing cost if you have extra space, or squeeze more cash flow out of real estate you already own.

3. Land Flipping

Billed as “the best passive income model,” Land Flipping actually takes a ton of upfront work in sourcing deals — usually through direct mail. How it works is you find lists of parcel owners, often targeting out-of-state owners who may owe back-taxes on the land, and send them a low-ball purchase offer.

Once you have a deal, the common strategy is to resell it on a low monthly installment plan. Those monthly payments are where the passive cash flow and profit comes in — after the initial work, you could be collecting checks and direct deposits for years.

To learn more about this business model, check out my interview with Roberto Chavez or download this free land investing launch kit.

4. Wholesaling

Real estate wholesaling involves:

finding distressed properties and motivated sellers.
getting them under contract.
quickly selling them to other investors.

You don’t need much capital upfront, just a lot of legwork to find deals and network with potential buyers.

5. Traditional Rentals

Build a portfolio of rental properties and live off the income, like Chad Carson or Dustin Heiner. Both retired in their 30s thanks to the passive cash flow from their rentals.

“Turnkey” 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.

But with solid property management, this can be pretty hands-off.

Roofstock makes it easy to compare different investment properties all across the country, and they’ve got some cool search filters and research tools to help you find the right home for your strategy. Many already have tenants and property management in place, making this about as passive as landlording can be.

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.

6. Rental Arbitrage

This real estate strategy doesn’t actually require you to own any property. In fact, it can be a lower cost way to get started.

How it works is you sign a 12-month lease on a property, and (with the landlord’s consent) turn around and list it as a short-term rental on Airbnb or other platforms. You profit on the spread between whatever you can collect in short-term rental fees and your fixed monthly rent.

There’s an art and a science to rental arbitrage, and it’s highly controversial in tight rental markets. Still, some enterprising Airbnb hosts report bringing in 6-figures in profit — all while traveling the world.

7. Online REITs

Online real estate “crowdfunding” sites like Fundrise make for very passive investments and have low minimums. In exchange for (hopefully) stronger returns, you sacrifice some of the liquidity you’d see with traditional Real Estate Investment Trusts.

8. Short-Term Real Estate Loans

Help fund real estate rehab projects through short-term loans on sites like Groundfloor. These notes typically range from 3-12 months and earn 6-10% interest.

The minimum amount per loan is just $10 so you can easily spread your investments around to diversify, and Groundfloor has an easy-to-use interface that lets you “shop” for these investments.

If things go south, you’ve got the property as collateral so you can typically recover your principal.

9. Traditional REITs

These are perhaps the most passive real estate investment, and you can buy shares through any brokerage. Consider a modern broker like M1 Finance if you’re just starting out.

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.

What’s in My Passive Real Estate Portfolio? Comparing the Most Passive Real Estate Investing Options

My real estate portfolio — that 10% allocation you saw above — is entirely in the last 3 options above:

Online REITs
Short-Term Real Estate Loans
Traditional REITs

The drawback to all these? There’s no leverage.

If you have $100,000 to invest directly in real estate, you could buy $500,000 or more worth of homes. With the methods below, $100,000 will get you only $100,000 worth of assets.

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

In this section, I’ll share what’s inside my passive real estate investing portfolio, and how they’ve performed so far.

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!

Potential Returns:

Typical yields of 3-6% — I literally get paid to do nothing
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 2.19% and the fund has appreciated around 6.4% 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 two platforms: Groundfloor and PeerStreet. Of the two, Groundfloor is my preference today.

It’s open to non-accredited investors and has much lower minimums (just $10 per loan). In contrast, PeerStreet is only open to accredited investors and has a $1000 minimum per loan, which makes it harder to diversify.

On top of that, Groundfloor has more available inventory of loans to invest in.

But how both of these platforms work is you’re essentially 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.

Potential Returns:

Typical annualized interest rates of 6-10%

I’m up 7.5% on my (relatively new) Groundfloor account so far.

According to my PeerStreet account dashboard, I’ve earned 6.5% so far. It’s purely a cash-flow play.

Pros:

Loans are backed by real property and have an equity cushion.
The automated investment features can make it totally passive.
Short-term positions, usually 1 year or less.

Cons:

$1000 minimums for single loans (on PeerStreet).
You’ll need several loan positions to be diversified.

3. Online REITs

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

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 12.6% annualized returns through a combination of dividends and appreciation.

Here’s a snapshot of how my account has done over the years:

Pros:

Low $10 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.

Click here to learn more and get started with as little as $10.

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.

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 creative financing, land flipping, and wholesaling.

“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.
Wholesaling – 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 of these options appeal the most to you?

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