Strategies to Truly Hassle-Free Passive Real Estate Income

By Kevin Mathenge    24 Apr,2024

   Real estate has long been postured as a convenient and rewarding investment. Many are attracted by the connotation of passive income – that real estate allows them to collect regular paychecks without taking time during their busy day to work on the property or maintain it.

Indeed, real estate is a smart investment avenue that helps you diversify your portfolio away from the conventional types of investment; which is why it is often categorized as an alternative investment.

But its status as a wholly passive income earner has been disputed and demystified. This begs the question: what are the hassle-free passive-income-generating real estate investment options that enable you to earn passive income? This article provides the answers.

Why Income from Some Real Estate Investments Isn’t Truly Passive

Let’s take the example of a rental property. You could choose to buy a commercial or residential property that you then rent out. Every month, you’ll expect to receive rental income.

However, you’ll still have to work for that income by advertising your property to find reliable tenants, collecting rent, following up on late payments, and handling repair requests and maintenance.

Of course, you could delegate these tasks to a property manager, but even then, you’d still have to approve certain requests. So, generally, not all real estate investments can be considered truly passive income earners.

Some require more effort than others and can be correctly termed as active income earners. However, other options let you generate hassle-free passive real estate income.

Hassle-Free Real Estate Investment Strategies

There are three options you can consider if you want a truly hassle-free, passive-income-generating real estate investment. These options delegate the role of managing properties to specialty third-party companies, giving indirect exposure to real estate assets. They include:

●Real Estate Investment Trust (REIT)

●Crowdfunding Platforms

●Real Estate Exchange-Traded Funds (ETFs)

1.Real Estate Investment Trust (REIT)

A REIT, or real estate investment trust, owns and operates income-generating properties or holds (purchases or originates) mortgages on real properties.

These properties can be wide-ranging, from retail centers, warehouses, and medical facilities to office blocks, residential buildings/apartment blocks, and hotels. The world over, REITs are said to own commercial real estate assets worth about $4 trillion, a testament to their popularity.

A REIT pools contributions from many investors and uses them as capital to purchase and operate properties or purchase and originate mortgages. Investors essentially contribute to the fund by purchasing shares of the REIT.

They then earn truly hassle-free passive real estate income in the form of dividends. These dividends are derived from the REIT’s profits or taxable income and their payment is mandatory.

Most REITs must distribute between 85%-100% of their profits/taxable income as dividends to shareholders, depending on the jurisdiction. REITs in the United States, United Kingdom, and Germany for example, must pay out at least 90% of profits.

Further afield, the governments of the Netherlands, Italy, Belgium, and France mandate REITs to distribute 100%, at least 85%, at least 80%, and at least 85%, respectively, of their profits to shareholders.

However, not all REITs are regulated, which brings us to the three categories of REITs:

●Publicly traded REITs: these are companies that are registered with and regulated by a country’s regulated body. They’re also listed on a national securities exchange. Most REITs fall within this category.

●Public non-traded REITs: these are companies that are registered with and regulated by a country’s regulatory body but aren’t listed on any national securities exchanges.

●Private REITs: these companies are neither traded on a national securities exchange nor registered with any regulated body. Shares in private REITs can be purchased only by institutional investors.

2.Real Estate ETFs

Real estate exchange-traded funds (ETFs) are another avenue through which you can earn hassle-free passive real estate income. To understand what a real estate ETF is, let’s first explore the concept of ETFs. 

An ETF can be thought of as a security that is traded on a national securities exchange and can, therefore, be purchased or sold like a stock. 

Normally, an ETF pools capital from investors and invests those funds in a particular class of assets or securities. If the funds are invested in REITs, equity REITs, and real estate firms, they are known as real estate ETFs or REIT ETFs.

It’s worth pointing out that investing in real estate ETFs gives you, as an investor, access to a diverse portfolio of REITs. You, therefore, don’t have to buy or sell shares in multiple different REITs separately. 

This reduces the need to perform thorough due diligence for each REIT; the fund manager does this role in return for a management fee.

3.Real Estate Crowdfunding Platfor

A crowdfunding platform raises money from a large number of people and subsequently uses that money to invest in one or many asset classes. Some platforms can choose to invest in venture capital, private equity, private credit, short-term notes, and real estate, just to mention a few, while others only invest in one class. 

But crowdfunding platforms that invest in multiple asset classes allow you to diversify your investment portfolio. With them, you can own a percentage of many asset classes. So, you are not just restricted to real estate, as is the case with real estate ETFs and REITs.

Generally, crowdfunding platforms lower the barrier to entry. They make real estate – and other asset classes – accessible to investors who may not have otherwise afforded to buy the asset at its retail price. The investors instead own a slice of the asset, which, in most cases, is cheaper than owning the whole asset.

Conclusion

Investing in real estate can be an excellent way to generate income over and above your salary earnings. While it has been frequently advanced as a passive income earner, some real estate investments require active involvement and are, therefore, not true passive real estate income earners.

They provide direct exposure to real estate prices and property conditions. Fortunately, you can invest in REITs, real estate ETFs, and real estate crowdfunding platforms.

These options provide passive real estate income. They delegate the role of due diligence and property management to specialist companies.

Put simply, the passive real estate income-generating investment options only provide indirect exposure to real estate.

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We discuss the truly hassle-free passive real estate income earners, which are real estate investment options that require less effort and involvement than others.

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