5 Strategies for Generating Passive Income through Real Estate

There are myriad ways to achieve passive income goals.  But we are all here to talk about how to earn passive income through real estate, which comes with its own range of strategies—some more common than others.  There is no “right way,” and the strategies are never a one-size-fits-all deal.  

Before making any investment decision, you need to have a clear understanding of what your options look like.  What are the positives?  The not-so-greats?  Are there any tradeoffs?  These are questions you should be asking and researching, but we are here to give you some high-level insight into what these strategies involve. 

Direct Ownership with Outsourced Property Manager

The most hands-on of the passive methods, many investors will purchase assets directly and hire a third-party company to oversee the day-to-day operations and manage tenants.  Essentially, you pay to have eyes and ears on the ground.  

Although it can be considered a passive strategy in theory, it really is an active pursuit in practice.  As the investor, you are still tasked with the identification of properties, contracting renovations and/or maintenance, and monitoring the property manager.  

Effort Level: 5/5

Partner with an Active Investor Who Manages Properties

Working with an active partner who will manage the property for you is a seemingly too-good-to-be-true strategy for passive income—because it is.  It is actually ILLEGAL for a partnership to take money from completely passive partners without registering with the SEC as a syndication.  

Many small partnerships will and do operate with a few partners that share roles or have a limited but indeed active part in the business. (Bookkeeping is a good example here.)  However, this passive strategy is one where your efforts can quickly balloon into a much larger role and time commitment.

Effort Level: 4/5

Invest with Private Real Estate Lenders

Private lending is another option for passively investing in real estate.  In this model, you do not own the real estate but instead lend to someone who does.  This could be a homeowner, a fix-and-flipper, large commercial real estate bridge loans, or funds that include many loans.  Lending often takes place through a syndicated structure where you will have no active role in the real estate or the syndication.  This is a mostly passive investment that only requires due diligence on the type of loans, the lender, and the business structure of the syndication. Once invested, you are completely hands-off.

Effort Level: 2/5

Private Equity Real Estate (Syndications)

In parallel to private lending, investing with a syndicator/operator is truly passive.  These investments could look like purchasing a single asset or multiple properties in a fund.  With syndications, the passive investor’s work is upfront.  They are tasked with identifying sponsors, evaluating offerings, performing due diligence, and selecting investments.  After that, their work is done.  

We believe private real estate funds are the best way to maximize the benefits of real estate investing.  They provide the highest level of diversification from the stock market, provide access to the best operators and real assets, generate reliable income streams, and produce competitive returns—all with minimal effort on the passive investor’s part. 

Effort Level: 2/5

Real Estate Investment Trusts (REITs)

A publicly traded REIT may be the easiest way to get your foot in the door of real estate investing.  In fact, you may already be invested in REITs through your 401(k) and don’t even know it.  Congrats and welcome to the passive investors’ club!

However, REITS lack many of the benefits of private real estate, including diversification.  REITs are traded on the stock market and, therefore, are highly correlated with it.  When stock values jump, so do REITs; they can also drop just as dramatically.  So, although passive, they may not be the best or safest bet for passive income.

Effort Level: 1/5

Final Thoughts

Often, the syndication strategy is going to yield the strongest results overall.  We like to think of syndications as giving passive investors the most dime for their time.  That’s right, not bang for their buck: they could get greater monetary returns by taking the venture on themselves.  But that is going to take an enormous amount of time, and time is money too.

At Cira Capital Group, we help busy professionals diversify their traditional investment portfolios by creating these funds, pooling investors’ capital with our own, and investing with world-class operators.

Interested in learning more about our investments?