A five-year study by Tom Corley, the author of “Rich Habits,” found that on average, 65% of self-made millionaires had three income streams. As demonstrated in this study, by diversifying income streams, individuals could benefit from greater income and increased financial independence: the less reliant you are on a single source of income, the greater control and flexibility you have with your finances.
While there are nearly infinite ways to earn supplemental income, some options require less time and attention than others – and offer more consistent returns. Considerations like these can be important for anybody working a full-time job trying to determine the best place to put their capital or efforts. If you have limited time or desire to devote to building a side hustle, a wise investment strategy is key in creating a dependable, low-maintenance supplemental income portfolio.
Real estate has long been an asset of choice for savvy investors interested in building powerful supplemental incomes. Real estate can offer a consistent cash flow from rental income. On top of rental income, investors can benefit from asset appreciation over the long term.
But real estate investing hasn’t always been easy, and some forms of real estate investing pose fewer barriers than others. Active real estate investing offers the benefit of direct ownership, but also requires large commitments of time, lump sums of money, and ongoing responsibility. On the other hand, passive real estate investing significantly lowers barriers to entry, expanding access to real estate investments, and with much less maintenance required.
Are you ready to be an investor? Let’s chat “real estate investing”. Read on to learn about different ways to invest in real estate, and the pros and cons of each. Or, use the links below to jump to a section of your choosing.
- Active Real Estate Investing
- Passive Real Estate Investing
- What’s the Best Way to Earn Supplemental Income for You?
Active Real Estate Investing
When you hear the term “real estate investing”, you probably picture purchasing and selling or renting a property. These types of real estate investment are known as active real estate investing. They involve hands-on real estate purchases, active property management, and market knowledge.
Active real estate investing demands a wealth of real estate and financial acumen. But when done right, it can be an extremely lucrative investment.
Investing in Rental Properties
Rental properties have been the default choice for average investors who want to step into the world of real estate investing.
Investing in a rental property has obvious upsides. Those include:
- Regular income: a rental property is a regular and recurring source of monthly income as long as it remains occupied
- Tax deductions: there are a wealth of tax deductions that come along with being a landlord, including the cost of maintaining the property, mortgage interest, property taxes, and more
- Appreciation: generally speaking, properties tend to increase in value over time, which can enable to you raise rent and increase income over time
While this option certainly has the potential to offer supplemental income, it also comes with many ongoing, hands-on responsibilities – and its profitability depends entirely on the investor. Here are challenges you may face when investing in rental property:
- Upfront costs: in addition to the down payment on the rental property, you may need to perform repairs and renovations to get the rental up and running
- Illiquidity: a rental property is also considered an illiquid investment, meaning that an investor should expect to tie up their money in the asset—typically for years
- Time: being a landlord can be a time consuming job; not only do you need to handle rent collection, but you’ll also need to be available around the clock for maintenance issues and more
- Vacancy: in order for your rental investment to remain profitable, you’ll need to keep it occupied; finding new occupants for your building takes both time and effort
- Risk and liability: in addition to needing to comply with state and federal rental laws, landlords may face evictions, property damage, litigation, and more
Investing in a rental property is a serious commitment. It’s easy to see how a side hustle like this can turn into a full-time job. An investor must have the knowledge to assess, buy, and manage the property in order to turn a profit each month. Without this expertise, you risk not earning a profit at all, or worse, losing money.
Flipping Investment Properties
For those looking for an active real estate investment without the long term commitment, flipping investment properties is an appealing choice.
You’ve probably seen shows about flipping on home renovation networks. Investors purchase a dated house with good bones, update it with fresh paint and modern appliances, and voila! They turn tens of thousands of dollars in profit.
In truth, flipping investment properties is a much more complex process. For one, not all property flippers perform renovations on their purchases. Some simply jump at an undervalued property and instantly turn it for a profit. For those who do perform renovations, decisions and changes must be performed rapidly in order to be lucrative.
House flipping is truly high-risk, high-reward. When a flip goes well, investors reap the benefits, including:
- Quick return: real estate flipping can turn a significant profit very quickly; it takes about 6 months on average to flip a house
- Market stability: generally speaking, the real estate market is predictable and fairly unsusceptible to large and unexpected fluctuations
- Can be hands-off: if an investor doesn’t plan on performing renovations on the property, house flipping can be a fairly hands-off process
Again, high-risk comes along with this high-reward. Real estate flippers may face significant risks, including:
- Market knowledge: if you want to turn a property for a profit, you need to have in-depth knowledge of the real estate market; otherwise, you risk making significant investing mistakes
- Loss: there’s always the potential that a property simply won’t sell at the price you expected, and that may leave you at a loss
- Upfront costs: just like purchasing a rental property, flipping comes with significant up-front costs; this is especially true if you plan on performing renovations on your investment
- Taxes: a significant boon on a real estate investment can shoot you into another tax bracket, increasing your tax liability
Passive Real Estate Investment
If you’re not ready to buy a house, you can still reap the rewards of supplemental income and asset appreciation through passive investing. Plus, passive investors can receive the benefit of greater real estate diversification without the ongoing responsibilities of landlording or the significant risk of flipping.
If you aren’t ready to commit to a large down payment for a single property, a passive investment can lower the financial barrier. Where properties can range from tens of thousand to millions of dollars in acquisition and operation fees, passive investments are more accessible. Plus, they allow you to make money in your sleep.
In addition to requiring less capital, a passive investment also requires significantly less maintenance from an investor. The responsibilities, and ultimately the success of a property, fall on the shoulders of the investor in an active investment. In a passive investment, an investor only provides capital and lets the investment professionals take it from there.
Real Estate Investment Trusts (REITs)
A real estate investment trust is a form of passive real estate investment that utilizes individuals money to contribute to the purchase of a real estate investment. Many individual investors buy into, or invest in, a corporation or trust. The corporation or trust then uses those funds to invest in real estate.
There are plenty of upsides to investing in REITs rather than purchasing property oneself. Those include:
- Diversity in property type: REITs are not specific to residential properties; through an REIT, one may invest in commercial or industrial real estate, as well
- Diversity in location: REITs enable investors to invest in properties in many different locations; this diversification can protect investors from location-specific market fluctuations
- Highly liquid investment: REITs are traded via exchanges, unlike properties which require various entities to exchange
Of course, a real estate investment trust doesn’t hold the same significant risks of active investing. As such, it typically doesn’t come with the same financial boon of active real estate investing.
Using an Online Real Estate Platform
Online real estate platforms such as Fundrise are the crowdfunded investment of the real estate world. These allow investors to invest as much or as little as they desire in the real estate purchase. In return, the investor becomes a shareholder.
As with REITs, crowdfunding through online real estate platforms has significant perks, such as:
- Lower barrier to entry: some investments through online real estate platforms can be bought into for as little as $1,000—hundreds of times less than the cost of a property
- Greater diversity: those who invest using online real estate platforms also enjoy the options of investing in real estate across multiple locations, property sizes, and classes of real estate rather than putting large amounts of money into one property
Of course, as a relatively new form of passive investment, online real estate platforms have their downsides. Those include:
- Less liquidity: unlike an REIT, most online platforms are not yet public and cannot be traded on major exchanges, resulting in less liquidity
- Fees: some online platforms have associated fees for management that can eat away at investment profits
What’s the Best Way to Earn Supplemental Income for You?
Many investors understand how real estate can offer a valuable and reliable source of supplemental income when selected and managed well. Before beginning, it’s important to assess which method of real estate investing maximizes your return for the amount of time, money, and responsibility that you’re able to commit.
If you’re not ready to become a landlord or property flipper, you can skip the hassles and potential pitfalls that have traditionally gone hand-in-hand with real estate investing and invest passively in a diversified pool of real estate.
Regardless of which method fits best with your investment strategy, getting into the historically well-performing asset class of real estate is a great way to start building an income stream today. Ready to get started? Use our investment calculator to plan your first adventure.
Kendall Davis leads the Investments Team at Fundrise, the first investment platform to create a simple, low-cost way for anyone to unlock real estate’s historically consistent and exceptional returns. Since joining in 2014, Kendall has built out investor relations for the company, focusing on all aspects of the Fundrise investor experience and furthering the company’s mission to democratize real estate investing. Stay up to date with the latest from Fundrise through their social channels: Facebook, Twitter and LinkedIn.