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.
As VP of Investments at Fundrise, I often hear from investors their desire to add another income stream. 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 dependable, low-maintenance supplemental income streams.
Real estate has long been an asset of choice for savvy investors interested in building powerful supplemental incomes. Why? 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.
Active Real Estate Investing: Ready to Be a Landlord?
Rental properties have been the default choice for average investors who want to step into the world of real estate investing. 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.
Active real estate investing demands a wealth of real estate and financial acumen. 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.
If you do have all the necessary skills, do you also have the necessary capital? A rental property is an option that only some can afford. It requires a large monetary commitment upfront, in the form of a down payment and/or loan – all for a single asset. A rental property is also considered an illiquid investment, meaning that an investor should expect to tie up their money in the asset. As a long-term investment, this usually means years.
On top of financial responsibilities, rental property ownership also comes with myriad hands-on responsibilities to the tenants and property. Rental property owners bear the full weight of these responsibilities. Some ongoing, hands-on responsibilities include ensuring maximum tenant occupancy, performing tenant background screenings, collecting rent, maintaining appliances, and possibly evicting tenants. Additionally, a rental property owner must ensure that the property and its finances comply with all applicable laws at all times.
It’s easy to see how a side hustle like this can turn into a full-time job. If you don’t have any interest in becoming a landlord, there are more accessible, passive ways to generate supplemental income in the real estate market.
Passive Real Estate Investing: Less Responsibility, Greater Benefits
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 – all without the ongoing responsibilities of building maintenance, landlording, and other obligations that property owners face.
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 rental properties can range from tens of thousand to millions of dollars in acquisition and operation fees, passive investments are more accessible.
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. For example, at Fundrise, our real estate team provides active real estate private equity management service for all investments. This entails underwriting, originating, and closing all investments – and continuing to manage each investment throughout the lifetime of ownership, without ever needing to take time of the investors themselves.
Passive real estate investors 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. Online real estate investment platforms offer investors ways to invest in diversified portfolios of real estate, but access and investment minimums vary by platform.
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, 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. Our Supplemental Income Portfolio was created with the purpose of earning investors consistent supplemental income over the long term. To achieve that goal, it’s invested in a diversified pool of more than thirty debt and equity real estate investments across the US.
Overall, the traditional barriers of real estate investing have been drastically lowered thanks to advancements in technology and federal regulations. 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.
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.
Hello, great article thanks for sharing. Fundrise looks really promising, however I’m a British national living in Vietnam therefore am not eligible. Are there other companies you could recommend that operate for international investors like myself? Kind Regards. James
Great insight! When the article mentions passive real estate investing within portfolios; is it the same as stock portfolio? But instead with homes? So essentially I’m investing in multiple homes? How does that work?
You completely ignored a common solution for the landlord hassle. I employ a property management company to handle our rental properties. It does cut into our profit, but without them, I couldn’t own more than 3-4 houses. It has enabled me to run my business as more of an investment than a business with daily hassles.
Having a management company maintain your properties is only one solution to a multi faceted problem that comes with active real estate investing.
You completely ignored the capital requirement issue, which is the biggest hurdle anyone will have to overcome to even get started in the first place.
[…] I wrote in a Mint blog post last year, investing in real estate is one of the easiest ways to earn supplemental income. As an asset […]
Very interesting article. Not sure if REIT’s are for me. I’d like to have some input in property investing. But thanks for the article.