Passive Income From Real Estate

June 12th, 2012 by Steve Pavlina

Real estate investing is one of the most common ways that people become wealthy.

You can buy real estate such as houses, apartment buildings, office space, retail space, etc. and rent it out. You can also make money from the appreciation, assuming that real estate prices rise while you own the property.

When renting a property, it’s nice if you can create a positive cashflow, meaning that your monthly rents provide enough to cover your mortgages, upkeep, property taxes, and other expenses and still leave you with some profit. Note that as you pay down the mortgages (which is essentially being done by your tenants), you will gradually own more equity in the property. You can then borrow against this equity to fund more investments, or you can sell it and cash out.

Real estate investment has some tax advantages too. One role of government is to help ensure access to housing for its citizens, and so tax laws encourage real estate development and investing.

While real estate investing can be done in ways that require a lot of cash, with some creativity you can do deals that don’t require tying up a lot of money — and still generate passive income for yourself. In this capacity you can also act as a real estate dealmaker, putting deals together that other people will execute. For instance, you could assemble a proposal for a new shopping center, help get key tenants interested, and then sell the deal to a real estate developer in exchange for a cut of the revenue. This is way beyond my current expertise, but I’ve heard of people making good money doing these kinds of deals.

Many businesses and organizations hold a great deal of wealth in the form of real estate. For example, McDonald’s not only makes money from selling dead cows; they also own many valuable street corners around the world. The Catholic Church is also a major land owner.

As your investments increase in value and your equity increases, you can borrow against your equity to buy more property, thereby increasing your holdings over time. Of course there’s a risk of overextending yourself. Many real estate investors have gone bust when their over-leveraged investments sank in value, and they ended up owing more than their properties were worth while also dealing with tenants who could no longer pay the rent.

I can’t share much about real estate investing since I’ve never been into it. I’ve read several books on the subject out of curiosity, but providing housing and office/retail space to tenants just doesn’t excite me. I think this would be a decent way to generate passive income for someone who is patient, can be disciplined enough to stick to a long-term plan, and who knows a lot about property and is good at assessing what a property is worth.

If this type of investment interests you, please don’t let my personal preferences dissuade you from investigating it fully. Libraries have plenty of books on how to invest profitably in real estate, and I’m sure there are plenty of websites and forums where you can find good advice from experienced investors.

Even though it’s not my cup of tea, I wanted to mention real estate investing as part of the passive income series since it’s a common path that people use to generate passive income and long-term wealth.

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