WRITTEN BY : John Larson
There’s nothing wrong with taking the traditional route in investment options, like stocks, bonds or mutual funds as they typically deliver a return of 5-7%, which is better than nothing. At the same time, the investor doesn’t have much control over what happens in the stock market — success there is often determined by your reaction.
On the other hand, there are passive investment options that do allow you to have more control and, therefore, a greater return. One of the best options for passive income is real estate investing, and it is also a prime example of an asset with multiple income streams.
Real estate generates passive income for the investor in the following ways:
1. Cash flow: Cash flow is straightforward: When you purchase a rental property as a real estate investment, the tenants pay a monthly rent. The rent cost is usually higher than the monthly mortgage payment, even in today’s market. The difference in the rent and mortgage payment produces an instant and consistent cash flow.
2. Equity capture or ‘instant equity’: Although it is difficult in today’s market, if you can find a property below market value and the appraisal comes in higher than your purchase price, you are positioned to acquire equity capture or “instant equity.” You could also turn around and sell the property for some quick change or hold and let it mature. Such a circumstance is possible in growing markets, like the Dallas-Fort Worth (DFW) metro area. The economy is steadfast in sectors like aerospace and rapidly growing in innovative sectors, like energy and health care.
3. Appreciation: Choosing the right market to invest in is crucial to a successful, long-term real estate investment. Before viewing properties, you need to look at the community’s potential growth and see who else is investing in that market. Again, the DFW and Houston metros are headquarters to almost 10% of the Fortune 1000 and over 5% of the Fortune 500 companies. The DFW metro also has a booming health care industry and is pulling people in at an exceptional rate, adding 146,000 residents from 2017 to 2018.
4. Principal pay-down: The steady flow of rental income from tenants goes straight to paying down the loan principal, which accounts for 80% of the value in conventional loans. Other investments cannot offer such a high value at low rates.
5. Tax write-offs: Did you know there are multiple possible write-off opportunities in real estate investments? One of the most underused methods is the 1031 Exchange, a purchasing option that allows you to essentially swap investment properties and avoid paying taxes on the income of your sale. Then, of course, there are write-offs for property management, travel costs to and from the property, maintenance, mortgage interest and so forth.
6. Inflation-profiting: Unlike other investments, conventional loans offer fixed interest rates, which protects your bottom line. People cringe at the word “inflation,” but for real estate investors, it widens the lane for return. As the market value increases over time, the investor can bump the monthly rent to keep up and fatten the return. The loan amount will never change to reflect the inflation-adjusted value.
Real estate investments not only offer the investor control, but creative options to improve income. Passive investing suggests the property is handed off to a professional management company, so it’s easy to invest in another city or state. More specifically, turnkey property investments spark cash flow immediately and sidestep the headaches of navigating maintenance or finding quality tenants.
There are so many real estate opportunities out there in which to invest. Most investments are a one-stop shop, but with real estate, one property can act as a passive income catalyst and give rise to more prospects.