Real Estate Investing – Passive Income Potential for Your Portfolio
Real Estate Investing can be a good option to generate Passive Income. This can be beneficial if you are building passive income streams as a business. Passive income streams are even more useful after you retire so you can enjoy more important things while your assets work for you.
Before digging into real estate investing, let’s clear up a very common myth about real estate. Your home is not an investment. It is not an asset, it is a liability.
This may not seem important until you realize that millions of people used this mistaken mentality and got themselves into serious trouble by “investing” in homes that were overvalued during the housing bubble.
Now that the bubble has (partially) deflated and housing values are back down closer to reality, many home owners are underwater with their mortgages, owing more than the home is worth.
This is truly one of the worst investment debacles of our time, but it repeats itself over and over throughout history.
The Dutch fell for a similar financial scam back in the 17th century with Tulip Mania, of all things. Yes, people were “investing” in tulips and tulip bulbs paying up to 10 times the annual income of a skilled worker for a single bulb when the bubble reached its peak in 1637.
This is generally considered the first example of an asset bubble and is also known as the “greater fool” theory. You can read more about the greater fool theory in Wealth Growth.
One step you can take to avoid asset bubbles is to never view your home as an asset or investment. Forget what the banks, mortgage lenders and financial planners tell you. Your home is a liability, period.
Real Estate Investing for Passive Income
There are two main purposes to invest in real estate and in many cases they may be combined.
The primary reason for real estate investing is to generate passive income through a lease. Rental properties can provide a nice monthly profit with little or no effort on your part – that is if you invest wisely to begin with.
The secondary purpose for real estate investment is wealth growth. By strategically buying undervalued properties they may be sold later for a handsome profit. While you are holding the investment property, you may be able to generate passive income by leasing it (and many investors would not make the purchase otherwise).
Of the two strategies for real estate investing, passive income generation is usually going to be more profitable than flipping properties over the long run and will often take much less work (either by you or a third party management company).
Real estate investing is only one of several ways to generate passive income, so be sure to explore your options before starting.
Getting on board with an experienced real estate investor that you know and trust is probably the best way for a newcomer to get their feet wet. Investing as partners with other, more experienced investors will help you to avoid pitfalls while you learn the ropes.
Did you know you can use your retirement account for real estate investing? Most are not aware of this, but with a qualified Solo 401k you can invest in rental properties and other alternative assets that aren’t available in conventional Wall Street retirement accounts.
Self-directed investing isn’t for everyone. But if double-digit returns without becoming a landlord sound interesting, check out this article on How To Buy Real Estate With Your 401k.