Technically, passive income is money earned with little to no effort. However, there ought to be some active effort put toward choosing the right investment options for serious investors. That’s because there are many questions you need to consider when looking for investment ideas to generate passive income—and that’s what we will cover in this article.
What You Need To Consider Before Investing
Though a stable passive income stream is undoubtedly achievable, you’ll need to put in the work to set it up. Before you make investment decisions, you’ll need to consider several factors:
How Much Spare Time Do You Have?
To obtain a lucrative passive income stream, you’ll need to spend some time getting everything set up. The amount of spare time you have will affect what types of passive income ideas you should choose.
How Much Capital Do You Have To Invest?
The amount of money you have to invest initially will impact how much money you make passively. This is especially true when devising a passive income stream. The amount of money you have to put in will affect not only which ideas you choose but also how much money you’ll generate.
What is Your Tolerance to Risk, and What is Your Target ROI?
Before deciding on a passive income idea, you should familiarize yourself with the risks and the potential gains.
If you expect high returns, the higher the risk will be. Conversely, if you are comfortable with slower growth, you can also expect lower risk.
What Is Your Time Horizon?
In investing, a time horizon refers to the length of time you’ll hold an asset. Different assets have different suggested time horizons With investments like commercial real estate, the longer you hold onto them, the more you’ll stand to gain. That’s why it’s essential to factor in your time horizon when choosing a passive income investment idea.
How Much Debt Do You Owe?
Generally, you want to reduce debt and establish a secure financial foundation before trying to generate passive income streams. By prioritizing debt repayment, you are, in fact, investing in yourself! That’s why if you have outstanding debts, you are better off allocating funds to paying them off rather than trying to set up passive income revenue.
After considering these questions, we are now ready to explore the “most passive” passive income idea—investing in real estate.
Passive Real Estate Investing for Entrepreneurs
Real estate investment is perhaps the most “passive” of the passive income ideas out there. Real estate generates income directly through rent and indirectly through price appreciation.
Investing in Real Estate Can Be the ‘Most Passive’ Stream
The following options only require an investment to get started. However, some commercial real estate options require a costly initial investment, which acts as a bar for entry for some who do not have the capital to spare.
Private Equity Real Estate Investing
Private equity real estate firms are privately traded companies that specialize in researching, purchasing, developing, and managing real estate properties. This option is the most exclusive—some private equity firms require a high initial investment of $25,000 and have a long holding period—anywhere from five to ten years.
On the other hand, being a partner in a private equity firm gives that person a say in investment decisions and other managerial decisions. If they prefer a more “active” passive income option, this would be it.
To sum up, this option boxes the average investor out with its high investment minimums. Entrepreneurs should check out crowdfunded real estate investing platforms for more equitable real estate investment opportunities.
Crowdfunding Real Estate Investing Platforms
Crowdfunding real estate investment platforms like Fundrise and YieldStreet allow investors to choose specific properties to invest in and have variable investment minimums. This gives retail investors more control over which properties they invest in.
These platforms are diverse and have various benefits and restrictions that vary from platform to platform. Having tiered memberships, users can begin to invest with as little as ten dollars. Remember that these platforms all take a percentage out of annual returns. This fee helps these platforms to pay their real estate analysts, strategists, and other staff.
However, the most passive option is likely investing in real estate investment trusts (REITs) or REIT exchange-traded funds (ETFs).
REITs and REIT ETFs
If the investor doesn’t care about having a say in the development and management of the property, they might consider investing in real estate indirectly through the stock market. REITs and ETFs that invest in REITS are two stock market options that give traders exposure to real estate through traditional markets.
Have You Decided on a Passive Income Real Estate Strategy?
The options listed above are all effective ways to establish passive income streams, but each has its own unique advantages and disadvantages. If you have a large amount of capital and want to have some control over investment decisions, then investing in a real estate private equity firm is a good bet.
However, if you don’t have as much upfront capital, crowdfunded real estate platforms or REIT and REIT ETFs can be lucrative options for generating passive income streams.
Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.
