These days, there are many ways in the property market to create smart real estate investments. In addition, when it comes to real estate investment, there are three types of income that you should understand: Earned Income, Passive Income and Portfolio Income. This model of income has been taught by Robert Kiyosaki, real estate investor. He discusses these concepts in his book, “Rich Dad, Poor Dad.”
In this article we not only discuss smart real estate investments, but also how to generate money from many different types of real estate investment. This includes the BRRRR method for rentals and Real Estate Investment Trusts. We also make some predictions for the future.
If you work at an 8-5 job, working Monday through Friday, you receive earned income. You might be a manager, a cashier or a trucker. For example, you may be paid hourly or by salary. As a result, if you don’t work, then you don’t typically get paid. Essentially, you are trading your time for money.
There are 24 hours in a day and 168 hours in any given week. Most people work a 40-hour work week shift. However, even if you worked every hour of each day, there is a limit to how much money you can earn. Even if you wanted to work 30 hours a day (which is impossible), you cannot violate the laws of universe.In addition, there are limits on taxation with earned income. The IRS has established tax rates for all earned income, based on your earning bracket. For example, a single person who makes $40,125 – $85,525 is taxed at a rate of 22%. Money is automatically taken from your salary each month. The tax money is then sent directly to the IRS. Although there are things you can do to reduce your tax bill, there’s not much wiggle room on how much the IRS takes.
Creating Smart Real Estate Investments with Passive Income
Passive income is one of the best ways to initiate and create smart real estate investments (and create a cash flow). As a result, it is simply earning money with little or no effort. Moreover, with passive income, you earn money while you sleep or vacation. Although this idea may sound impossible, it is a secret that millionaires and billionaires have utilized for hundreds of years to become wealthy through cash flow real estate.
Common examples of passive income include owning commercial property investment rental properties. Of course, there are other examples of passive income, like stock dividends, high-yield savings accounts, annuities, and real estate investment trusts (REITs) as well.
Unfortunately, although passive income may seem like easy money, it’s not. Generating passive income requires upfront work that lays the groundwork for future income. It is not a get-rich-quick scheme. In addition, it may require some additional work as you move forward. For example, if you own a commercial rent property, you will be required to pay for property maintenance, improvements, taxes and insurance on your investment.
Methods to Make Money Investing in Real Estate
Rental Income, Appreciation, Tax Deductions, Creative Services
The most common way to make money via smart real estate investments is to generate rental income. Rental income is a type of passive income that is generated from charging tenants of a property rent each month.
Examples of rental income sourced through smart real estate investments include medical facilities, warehouses, business offices, strip shopping centers and the like. Ideally, successful commercial property investment involves selecting an area where growth is occurring or that is densely populated. The investor purchases commercial property in these areas and then leases space to tenants, generating passive rental income.
In addition, when searching for any real estate property you want to maximize the quality of your investment. Purchasing properties that require minimal improvements or renovations is best. Moreover, the property purchased should be at or below market value. Obviously, you don’t want to buy a property in the middle of a real estate bubble, which could be worth less the following year. In addition, purchasing at the right price will maximize the cash flow from the smart real estate investments you make.
Next to generating rental income, appreciation of property values is the second most well-known way to generate income and cash flow real estate. Property appreciation occurs when market prices increase overall or when improvements are made to a property.
Recently, the United States has seen significant increase in market prices across the board for real estate. In fact, many experts believe that the real estate market has been in a bubble and prices are at an all-time high.
However, even if the market didn’t lift the value of your commercial property, it may have increased simply as a result of capital improvements. For example, if you own an apartment complex, perhaps you added covered parking to the complex or installed a swimming pool. Both of these would be considered improvements, which would theoretically increase the value of the property. Appreciation, or an increase in the value of the property would only be realized upon sale of the property.
There is a great way to generate income from your commercial properties that many people don’t even consider. There may be opportunities at your properties for add-ons or additional services that you haven’t considered. For example, installing vending machines or charging for covered parking. The only limit to providing these services is your own creativity.
Many of these services require little or no expense, effort or improvement to the property. For example, having a third-party vendor install a vending machine can cost nothing. Yet, you can earn a percentage of sales from the vending machines by contracting with the vending company.
Tax Deductions and Depreciation
There are many tax deductions for commercial real estate property owners. In many cases, when properties are treated as a “pass-through,” a tax deduction can be taken. Moreover, the tax savings can mean thousands of extra dollars in your pocket.
There are also depreciation options for certain landlords to take advantage of. These allow property owners to deduct the costs of personal property, such as onsite equipment, appliances, etc., from their taxable income. Follow up with your tax professional for more information regarding tax deductions.
Alternative Methods for Property Investment
Long Term Investment Income (Portfolio Income)
Portfolio Income from long term investments is earned is made by capital gains. Assets can be examples of portfolio income. For example, if you own stocks, bonds, property, etc., you have portfolio income. When you sell your assets, hopefully they have increased in value while you held them. As a result, during the sale you incur capital gains.
For example, let’s say you bought $1,000 worth of stock in 2018. Now, in 2020, you decide it’s time to sell the stock. The stock is now worth $1,500 in the market. When you sell the stock, you will realize a $500 capital gain or profit ($1,500-$1,000 = $500). Capital gains from assets like stocks and bonds are how Wall Street traders make money.
Real estate property investment can also become portfolio income. Even if you own a commercial property for which you collect rent, you can still realize capital gains as well. For example, if you decide to sell your commercial real estate investment, you may profit from the sale (assuming the property is sold for more than you paid for it).
Real Estate Investment Trusts (REITs)
A REIT, or real estate investment trust, is a company that owns and manages real estate assets. REITs take advantage of special tax savings, allowing them to incur minimal corporate income tax. In addition, a REIT pays dividends, a type of passive income for commercial real estate investors. Historically, many REITs have paid increasing dividends each year, which means your passive income stream might grow with little effort.
However, with any investment comes risk. Some REITs are inherently riskier than others. For example, a REIT fund that contains a large number of commercial property investment assets will be less risky than owning one REIT stock with less diversification. In addition, determining which REITs to invest in can require significant time for a business analysis of each business’s records.
Another risk with REITs is reduced dividend income. Historically, during economic downturns such as the real estate market crash of 2008, REITs lose significant value. When this occurs, dividend income can be slashed or removed completely.
Where Should I Buy Investment Property?
It’s important to understand that real estate prices are likely going to decrease in the near future. Namely, the reason for this is that demand will begin to shrink to reflect a weak economy. In addition, migration will slow and knowing where to buy can maximize smart real estate investments. However, there will be winners and losers in the market short term. For example, it appears that in the short term, a divided real estate market may present itself. In addition, keep in mind that each city has its own real estate market that varies.
Current data being reported in the media shows people leaving larger coastal cities and going to smaller inland cities. For example, Californians have been moving out of California to places like Washington, Arizona and Texas in record numbers. This is not a new phenomenon and the trend appears to be gaining speed.
As a result, larger coastal cities like Los Angeles and New York City are seeing reductions in demand for real estate as residents leave the cities permanently. In turn, smaller cities like Phoenix and Las Vegas are experiencing higher demand for real estate as residents move in from the coastal cities.
It appears that in the short term, cities where people are moving to (like Las Vegas) may see higher prices during the coming real estate bubble deflation. The worst-case scenario for cities receiving the influx of those moving from elsewhere would be that property values would remain steady.
Juxtaposed to this phenomenon, larger cities are seeing an increase in available real estate, causing supply to outpace demand. As a result, prices are already dipping lower in cities seeing a mass exodus.
Are You in a Growing or Shrinking Real Estate Market?
The lesson here is that in order to make logical real estate market predictions for your home market, determine whether you are in an area where people are moving to or from. For example, if you live in Phoenix, Arizona, you are probably in a strong market that is attracting Californians. As a result, prices will likely be stable or even positive in the near term.
Now, one other caveat to consider is the state of the economy currently. Unfortunately, unemployment rates are high the US. Higher unemployment rates are negative for home buyers and are typically seen as a harbinger for decreased demand. As a result, unemployment may cause a decline in home buying nationwide. But we still haven’t answered the question of where the best place to buy rental property might be. Let’s take a closer look at demographics.
In “The Demographic Cliff” by Harry Dent, it is noted that the baby boomer generation (“Boomers”), those born between approximately 1946-1964, are retiring now. As a result, these baby boomers will be down-sizing from larger homes to smaller homes and buying vacation homes.
Prior to the COVID-19 Pandemic people were already beginning to shift in where they lived and how they lived. Now, the changes in living patterns and demographics have been accelerated. In general, more people will move out of bigger cities and move to areas with less dense populations. For example, people are moving out of cities like Los Angeles and moving to places like Idaho. Obviously, buying in expanding markets like Idaho will be more likely to maximize your smart real estate investments through cash flow.
Individuals are selling expensive homes and flats and buying more affordable properties to replace the high priced, big city real estate. Boomers are selling their large family homes and moving into smaller, more affordable homes.
How to Invest in Real estate passive income
You may be wondering how the big real estate investors acquire so many properties in just a few years. Well, the secret to buying more investment properties is using the “BRRRR” strategy. So, what is BRRRR and how will it help in buying more investment houses?
The BRRRR Real Estate Strategy for Real Estate Passive Income
“BRRRR” stands for buy, rehab, rent, refinance and repeat. The BRRRR investment strategy has been very effective for successful real estate investors. It allows investors to build a portfolio of investment properties quickly. In addition, it requires using less personal capital. Let’s breakdown this step-wise process to understand the details and the order of this strategy.
Step 1: Buy Real Estate Investment Properties
Buy Undervalued Properties and Calculate Profitability Before Jumping In
Once you have determined that you want to focus on real estate passive income, such as apartments, duplexes or larger complexes, it’s time to buy. First, you will want to search for real estate passive income via undervalued or significantly discounted properties. Many investors credit their profit margins to buying investment houses at prices that are significantly below the potential market value.
Next, after screening properties, you must do some calculations. One calculation that can help determine whether the real estate passive income you have chosen is profitable is the After-Repair Value (ARV). This will tell you what the potential investment property is worth after it has been rehabbed. If the cost to rehab a home is too high, profitability can be an issue. In turn, this can jeopardize your BRRRR strategy.
Finally, you will want to conduct a rental analysis. A rental analysis is a process of determining how much rental income the property is capable of generating. You will use this value in your overall profitability calculation for the deal.
Some other considerations: Don’t forget to include costs such as closing costs, rehab costs and the amount of cash that you will put down for financing. Many investors expect to use 20% down for investment houses. Clearly the BRRRR method is a great way to create smart real estate investments.
Step 2: Rehab Investment Property
The next step in the BRRRR process is to begin repairing and renovating (rehabbing) the real estate passive income investment property. The object of the rehab is to quickly conduct repairs that will make the home appealing, safe and add value to the property. In addition, you want to rehab the property as quickly as possible. Furthermore, the quicker the process of rehab is complete, the quicker you can begin earning money from rental income.
Step 3: Rent Investment Property
After completion of the property rehab, it’s time to find a tenant for your property. A good tenant will consistently provide income (in the form of rent), creating cash flow for your smart real estate investments. Furthermore, a good renter will take care of your property and not allow it to be damaged. Carefully determine what the market rental rate is for your area. In turn, this will ensure that you quickly find a renter and the property doesn’t sit vacant for months. In addition, you will want to properly vet potential tenants to make sure you find renters who are the best fit.
Step 4: Refinance Your Investment Property
The third “R” in the BRRRR process is refinance. After rehabbing the property and finding a renter, you can begin to look for a lender. The refinancing process means you will be working with a bank to borrow money based upon the remaining equity in the property. However, there are several things to know about refinancing real estate.
First, banks typically only lend approximately 75% or less of the appraised value of the property in a cash-out refinance. The lender will consider your credit score when determining whether to lend money to you. In addition, you may need to demonstrate that the property is generating rental income and is legitimately appraised at the value you say it’s worth.
Dealing with banks can be a slow, frustrating process. Keep in mind that banks only lend money in situations where they feel that the money is secure. Furthermore, they don’t want to lose money or lend too much money out for an overvalued property. In addition, economic cycles can change factors such as interest rates and credit flow. For example, after the 2008 housing crisis, it was very difficult to obtain a loan from banks and the BRRRR method was not smooth.
Step 5: Repeat the Process
If everything lines up correctly, the BRRRR method will be a success. You will find an undervalued property, buy the property, rehab and rent it and then obtain financing that you can use to buy the next property. You can then repeat the process of acquiring investment houses. If the BRRRR method is successful, you will be generating a net profit each month.
Getting Started with Real Estate Passive Income
Buy Where There is Growth and Population Movement – The South and West United States
One rule that smart real estate investors use is to buy properties where populations are growing. Population growth and population movement tend to drive prices up in real estate markets. Basic economics tells us that when there are more people demanding housing, supply cannot keep up with demand. As a result, prices go up, which is good for landlords. This is how smart real estate investments are made.
For many years, there has been growth in the South and Western United States. For example, a United States Census Bureau 2019 Article states that of the 15 cities in the US with the most growth, eight of them were in the South, six were in the West and one in the Midwest. Popular cities include places like Phoenix, Arizona, San Antonio, Texas and Jacksonville, Florida.
Smart Real Estate Investments: Wrap Up
Hopefully this article has helped you understand real estate passive income and how to generate cash flow in smart real estate investments. Buying real estate to generate passive income as an investment can be a great opportunity for generating wealth for many years. Using the BRRRR method for acquiring investment properties is a proven strategy for success in generating passive income. In addition, real estate may be a safer investment right now compared with other options.
It is important to note that Piggy Bank Coins does not provide financial advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.
In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, in order to help you make the best choice for you.