How to generate passive income through Real Estate
“If you don't find a way to make money while you sleep, you will work until you die”
— Warren Buffett
Time is the most precious resource we have. This is one resource we are guaranteed to have only a finite amount of. In the limited lifetime that we have, we are trying to achieve multiple things such as leaving a legacy, finding love, identifying our life purpose, but most importantly maximizing Wealth for the financial wellbeing of not only us but for generations to come. With regards to financial Wealth, most people focus only on growing their active income, which is money earned from your job. However, the wealthiest people in the world have built their fortunes by investing enough time and money in growing their passive income streams.
Examples of passive income investment are mutual funds, fixed deposits, Real Estate, gold, cryptocurrency, and other emerging financial Asset classes. Currently, a majority of individuals have not determined the ideal diversification strategy; which is alarming, according to the RBI (Reserve Bank of India). A 2017 survey conducted by RBI indicated that the average Indian household holds 84% of their wealth in Real Estate and other physical goods, 11% in gold, and 5% in financial Assets. With the advent of technology, greater knowledge, and penetration of financial Asset classes such as mutual funds and fixed deposits, this allocation is likely to change over time with lesser dependence on Real Estate.
Although the dependence on the Real Estate sector for an average individual, this industry has typically not been leveraged enough as a source of passive income. The primary reasons for this are the lack of knowledge in this industry and the inability to manage this Asset class remotely. It is important to note, however, that the industry has undergone significant regulatory changes making it easier and more user-friendly for individuals to invest in Real Estate. The Indian Real Estate industry has also advanced significantly over the last several years to accommodate for alternate Real Estate investment options. Some of these are shown below:
1. Real Estate Investment Trust (REIT) Shares
REITs are the Real Estate version of mutual funds. They are stock-market listed investments allowing investors exposure to the Real Estate market without having to purchase or manage the properties. However, unlike investing in individual Real Estate companies which are highly volatile, REITs are a low-risk investment option as there are a number of stringent guidelines to follow to become eligible to list a REIT. With REITs, your investment is spread out over a portfolio of Real Estate properties, be it commercial, residential, or any other type. REITs are also a stable investment option with dividends, interest payouts, and exposure to the Real Estate market, which is usually less volatile than equity markets. REITs have been an old and popular concept in the US. But REITs in India were only introduced in 2007 and currently there are only 3 listed REITs. This is a growing market with more companies expected to list as REITs in the upcoming years and investors become more educated about REITs and feel confident of generating stable returns with REIT investment. In fact, REITs are expected to create a $19.65 billion opportunity in India.
2. Real Estate Crowdfunding
Real Estate crowdfunding involves a group of individuals who pool their capital together to purchase Real Estate. Individuals are identified through friends, family, brokers, or partners or the newly formed crowdfunding platforms. The main reason for people opting for crowdfunding is that it reduces the amount of upfront capital required while still enabling investors to generate gains in the Real Estate market. These deals can quickly become very complex, especially with other models of structuring deals such as Real Estate syndication. Finding the right strategic investors is a critical feature of Real Estate crowdfunding.
3. Vacation Homes
The Covid-19 pandemic has fueled demand in owning second homes. What was typically considered vacation homes has now created a demand for “workcation” and “staycation” homes. This provides a great investment opportunity for an individual to not only have a vacation abode amidst the Covid outbreak but also provides a great rental opportunity. The vacation homes industry is a new and growing passive income generating option. This investment may need a trusted partner, friend, or family member to manage the vacation home on behalf of the investor, especially if the property is remote. Data indicates that vacation home hotspots are tourist spots such as Goa, Shimla, Dehradun, and the outskirts of big cities, such as Lonavala near Mumbai.
The importance of generating passive income is simply under-estimated. Passive income streams are lower-risk investments that generate returns with limited to no investment of time or money — in other words, you can literally reap rewards while you sleep. You also make money while you’re awake. It’s automatic and simply keeps coming in. If your goal is to achieve financial freedom and have greater control over your time, the more effort you put into expanding passive income streams the better. Passive income generation also has different taxation rules than active income, which are often at more favorable tax rates rather than active income. It is important to identify the best diversification strategy to maximize your passive income portfolio.