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For decades real estate has objectively been one of the top investing choices for anyone looking to build significant wealth over time. Generating passive income through real estate is a tale as old as time and there are many ways to get started on your investing journey. Whether you want to make real estate investing a full-time endeavor or you’re just looking to generate a bit of passive income on the side, there are feasible options for everyone. Let’s take a look at a few different ways to pursue financial freedom through real estate.
BRRRR Method
Compounding is invaluable. The first, and my personal favorite, form of real estate investing that we'll touch on is the BRRRR method. BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. This is a common investing strategy that allows for immense growth in passive income over time. In practice the BRRRR method looks something like this: buy a distressed property, rehab or renovate the property which builds immediate equity, rent the property which pays your mortgage (or most of it) and simultaneously builds equity, refinance the property to utilize the equity you've built over time, and then repeat that process. The main idea behind this investing method is to roll the equity you've built by rehabbing and renting your real estate into your next project. Ideally, you will use these funds for the down payment and closing costs on your next purchase. This method will compound on itself over time and is a great way to generate passive income as eventually the equity you're stockpiling will be doing most of the heavy lifting.
Time is your ally. The BRRRR method will snowball over the course of 5, 10, 20 years and you will have a real estate investing empire before you can say "Equity". This is not necessarily a great method for beginners with very little funding, but it's a great method to get familiar with as early as possible. The more capital you have to utilize the better suited you will be for the BRRRR method, but don't let lack of funding shy you away, real estate financing is a wonderful thing. One last benefit to this investing method is that it can be a source of FUN. Shopping for your distressed properties, planning/designing the renovations, coordinating your ultimate plan, this is all meant to be interactive and enjoyable! Who doesn't value a potential hobby that can also fund your retirement.
Real Estate Investment Trust
Conventional wisdom prevails. Our second form of real estate investing, and maybe the most common among hands-off investors, is the REIT. A Real Estate Investment Trust is a security that is publicly traded, just like a good old fashioned stock, on the exchange. The difference is that REITs are typically made up of real estate related entities that own, operate, or finance income-generating real estate. This is a great way to generate passive income as it is the 'set it and forget it' method that, on average, yields higher returns than your typical stock investment will over time. REITs are also required by law to pay 90% of their income to shareholders, making this a fantastic real estate investing option for passive income. If there is one word that will always come up when discussing investing, it's diversification. REITs are not the "one basket" to throw all of your money into, but it is a great place to start if you're considering dipping your toes into the real estate investing world with little experience.
House-Hacking
Innovation breeds success. Our final method of real estate investing is known as House-Hacking. This is a creative way to generate passive income off of your current residence. The idea behind house hacking is to rent out a portion of your primary residence. For example; if you own a duplex, you will live in one unit and rent out the other. Own a 4-unit property? Live in one unit and rent out the other THREE units, even better. House-hacking is a common "step one" in the real estate investing world as you are able to utilize the rent payments to cover things like mortgage, taxes, maintenance, etc. all while still having a place to live. As a first-time homebuyer this is a fantastic option as you cut the costs of homeownership immensely by housing your tenant(s).
Planning is everything. As you get started on your real estate investing journey and acquire your first property to "house-hack", it's important to keep in mind, "what's next?". With house-hacking, you are not only building equity that you can roll into your next project, but you've also acquired a wonderful option as a long-term rental. Multi-family properties serve as an elite investment choice given the amount of rental income they can produce. House-hacking is a solid foundational tactic for investing in real estate and is a great first step for anyone looking to build generational wealth and/or passive income.
To Wrap Things Up
Generating passive income is a lifechanging accomplishment and investing in real estate is one of the most proven ways to make that happen. Whether you're a hands-off investor taking advantage of a high-yield REIT or someone who wants to be actively involved in house-hacking or the BRRRR method, there is an option for everyone. The main idea is that your real estate will not only serve as the place you will potentially raise your family, but it can also be the source of your long-term financial prowess.
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