Over the past few months we’ve written a lot about residual income and how you can start to build it by investing time and/or money. We’ve spoken with dozens of “residual income gurus” who’ve broken free of the “9-to-5” by creating some of the best blogs on the web filled with ultra-useful content on a range of topics including early retirement, ways to make money online and personal finance tips.
This article is intended to zero in on one increasingly popular strategy for generating passive income—real estate investment. Out of all the possible residual income ideas, why choose real estate? We asked several veteran investors and personal finance writers why they’ve chosen to add real estate to their portfolio and how it augments their income stream.
Sam Dogen, better known to many as the Financial Samurai, has been earning passive income since his first job out of college. Today, Sam passively earns more than $200,000 a year—not bad, right? Real estate is a fundamental part of Sam’s income strategy and produces about 50% of his total passive/semi-passive income stream. In fact, he prefers it over the stock market since there “aren’t so many random exogenous variables that pound your investment to bits.”
Focused specifically on earning residual income through real estate, Investfourmore’s Mark Ferguson owns 16 long-term rental properties and aims to own 100 by January 2023. Right now, Mark says he earns roughly $8,000 of passive income from real estate each month. Mark loves his rental properties because “they are passive and take almost no work to see consistent income every month. I have a property manager who takes care of the headaches.” However, owning rental properties are best for “the long-term and building slowly… If you can be patient and disciplined, it will pay off in the end.”
Scott Trench lives and breathes real estate. As VP of Operations at BiggerPockets, the “real estate investing social network”, and a private investor, Scott has built a sustained cash flow of about $1,000 per month. Scott’s strategy is to use the compounding power of the cash flow he generates through his rentals to actively increase his real estate portfolio year over year.
Eric Bowlin is 30 years old and retired thanks to his early investments in real estate. Today real estate accounts for more than 80% of Eric’s income. Eric originally allocated funds in real estate because of some major stock market losses he incurred during the 2008 financial crisis. He likes the real estate industry because it’s “massive, diverse, and can fit every personality and investing style…a hands-on investor can actively find and manage rental property [while a different investor] could be completely passive by investing on Fundrise or in a REIT.”
Real estate doesn’t constitute a significant portion of entrepreneur Nick Loper’s income but he sees it as a “growing cash flow opportunity” which he’s recently become more and more interested in after a financial advisor recommended holding up to 20% of his portfolio in real estate for both diversification and cash flow. Nick had been burned in the 2008 crash so he began looking for ways to add real estate to his portfolio without direct investment. A new Fundrise investor, Nick loves that someone else manages the properties and that his exposure and liability is limited to his investment, “which is certainly NOT the case in a traditional single family home rental investment.”
Chris DeMuth Jr.:
Writer and Rangeley Capital CEO Chris DeMuth Jr. says that regular income from real estate is just an add-on benefit to the overall returns he sees from the asset class. Chris says that real estate will be a particular focus of his investing over the next few months as he tries to capture returns from the “tailwind of REITs getting reclassified within the S&P 500 and other major market indices.” In general, Chris recommends that investors allocate 5 - 15% of their portfolios to real estate.
James Dahle, MD:
Dr. James Dahle, founder and editor of The White Coat Investor, says that real estate “is an ever-increasing part of [his] investing strategy” because of its “high returns and low correlation with the rest of [his] portfolio.” However, James is still working so, for now, real estate makes up a very small percent of his income stream. It’s a type of investing he enjoys especially now that newer, online platforms offer relatively low minimums and a hassle-free process.
SparkRental CEO Brian Davis plans to use his real estate investments to “hasten the day [he’s] no longer beholden to a 9-5 job.” To date, his primary strategy has been to buy, renovate, and hold properties to generate income. However, Brian recognizes the importance of diversification to both strengthen returns and mitigate risk, which is why he maxes out his IRA and 401(k) accounts each year, in addition to adding stocks to his portfolio.
Though the eight investors interviewed above may make it sound easy, diversifying into real estate has traditionally required a large upfront investment, both of time and money. There is no residual income formula that works for everyone. However, thanks to new investment vehicles those interested in earning passive income through real estate have several options to choose from aside from purchasing their own property. You can learn more about our online real estate investments here.