As the great Warren Buffett of Berkshire Hathaway (BRK.A)(BRK.B) once said:
If you don’t find a way to make money while you sleep, you will work until you die.
Generating passive income is truly the key to unlocking your freedom from wage slavery and opening doors to spending your precious time in the best way possible. The equation is simple: more passive = more freedom.
One of the most popular methods for building a massive passive income stream is investing in real estate. The reasons for this are simple:
- Real estate is always in demand
- It is relatively disruption-proof
- Its limited supply and dependence on significant labor and raw material to produce makes it quite inflation-resistant
- It is often easily leveraged, making it easier to increase returns on equity
- Real returns are increased even further given the unique tax advantages of real estate
There are three popular paths for building a passive income stream through real estate:
Option 1: Own Rental Properties
Owning rentals is obviously a popular approach given that it can be easily leveraged, leading to some eye-popping cash on cash returns and IRRs, especially when interest rates are low. Furthermore, it is a tangible asset that gives investors full control of what they own and has very low correlation to public markets. For entrepreneurial investors who like to roll up their sleeves and have a passion for building sweat equity through real estate projects, this can be a great way to go.
However, there are also significant cons to owning rental properties. The biggest is simply that they come with the infamous triple Ts:
This means that owning rental properties is more akin to having an actively managed business rather than a passive investment that throws off cash flow while you give your attention elsewhere.
Another major con is that mortgage rates and residential real estate prices are sky high at the moment. Therefore, the value proposition of rental property investing is at arguably an all-time low right now.
A lack of liquidity can also be a big con. If you ever want to sell your property, it will take a lot of work, time, and expense to repair and stage the property, determine a proper selling price, market it, negotiate …….