The Myth of Passive Income in Real Estate Investing

You may have heard it many times: real estate investing is passive income. Or the phrase, "Buy real estate and receive money in your sleep." Nowadays, most people working a job receive their money a minute after midnight, deposited electronically. Those who are not night owls or working night shifts are indeed receiving money in their sleep. So, is the concept of passive income a big fat fib?

The simple answer is ‘yes’. It is not passive; however, it may create more time flexibility or time freedom. Let’s separate the terms for accuracy.

Passive Income: The Illusion

The theory behind passive income is that you do nothing, and the money keeps rolling in. This is true for royalties from something you created years ago. You have passive income if you do no further work and the money rolls in quarterly or yearly..

With real estate, you can invest in a fund or a property that someone else manages, and over time you will see a return on investment (ROI). There is risk involved, so? ROI depends on things going as planned. As we know, a straight line one desires is not that certain. This is the closest you can come to passive investing in real estate. It could be considered investing in funds that invest in real estate rather than investing directly in real estate.

Like the example of royalties on a project, there is time for doing the work. Whether you are investing in a fund, a large project, a joint venture property, or purchasing a single rental, you are doing the work upfront. That means you vet the people, the property, and the deal. If you are purchasing your property for the first time, you are also getting the necessary education and consulting with a team and people in the know to mitigate risks.

Once the initial work is done and the papers are signed, you may receive money coming in without any effort on your part. On a single rental, once you have a good tenant and if the property is in good condition, you may not have to do anything with that property for a couple of months, and the money appearing in your account feels like passive income. However, there are always months when a repair is needed, and you (or your manager) must call the repair person and get it fixed.

When your tenant leaves, you need to fill the vacancy. Even when you have a manager, you are managing the manager and the property. It is your asset, after all. The manager is not the one renewing the mortgage, filling out the yearly insurance forms, or dealing with letters from the city about the weeds or snow not being removed.

If you have money in a fund, you will receive reports on the progress and make new decisions about where to deploy the capital when it returns to you.

Time Flexibility and Freedom: A Different Perspective

Time freedom is not the same as time flexibility. Time freedom means you are not bound to do anything when you don’t want to. Time flexibility means you will do what needs to be done and can be flexible about doing many things within a time frame. Let’s break it down into simpler terms.

If the power goes out in a property, it needs to be addressed right away. Your manager will take care of that if you have one; otherwise, you are making the call to find out what is happening and get it rectified. Some urgent items are not flexible. Other things can work in a schedule. A walk-through of the property to check fire alarms (if you are self-managing) can be done this week or next. The appointment for the mortgage renewals can be done sometime leading up to the date. You are not free to ignore the things that need to be done; you have the flexibility to do them within a timeframe.

Time freedom comes when you have invested capital that brings in enough income to do something else. You may have money/real estate tasks to take care of in moments, and the rest of the time you are free to spend as you like. It is the idea of retirement that is projected from the beginning of a career. Freedom 65 doesn’t sound as great as the more common phrase "time freedom."

Time freedom sounds like you get to vacation every day for the rest of your life. It is also the perceived notion many have about time freedom in real estate. And in time, that can happen, but it doesn’t happen overnight.

The Reality of Real Estate Investing

Real estate is a great way to build wealth. Wealth is a long-term play. There is work involved. There is mailbox money, but it is never truly passive income if you are managing your properties, managing the managers of your properties, and managing your money.

Many people enter real estate investing with the hope of achieving passive income. They dream of the day when they can quit their jobs and live off the returns from their real estate investments. However, they often find that reality is quite different from the dream.

Active Involvement: The Unseen Work

With a property manager, you are still actively involved in your investments. You need to keep an eye on your property manager to ensure they are doing their job correctly. You need to make decisions about repairs and maintenance. You need to stay on top of market trends and adjust your investment strategy accordingly.

For those who choose to self-manage their properties, the workload is even greater. Finding and screening tenants, handling maintenance requests, and dealing with the occasional emergency are all part of the job. Even when things are running smoothly, there are still tasks that need to be done regularly, such as property inspections and financial record keeping.

Financial Management: Beyond the Property

In addition to managing the properties themselves, there is also the financial side of real estate investing. Keeping track of income and expenses, preparing for tax time, and making decisions about refinancing or leveraging equity are all ongoing tasks. Real estate investors need to have a good understanding of their financial situation at all times and be prepared to make decisions that will impact their overall investment strategy.

Market Fluctuations: The Risk Factor

Real estate markets are not static. They fluctuate based on a variety of factors, including economic conditions, interest rates, and local market trends. Successful real estate investors need to stay informed about these factors and be prepared to adjust their strategies as needed. This may involve selling properties that are underperforming, buying new properties that offer better returns, or making improvements to existing properties to increase their value.

Education and Networking: Lifelong Learning

Real estate investing is a field that requires continuous learning and networking. Successful investors stay informed about the latest market trends, investment strategies, and legal and regulatory changes. They attend seminars, read books and articles, and participate in online forums and networking groups. Building a network of other investors, real estate professionals, and service providers is also crucial for long-term success.

The Bottom Line

While real estate investing can provide a significant return on investment and create more time flexibility, it is not truly passive. It requires active involvement, ongoing education, and a willingness to adapt to changing market conditions. The concept of passive income in real estate is more of an ideal than a reality.

In conclusion, real estate investing is a powerful tool for building wealth and achieving financial goals. However, it is essential to understand that it requires work, dedication, and a proactive approach. The idea of passive income may be alluring, but the reality is that successful real estate investing involves a combination of active management, strategic planning, and continuous learning. By embracing this reality, investors can make informed decisions and build a sustainable and profitable real estate portfolio.