Ownership of multifamily real estate, commonly called apartments, can be a great way to create stable streams of passive income while investing in the future. Multifamily real estate can be one of the strongest real estate assets in terms of passive income and overall ROI.
How to Invest in Multifamily Real Estate to Create Passive Income
Investing in multifamily real estate can be done either passively or actively. Active ownership is synonymous with being the “landlord” which can mean dealing with the 2 AM calls from tenants about problems in their unit.
The active investor must rely on their own knowledge of acquisitions and operations as well as their ability to apply that knowledge to construct, hold, and grow a successful real estate portfolio.
Due to the time commitment and stress, most people want to be investors not landlords, allowing them to experience the benefits of a real estate portfolio without the headaches. If this sounds like you, passive investing in multifamily assets sponsored by real estate professionals is the way to go.
The passive owner can leverage the specialized knowledge of real estate professionals and invest alongside them. This allows the passive investor to enjoy the benefits of direct ownership without the responsibilities of management.
As a fractional owner or limited partner in a legal entity that owns the multifamily property, the passive investor receives all the benefits of owning real estate. They get their percentage ownership of the cash flow, tax benefits, appreciation, and amortization.
What Exactly Is “passive income”?
There are three major categories of income recognized by the Internal Revenue Service (IRS):
- Portfolio Income
- Earned Income
- Passive Income
Portfolio income is income that is not earned from business activity or a job. Instead, it is income that is generated from things like royalties, capital gains, dividends, and investments that are not considered passive.
Nearly everyone is familiar with earned income. It is the income you derive from working at a job or owning a business. Earned income is highly taxed and requires your most precious resource, time, to earn. The average worker trades 40 hours a week, 50 weeks a year, and does that for 30+ years in exchange for heavily taxed dollars.
Passive income is different. It is narrowly defined by the IRS as income that is derived from only one of two sources; either from trade or a business activity that you do not materially participate in or from rentals.
The difference between earned income and passive income can be boiled down to time. With passive income, you don’t have to trade time for money like you do with earned income. You can earn it while you’re having lunch. You can even earn it while you’re sleeping.
Passive income isn’t you working for your money; it is your money working for you.
The Benefits of Passive Income
If you create enough recurrent passive income to cover your monthly expenses, then you are financially free and can spend your time as you see fit. Unlike money, time is nonrenewable. Have you ever heard of a time lottery where you stand a chance to win an extra million days? Perhaps you have heard the adage “Wealthy people buy time, while everyone else sells it.” That’s the power of passive income.
As if that wasn’t good enough, the icing on the cake is that passive income from commercial multifamily real estate is also highly tax-advantaged. The tax benefits afforded to apartment investors can allow them to defer taxes for years and in some cases even eliminate taxes altogether on the passive income they derive from multifamily investing.
Think of each multifamily property you invest in like a small business. If it is run well it can turn a profit. You charge tenants rent to occupy space (Revenue) and you have operational expenses (i.e., taxes, utilities, maintenance, staff wages, etc.) that you must pay for. The profit (revenue minus expenses) is the passive income derived from operating the property.
Becoming A Multifamily Real Estate Investor
Making passive investments in multifamily real estate is a proven way to invest in real estate without having to become a landlord. You can leverage the professional expertise of your sponsor to create stable streams of tax-advantaged passive income that can buy back your time from work so that you can do the things in life that matter most to you; and that is what makes passive income truly priceless.
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