This article is presented by Connect Invest. Read our editorial guidelines for more information.
If you’re a student of commercial and residential real estate investing, you don’t sweat market fluctuations because you know that the cycle of recovery, expansion, hyper-supply, and recession is perfectly normal. However, “normal” got tossed out the proverbial window with the arrival of the pandemic three years ago, and an era of market behavior never seen before was ushered in.
Many people who transitioned to working from home took advantage of low mortgage rates to move to larger houses outside the city. But, subsequent rising inflation, increased interest rates, and a stalled inventory of available homes created a uniquely volatile housing market.
Despite this, the housing market remains strongly competitive. Meanwhile, commercial real estate developers pivoted strategies and took advantage of the demand for more open workspaces and buildings that embraced the live-work-play culture that has been making inroads with corporations.
Does this mean it’s a good time for real estate investing? The answer is a resounding yes! We’ll discuss how you can earn passive income from real estate (with as little as a $500 initial investment) while minimizing your downside risks.
What Passive Real Estate Income is and Why It Matters
Passive income is money you earn with little to no effort, and it’s a sound investment strategy in a diversified portfolio. Passive income from real estate includes earnings from rental properties or other real estate investments, usually involving some upfront investment.
We can pour ourselves into our jobs and work as hard as we possibly can, but no matter who you are, time is the universal limiting factor. There are only so many hours in the day, and who wants to toil around the clock? A balanced life involves more than work.
And who doesn’t like to make money with next to no effort? You earn money whether you’re awake and working or enjoying a sunset on the beach with people you love. Passive income puts money in the bank, can help you pay off debt, and makes your retirement more financially secure.
What Are the Benefits of Investing in Real Estate?
While all investing comes with some level of risk, smart real estate investments are fairly stable and profitable. Let’s consider some of the benefits.
Your commercial or residential real estate tenants generate income for you. The cash flow is the money left after the mortgage and operating expenses have been paid. Over time, as the mortgage is paid down, your cash flow increases.
The value of real estate tends to increase over time, and a wise initial investment could see a healthy profit if you choose to sell in the future. Rents also go up, which increases your cash flow.
A healthy, secure financial portfolio is a diversified one. According to Connect Invest, a real estate investment company, investing in real estate is a way to keep all your eggs from being in one basket and helps to protect you during economic downturns.
Real estate has a tendency to increase in value, and as you pay your mortgage down, you build equity. That equity is an asset, part of your net worth—increase your equity, and you increase your net worth.
The downside of inflation is that the prices of goods and services increase. But at the same time, home values and rents go up too, which results in your monthly income increasing—a nice hedge against rising costs.
Many expenses associated with owning real estate, such as property taxes, mortgage interest, property insurance, and property management fees, are tax deductible. If you sell your property at a profit, you will have to pay capital gains tax, but the rate is lower than income tax. Who doesn’t appreciate low taxes?
What Factors Affect Real Estate Market Volatility?
The volatility (increase and decrease of prices over time) of real estate is influenced by several factors, some of which investors have control over and some they don’t. Here are three of the most common ones:
1. Market demand: When demand for real estate is high, prices will increase. Conversely, when demand is low, prices fall unless supply is also low like it is right now. In that case, prices might remain the same. It’s important to know how to read the signs so that you invest when the market favors you.
2. Interest rates: Interest rates affect consumer habits. In real estate investing, higher interest rates mean higher costs of borrowing, but it can also result in higher rental rates.
3. Economic conditions: The value of real estate is sometimes linked to the health of the economy. When the economy is sluggish or stalled, the real estate market often behaves similarly.
How to Minimize Investment Risks
There’s no reward without risk. However, it is possible to mitigate real estate investment risk, especially when creatively investing. Here are a few ways to minimize investment risk:
- Diversify your portfolio: Just as spreading weight across a larger area on thin ice prevents you from falling in, spreading money across different investment types protects your portfolio.
- Expand across geographies: Resist the urge to invest only close to where you live. The digital world makes it much easier to research different cities and areas within those cities. Invest where the population and opportunities for good-paying white-collar jobs are growing.
- Understand market trends: Changes in interest rates, geopolitical events, and recessions all have a role in influencing real estate market trends. Supply and demand fluctuate depending on what is happening with these trends. Also, understand how the tide of income is turning. If people earn more, they will be in a position to buy.
- Select asset type: There are sub-asset classes in real estate, and they do not all perform in the same way. In commercial real estate, offices in high-demand markets tend to be less risky compared to retail or hospitality sectors in the same area. Residential real estate is usually less risky because of the lower buying price. Plus, if a tenant leaves, the vacancy may be filled quickly.
The Solution: Investing in Real Estate Without Volatility
Remember when we mentioned investing creatively? It’s time to elaborate. Connect Invest is an investment solution that offers short note opportunities. Whether you are seasoned or new to real estate investing, you can start earning passive income from real estate with a minimum capital investment of $500.
In addition, you can remove the worry of risk because the experienced team at Connect Invest has done their due diligence in order to minimize your risk. Connect Invest accomplishes this by carefully reviewing each project against set criteria, ensuring all loans are backed by real estate collateral, and spreading funds across a portfolio of real estate projects instead of a single one. Plus, Connect Invest rates are fixed, regardless of the volatility of the market.
When you purchase a short note, you are purchasing debt that companies assume to develop their projects. These notes are generally considered a low-risk investment, provide monthly fixed passive income, and are for a specified short term. Connect Invest short notes offer a commitment as short as six months.
To get started, you only need to be 18 years old and a U.S. citizen or permanent resident.
Once you set up a Connect Invest account, you can choose from six-, 12-, or 24-month note terms to begin earning passive income.
This article is presented by Connect Invest
Your connection to private real estate investing.
Connect Invest is an online investing platform offering short-term investments that fund a diversified portfolio of real estate projects.
A Move Toward Certainty
There may be a lot of uncertainties now, but making wise real estate investments doesn’t have to be one of them. There’s no time like the present to start on the road to a secure financial future and begin earning passive income.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.