There are few asset classes which have made investors really rich as real estate. Passive income may be described as income received on a regular basis on investment, which involves very little effort. There is no participation in the management or the work involved in the investment. Of course, there is nothing such as completely passive income because the money for investment has to be earned in the first place and the investor would like to stay updated on a periodic basis. Real estate investment can be made either by direct purchase of real estate or indirect investments. Direct investments involve a larger cost upfront, but can potentially generate higher returns. The most common form of indirect investment is by investing in real estate investment trusts (REITs) and does not involve direct ownership of the property.
When people talk about direct investment in real estate, what they have in mind is usually house flipping which is buying property for remodelling and resale at a higher price for buying for monthly rent income. House flipping cannot be classified as passive though it can generate extremely high returns. Rentals fall into a wide range of passive income depending on the strategy. Some investors only provide the capital and do not do much more than study reports sent by the people, such as managers. As with other asset classes, real estate can generate a truly passive income, but it takes up some of the cash flow because people who are hired have to be paid. It is really up to the investor to decide how active or passive he or she wants to be and what can realistically be entrusted to hired managers.
Would the real estate investor like the rental income to be generated by commercial or residential properties or a mix of both? Buying and renting commercial office space like office and retail space will normally generate a lower return but involve a much lesser degree of managerial involvement. The drawback here is that one property requires a much higher outlay. Many investors have done well by buying and renting in low income neighbourhoods, but other investors have failed because they can assume that the low prices compared to better neighbourhoods would produced higher returns. This is a misconception because the losses on the turnover of tenants, expenditure on repairs and unpaid rental will be much more than the benefit of buying cheaper property. Houses shall never be bought. Unless the location is one in which the investor would want to live. The first step in generating real estate passive income is to buy the property. Very few investors pay cash and without leverage, the returns from the investment will rarely provide an adequate return on capital. See Del Mar CA real estate.