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REIT Or Real Estate – Better Option For Passive Income?

What is passive income?

Passive income is income derived from assets or sources which require very little maintenance work or for that matter very little involvement. For example interest on your savings account, yield from a bond which you purchased, or stock dividends all fall in the category of passive income.

It is generally a preferred income category for both working and retired individuals.  It is always better to get some form of return on your cash deposits than allow it to be depleted through depreciation.

Passive income options depend on several factors and preference of returns and risk although there are several instruments which are used for securing passive income here we will examine the possibility of earning passive income from real estate investment trusts (REIT) and the recently introduced concept of real estate crowdfunding.

Real estate investment trust commonly known as REIT, is an instrument which invests in real estate on behalf of their investors, REIT is traded on almost all major stock exchanges and purchasing a REIT is similar to purchasing a stock.  Investors earn return from REIT which is derived from their value in the asset; this can be through rental income, capital gain or combination of the two.

Real estate crowdfunding is similar to REIT; however unlike purchasing REIT through an intermediary usually a stockbroker, real estate crowd funding is done directly through an online platform. These platforms have projects which have been pre- screened and made available for an average investor and are usually referred to as “listings” they contain all the relevant financial terms and conditions along with background information and history of the sponsor. Sponsor is an individual or company that has made the listing available and is trying to raise funds for their project.

Information which is made available for the purpose of due-diligence of the investor also includes the “holding period” which is the time-span for which the investment is locked. During the term of the investment or the holding period investors receive annual returns on their investments and when the holding period is complete investors receive pre-defined profitability rates or capital gain on their investment.


As a source of passive income real estate crowdfunding has many benefits over REIT:

  • Returns from real estate crowdfunding are higher than REIT.  If we  take the weighted average of the Top Ten REIT companies listed on S&P Composite Index , average annual yield comes to around 6.8% excluding any taxes, on the contrary average returns on real estate crowd funding is between 12%-14%.
  • Price of a REIT is determined on movements in the stock market, there is no guarantee of any profitability as well and you have a chance to receive a negative yield if investments that a particular REIT has made do not materialize.
  • Real estate crowdfunding allows you to make more informed decisions when it comes to real estate investments.  You can evaluate the project and decide for yourself the type of investment which suits you, on the other hand REIT investment decisions are made by their managers and REIT holders have no control over them.

The trend of real estate crowdfunding has forced new regulations and guidelines with the aim to bring a legal framework to the industry.  This has enabled very strong growth in the sector with total money raised through real estate crowdfunding platforms rising by an average of 67% annually. Investors are particularly keen for short-term debt deals through these platforms, which gives them a good return as and they get their money back in a matter of a few months, yet equity crowd funding deals where investors have the option to partially own shares in the project are still extremely popular, these deals are a very good option to generate stable passive income and are now a prevalent component of the portfolio of many real estate crowdfunding investors.

Overall based on total return, price volatility and control over investment real estate crowd funding is a better option for passive income compared to REIT and while REIT has a long history spanning decades, real estate crowdfunding is a more recent phenomenon and although it will take some time before it hits the big numbers associated with REIT, crowdfunding in real estate is definitely on its way of being there.


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The advantages and disadvantages of selling a home on lease option.

1. Advantage: Having an immediate buyer. Like all free trade markets, the housing market continually shifts between a buyer’s and a seller’s market. In a seller’s market, buyers are readily available and willing to pay asking price or more for the home. However, eventually all seller’s markets turn to buyer’s markets. At this point, there are few buyers, who can take their time and offer less for your home. A common driving force for a buyer’s market is higher interest rates and a lack of readily available financing. In this scenario there are fewer buyers because a substantial percentage of the buyers cannot get financing through conventional means. In the current market, credit is the major issue. Banks are having to hold fast to their cash reserves to stay afloat and are only willing to provide mortgages to only the best credit scores. In this situation, there is a glut of buyers sitting on the sidelines, with plenty of cash flow to own a home but lacking the credit to buy a home. Offering a lease option gives these buyers a chance to purchase you home when otherwise they could not. For the person in a hurry to sell their home this could mean everything.

2. Advantage: Typically for a seller to agree to a lease option, the buyer needs to agree to purchase the home in the future at the asking price or at a higher price. The seller is yielding up their future appreciation to the buyer by setting a permanent contract and should expect to get their asking price or more. The seller should also expect to get some money down to partially cover the risk of the person choosing not to exercise their option.

3. Advantage: Along with the favorable selling price, the seller will also receive monthly payments to cover the seller’s monthly expenses and possibly more. How much more depends on the conditions in which the seller bought their home. If the interest rate is lower than the current rate or if there is equity in the home, the monthly payment the buyer would be expected to pay will be more than the monthly expense. The difference is income with virtually no work involved. There is probably not much hope for passive income if you have a high interest rate adjustable mortgage with negative equity, but in that situation, a short sale of your home may be a better option if available.

4. Advantage: Lease options are considered less risky than renting because of the down payment the buyer makes and the vested interest the buyer has in the home. I personally would not consider a lease option if the buyer did not offer a significant down payment because it would be too much like renting. Something that I find a little risky for my tastes. However, with a lease option, the buyer is expected to make a down payment to secure the advantages of the option, including access to future appreciation. In the lease option, the buyer has two very good reasons to keep the home: the down payment and the potential of equity growth. Unlike a rental, the home has been sold; it is just the transaction that will occur in the future. The buyer is now responsible for the maintenance and upkeep of the home, not the seller.

5. Disadvantage: One big disadvantage of a lease option is limited access to the home equity. When you offer a lease option, you must maintain your current mortgage and any other loans on the home or pay them off yourself. If you have thousands of dollars in equity in the home, that money will not be made available until the lease option is exercised. Sure, you could refinance your mortgage to get the equity out, but will incur the costs of the refinance and a higher interest rate, which is probably not worth it. As such, the rate of return on your money over the life of a lease option is dependent on how much equity is tied in your home. With little to no equity in a home, a lease option can result in a very high relative rate of return on your money. Even with a lot of equity, the option can be quite profitable.

6. Disadvantage: A lease option is an expressed intent by the buyer to purchase your home in the future. They pay you some money down, but have no obligations except to pay you a monthly payment until that time. However, there is a risk they do not pay you on time or at all. However, as far as your own mortgage is concerned, it must still be paid, and if the occupant has not given you the money to pay the mortgage, you must dig into your own pockets to find the money. Fortunately, you have the down payment to fall back on though only for a while. A lease option is a safer bet when you have enough income to afford that second mortgage payment.

7. Disadvantage: If the lease option buyer chooses not to buy the home during the lease period, then the home falls back to your possession along with the costs of repairs, if any. If they do not exercise their option, you do get to keep the down payment which helps to pay for any restoration provided the repairs do not exceed the amount of the down payment.

8. Disadvantage: When you sign a lease agreement, the seller obligates themselves to sell the home in the future for a predetermined price. If the price of the home increases in value over the life of the lease option, the buyer benefits from the value increase provided they choose to exercise their lease option.

In summary, we have discussed numerous advantages and disadvantages to offering a lease option. Ultimately, it depends on your situation. If your mortgage payment is too much of a burden for you and you need to sell fast, offering a lease option will bring more buyers offering a larger selling price. You must also look at your personality. If you do not feel comfortable with another person using a home that you are ultimately responsible for, a lease may not be good. However, if you are comfortable with other people living in the home, have a decent interest rate on your current mortgage, and are investment orientedFree Articles, a lease option may be just right for you as the passive income can range from 20% to 100% of your invested equity per annum. A handsome return for a low risk investment.

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