How To Create Passive Income In Real Estate

Advertising Disclosure This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services

The common question asked around the internet is how to get started investing? To get started with investing (like anything new) can be a decent hurtle. What you need is a strategy. After all, if you are looking to lose weight, you typically look for some guidance from someone who's been successful at dieting, and what strategy they used to get there. A strategy can help speed up the process.

However, not all strategies are equal. Like with diet and exercise, you get conflicting viewpoints, especially in the mainstream media. While there's no right or wrong method to investing, there are certainly better methods.

Passive investing is the best investment option for most individuals. That, of course, doesn't mean it will yield the best returns. On the contrary. It means when other investing unknowns are taken into consideration, it's currently the most reliable method to yield the most stable results.

With any of the strategies I mention, I'm emphasizing passive investing. This means focusing on:

Low annual fees – Any investment that costs sub 1% annually to own
Diversify – Good asset allocation affects returns more than anything else. You do this by not putting all of your eggs in one basket.
Investing In The Entire Market – Using mutual funds or ETFs that accurately track an index you are investing in.
Not Actively Trading – Not using actively managed funds for most investment choices.

Each of the strategies listed below implement these core principals slightly differently, but they are primarily the same. To simplify, it really comes down to three strategies:

Automated Financial Services
DIY Investing
Professional Management

The advancement of computer technology has affected all three strategies for the better.

Automated Financial Service

The automated investing industry is really a new category in the financial industry. Previously, you really only had the two latter options. Forty years prior, DIY passive investing was also very difficult to implement. Companies such as Vanguard revolutionized this option.

Now companies like Betterment are taking modern finance to the next level. Instead of having to be concerned about the technical details in modern financial theory, Betterment does all this for you. Their focus is about your end goal – what's the purpose of your saving.

I imagine this type of service targets the beginning investor recently out of college who is just starting to save, but has no clue what to invest in. This, in my opinion, is perfect for using Betterment. It requires no time to research and maybe an annual review of your goals. It's pretty much set it and forget type of investment service. Your performance will more than likely beat 80% of active fund managers.

As I reviewed, Betterment focuses on your goals, rather than investment theory. It's an automated investment service that does passive investing for the masses. What once was only available via a high cost financial advisor is available through Betterment's web site. If you are wanting to go down this route, Betterment is the best service out there.

I suspect services like this will become more popular in the future. With the advent of trading APIs (like Ally Invest) you'll be able to keep your existing brokerage and link to a service like Betterment to make the trades for you.

DIY Investing

The next level of progression is doing the investing yourself, otherwise known as DIY (Do It Yourself) investing. It can be a time consuming endeavor, but can yield great rewards (both through financial education and monetarily). If you're not careful, it's also possible to really shoot yourself in the foot.

I would consider individuals who typically have around a $50,000 – $2 million net worth fit into this category. An individual who fits this profile enjoys the reading and research required to understand modern investment theory. In addition, an individual will stay the course during down markets like we saw in 2008-2009.

For a DIY investor, you are not out there without any help. There are many financial books about passive investing and web sites such as Investor Junkie. Web site services such as Morningstar are a great help as well, but it can be a lot of leg work. Morningstar allows you to research any mutual fund or ETF, and you then determine if it's the right investment for you. This is an invaluable service when picking funds in your 401(k). However, Morningstar will not tell you what's your best asset allocation and what better investment options are available within your account.

Technology is now available to help the DIY investor in this respect as well. With DIY investing, your choice of broker becomes more important. It's recommended to get your trading fees as low as possible. Today you can either do this by picking a commission free ETF broker and/or choosing a low cost per trade broker.

You can go the more traditional route and choose mutual funds. Vanguard is perfect for this; however, while they also have ETFs, they no longer have exclusivity on low cost annual fees. Part of a DIY investing strategy is using commission free ETFs as well.

From my experience TD Ameritrade is a good choice, and Fidelity as well.

Professional Management

Not everyone is cut out to do it themselves. Some don't have the skills. Others don't have the willpower and will invest at exactly the wrong time. How many stories have your heard of individuals who pulled out exactly at the March 2009 lows? In addition, many individuals spend more time picking a vacation spot than planning their financial future.

If this describes you, than more than likely you should get professional guidance. Even for a DIY investor it might make sense to get a second opinion. Someone to help look over your shoulder. Just like a good auto mechanic, a good financial advisor can offer wisdom and identify problems you might not be aware of.

It's also possible a DIY investor's portfolio gets so large and hard to manage that it might make sense to hand over the reigns to a professional. Nothing wrong with this, and it's the same reason why I no longer do my own taxes.

First off, let me state skip any financial planner who isn't a fee only advisor. This means you pay either a flat rate, by the hour, or sub 1% annual fee. Financial planners tied to a brokerage house who sell only their funds, or only sell front-end loaded funds, are best to avoid.

When picking a professional, make sure you ask for references, and be direct with your questions. Even though you are expecting a financial advisor to look out for your self best interest, it's still not their money. No one cares more about your money than you do. Choose an advisor that matches your passive investment philosophy. An advisor who requires trading in and out of your account less than 60 days is best to avoid.

You can do your research on services like BrightScope.com and find a planner near you. Another option, like Betterment, is to use one an online service. One such service is Personal Capital.

Personal Capital leverages technology so you can access to a financial advisor that manages 200+ clients, but with personalized service that previously was only available to ultra high net worth individuals. With as little as $100,000 to invest, Personal Capital can get a holistic view of your portfolio and give you the best recommendations. Personal Capital is another highly recommended service by me.

Summary

When I first started investing, I went completely in with the DIY method of investing. I thought there was no other option. I also thought everyone else should do exactly the same. But just like owning a business, I realized not everyone is aptly suited to go down that path. This is why I also suggested the option of using a financial advisor. While not all financial advisors are created equal, if you can find one that aligns with your investing beliefs, they can better execute your plan.

All three options have their pros and cons. Which one you choose depends upon your net worth, skills, time to research, and tolerance to risk. One size certainly does not fit all when it comes to investing. The question you have to ask yourself is: which passive investing strategy is right for you?

Larry Ludwig was the founder and editor in chief of Investor Junkie. He graduated from Clemson University with a bachelor of science in computers and a minor in business. Back in the '90s, I helped create some of the first financial websites for firms like Chase, T. Rowe Price, and ING Bank, and later went on to work for Nomura Securities. He's had a passion for investing since he was 20 years old and has owned multiple businesses for over 20 years. He currently resides in Long Island, New York, with his wife and three children.