12 Ways To Make Passive Income From Real Estate Investing

In This Article

Whether you want to pay off your credit cards, build your retirement fund, or save money for college, we could all use a little extra money in our lives. Passive real estate investing allows you to enjoy additional income without having to work for it. 

Passive income from real estate is any income you generate from long-term tenants, short-term rentals, and other real estate investments. Some passive real estate investing strategies require you to actively participate in your investment, while others need little more than a cash investment to get started. 

Whatever your goals are, there’s a passive real estate investment strategy perfectly suited to your needs. Here’s how to make passive income from real estate investing.

Start By Asking Questions

One of the many benefits of earning passive income from real estate investments is the spectrum of involvement you have as an investor. Unlike when investing in individual stocks or mutual funds, where you or your financial advisor invest your money and—hopefully—watch it grow, your real estate income streams can be passive, active, or a combination of both.

This brings us to the first question you should ask:

How Active in Your Real Estate Investments Do You Want to Be?

Active real estate investors are people directly involved in their properties. These investors manage their rental properties, flip houses, hack houses, etc. Since you’re looking to generate passive cash flow, your two main options are to be a passive investor or an active investor with passive management. 

• Passive investors give someone money and have them do the work.
• Active investors with passive management research and buy rental properties, then hire a property manager to handle the rest. 

Should You Work On Your Own or With a Research Investment Group? 

Both of these options come with their pros and cons:

• Working on your own: You’re fully autonomous unless you choose to work with a powerful team. That team can consist of a real estate agent, general contractors, lenders, other investors, etc. It can be very profitable but requires more work and research, and you usually assume more risk. 
• Working with a research investment group: By working with these groups, you’ll gain knowledge and access to investment properties in emerging and profitable markets. 

Where Should You Invest?

What neighborhoods have promising rental markets? Research the following:

• Property values
• New and upcoming developments
• Ratio of renters vs. homeowners
• Employment statistics
• Crime rate statistics
• Neighborhood amenities
• Schools
• Transportation

Also, will quality tenants want to live there? Would you want to live there? To level up your analysis, check out this book.

Are You More Interested in Appreciation or Cash Flow?

The type of passive income will directly influence your investment strategy. If your priority is appreciation, you should focus on flipping properties. If you’d prefer monthly cash flow, then you should buy and hold properties to earn rental income. 

12 Ways to Make Passive Income From Real Estate

Here are 12 ways to make passive income from real estate investments. If you want to be a fully passive investor, the first four are for you!

1. Publicly-Traded Real Estate Investment Trusts (REITs)

REITs publicly traded in the stock market are often considered the easiest, more affordable way to invest in real estate. In the U.S. alone, REITs collectively own more than $3.5 trillion in gross real estate assets. They’re a fantastic source of passive income as they have to distribute 90% of earnings as dividends to keep their tax-advantaged status. 

You have more than 200 publicly traded REITs to choose from, and most trade for under $100. Many REITs focus on specific niches, including residential, industrial, retail, and office, and can be bought and sold through a brokerage account, much like regular stocks. 

Like other forms of passive income, the only work required of you is to figure out which REIT you’d like to invest in. 

2. Private REITs

Unlike publicly-traded REITs, private REITs are purchased through investors, financial advisors, or direct-to-consumer sites like Realty Mogul. Typically, private REITs are less volatile because they can’t be bought and sold on a whim. They also usually yield higher returns, but less frequently. With Private REITs, you’ll usually earn passive income quarterly or annually, rather than monthly. 

3. REIT Exchange-Traded Funds (ETFs)

REIT ETFs are similar to mutual funds. Instead of investing in a single REIT, with REIT ETFs, you’re investing in multiple REITs simultaneously, reducing your risk of losing money. If you’re a new real estate investor, buying REIT ETF shares is a great, low-cost way to get started. 

Note that you will be charged a fee, also known as the ETF expense ratio, but this is usually under 1%. 

4. Real Estate Crowdfunding

Real estate crowdfunding is fairly new, but it’s definitely one of the most popular passive real estate investment opportunities out there. With real estate crowdfunding, you pool your funds with several other investors so that a third-party sponsor can purchase and manage an investment property. 

The frequency of the real estate passive income you earn depends on the investment opportunity and structure your sponsors select. Similar to REITs, you have many crowdfunding opportunities and niches to choose from. Also, like REITs, the only work required of you is selecting which crowdfunding opportunity you wish to invest in. 

5. Single-Family Units

If you’re looking to actively invest in properties and hire a property management company to run them, purchasing a single-family unit is often the most popular way to start.

Single-family units are condos or single homes with only one tenant or family living in them. You’ll collect passive income every month in the form of rent (minus the rental property fees charged by your management company), which you can use to pay off the mortgage and other expenses while building equity. 

However, be aware that when the unit is not occupied, you won’t earn money from it.

6. Multifamily Units

Multifamily units are typically duplexes, triplexes, and fourplexes. They operate similarly to single-family units, except you’ll earn multiple passive income streams, not just one. More units also means more tenants to manage, but if one of the units is vacant, you won’t take as big a financial hit. 

7. Apartment Buildings

By definition, apartment buildings are classified as properties containing five or more units. You’ll want to do extensive research before hiring a property management company to maintain the building because they require more intensive management. 

Besides potentially enjoying a larger passive income stream, real estate investors in apartment buildings can apply for a commercial loan instead of a residential one. 

8. Short-Term Rental Properties

Short-term or vacation rental properties are great investments in areas with dense populations, lots of tourism, or popular vacation destinations. Instead of having tenants live in the property for months or years at a time, short-term rentals are usually charged per night. 

You can earn 2-3x more income with a short-term rental property, but they also require more work, like scheduling, cleaning services, and cancellations. Companies managing rental properties usually charge 20%-50% in fees, but it can be well worth it. 

9. Mobile Home Parks

Investors of mobile home parks often own the land and collect rents from residents who move their mobile homes onto it. These homes are a viable housing option for people experiencing economic stress or if housing costs are skyrocketing in your market. 

Typically, you invest in a mobile home park with other investors or as part of a fund. 

10. Commercial Properties

With commercial properties, you’ll usually enjoy longer leases with the companies who occupy them, as well as more steady passive real estate income streams. However, commercial properties are more niche and tend to be vacant longer, so you’ll need to prepare for that. 

Much like residential real estate, location is everything for a commercial property. The more desirable the location, the better your chances of keeping it occupied. 

11. Industrial Complexes

When you think of commercial properties, your mind may go straight to retail. However, there are plenty of other commercial sectors to consider, including the industrial sector, where warehouse, manufacturing, and storage facilities can generate passive income with minimal management required. Much like other commercial properties, owners of industrial complexes can enjoy longer leases but also experience extended vacancies. 

12. Mixed-Use Developments

Some properties allow for versatility. With mixed-use developments, you can have residential, retail, industrial, and office tenants all at once! As such, you can enjoy a variety of lease streams and passive income streams. 

Other real estate passive income opportunities include:

• Land lot ownership
• Self-storage units
• Private lending
• Tax liens and deeds 

Mistakes to Avoid as a Passive Real Estate Investor

Unfortunately, no investment is without risk. While real estate is historically the most consistent investment you can make, you can still end up taking a loss. 

Here are a few quick tips to help you mitigate risk:

• Thoroughly research the type of investment you’re looking to make before making a purchase and entering into a fund.
• Screen your property management company before hiring them. 
• Always screen your tenants or hire a property management company that will.
• Never take on more debt than you can afford. 
• Be mindful of all the potential expenses that may be required when maintaining an investment property.

Conclusion

You can avoid these mistakes and many more by being an active member of the BiggerPockets community. Join other passive income real estate investors in our forums, and check out podcasts like this one to receive tips from experienced investors. Are you ready to enjoy passive income from real estate investing?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.