Do you want to earn passive income from your investments? While everybody wants to earn passive income, only 20% of households ever achieve it to any degree.
Still, that includes small stock dividends and interest rates. If you want something substantial, there’s nothing better than real estate. Let’s talk about generating real estate passive income!
What Is Passive Income?
When you work at a job and receive a paycheck or when you invoice a client, this is called active income. This is the most common form of income that everybody is familiar with.
Conversely, passive income is income you don’t have to work for. This could be on a consistent basis (i.e. monthly, annually, etc.) or sporadic income. Either way, it will continue to flow without intervention.
For example, think about authors who write a book and continue earning money from that book throughout their lives. Too much work for you? Instead, consider investors who earn dividends on their portfolio.
Real Estate Passive Income Options
Of course, passive income is a dream for everybody, but few people ever attain it in any substantial amount. Fortunately, investors of all sizes can generate passive income with real estate.
Let’s discuss the different options real estate investors have to earn passive income and compare the advantages and disadvantages of each.
A real estate investment trust (REIT) is a type of security you can purchase that invests in real estate. The law requires REITs to pay at least 90% of profits to shareholders, and you can buy many of them on public security exchanges.
Without a doubt, this is one of the easiest ways to get started, and you won’t have to do anything to start earning dividends. Some pay out annually, quarterly, or even monthly.
On the other hand, the payout potential isn’t nearly as high as some of the others on this list. If you want to play it safe and diversify among multiple REITs, you could definitely earn around 2% each year in dividends on average.
You may find REITs advertising dividends as high as 8% or even 10%, but these tend to be a lot riskier. Also, if you invest in REITs, you don’t have control over their operations, and a housing market crash is all it takes to destroy the most diverse portfolio of REITs.
Still, this can serve as a great entryway into real estate investing and passive income streams for new investors. If you want to step up your investment strategy, here are some other ideas.
If you know somebody who wants to become a landlord but doesn’t have the funding, you can provide some of that funding. If you own a certain percentage of the property, you can work out a dividend arrangement. This way, you’ll earn a portion of the rent based on your initial investment.
You can make these investments through crowdfunding, private investments, or other arrangements with landlords. As soon as they find tenants (or another income stream), you can sit back and start enjoying the income.
Generally speaking; however, you will likely earn less money in dividends than you would by owning a property in full. Also, you lose a lot of control over decision-making in this strategy, as the landlord will likely take control.
Of course, you’ll also share the liability with the other owner(s).
Vacation properties are a way to potentially maximize the profitability of your property. You can charge higher rates for short-term stays, and you may get consistent revenue if you buy in the right area.
However, there are some serious drawbacks to having a vacation rental. For one, even if you have someone to clean up, you will likely have to work several hours each week. When different people come and go regularly, more work is certainly involved.
Also, if your cleaner is sick or away, you’ll have to go yourself or find backup right away. This isn’t something you can do remotely without any headaches.
On top of that, if you buy in an area with seasonal tourism and high competition, profitability is far from guaranteed. The field is growing, but it’s also becoming more competitive in high-tourism areas.
Long-Term Rental Properties
The most tried-and-true real estate investment out there is buying a long-term residential or commercial rental property. Everybody needs somewhere to live, right?
We know what you’re thinking; landlords work. Yes, they do work, and this makes traditional rental property investments semi-passive income. However, there are ways real estate investors can make their investments fully passive.
When real estate owners hire a property management team, they no longer have to do any of the work. They won’t be tied down to one area, find a plumber at 3 am, screen tenants, or even collect their rent checks. All of this is done for a small portion of rental income, which is usually a single-digit percentage to eliminate 100% of the work!
That’s not to say you can’t involve yourself in the property. With full ownership, it doesn’t matter who is managing your property. You will still have total control over decisions involving your rental property.
Another benefit is consistent income. Unlike short-term rental properties, you can have tenants sign a one-year lease or longer. This ensures that you will have income throughout the year and not sporadic and unreliable payouts.
How to Earn Passive Income With Rental Properties
Now that you know why rental properties are the best option for generating passive real estate income, you probably want to get started yourself. Here’s what you need to know.
Determine Your Budget and Preferences
Not all of us have the ability to purchase a large commercial property in cash, right? Now is the time to determine how much money you have to invest and where you would find the most advantage with that capital.
For example, if you have $100,000 in cash available, you have a lot of options. You can potentially finance a $500,000 home (presuming you have income and good credit), purchase a fixer-upper and take out a construction loan, or buy in a more affordable market.
Whatever your investment capital is, try to get pre-approved with different mortgage lenders based on your current financial situation, and let them know what your goals are. This will tell you your maximum buying power and help you during the buying process. From there, use a rental property calculator to see how much you can earn with that amount!
Choose the Right Investment Property
Based on your budget and goals, it’s time to find the right property. This is arguably the most important step in your investment journey, as it will play a large role in determining profitability. The right location and the right building can turn your investment into an excellent revenue stream.
Conversely, choosing the wrong location or the wrong building can just as easily tank your investment. If the neighborhood goes downhill or if the building needs major repairs, you could lose money. Always conduct thorough market research, find a good agent, and get a thorough inspection before purchasing!
Generally speaking, multifamily properties tend to be the most profitable. There are plenty of exceptions, but they’re in the “sweet spot” between single-family properties and commercial properties, which have different tax rates, prospects, and funding challenges.
Find the Right Property Manager
You don’t need to find and screen tenants. With the help of the right property management team, you can rest assured that your investment is taken care of. They can handle everything, including:
- Communication with tenants and candidates
- Tenant screening
- Budget management
- Maintenance and repairs
- Rent collection
- Policy enforcement
The list goes on. Again, all of this comes for only a small portion of your real estate investment income, so if you aren’t making money off of your property, neither is your property manager.
Without a doubt, this is the safest way to generate substantial passive income. You’ll have industry experts handling day-to-day management, and you can achieve a much higher potential ROI than with a REIT or similar investment. If you’re interested in generating passive income, then this will offer the best return on average.
Start Earning Today
Now that you know how to generate real estate passive income, why wait? Real estate is one of the best investments available, and rent prices are only going up around the country. Now is the perfect time to set yourself up for passive income for life!
Stay up to date with our latest real estate investing tips, and don’t hesitate to contact us with any questions or for help with managing your property!