Investing in real estate, whether it’s in land or buildings, is a popular choice for those with extra money. Real estate serves as an asset that helps you build and diversify your portfolio, and it’s crucial for securing your own place to live. However, smart investments in real estate can also generate passive income. Here, we share with you tips on how you can earn passive income from real estate.
What Is Passive Income?
Passive income is money you earn with little effort. Think of the interest you get in your savings account—you don’t actively work for it; the bank still pays you for keeping money in the account. Another example is investing in a business partnership where you earn interest on your contribution without actively participating.
And if you’re cash-strapped, read up on 17 Clever Ways to Come Up with a Down Payment for a Rental Property.
Generating Passive Income from Real Estate Benefits
Having multiple sources of income, even passive income from real estate is quite valuable. It ensures financial stability even if you face job loss or business challenges. Let’s take a look at how this can be beneficial for you:
- Less Risks: Real estate isn’t tied to the risks of stocks or bonds. By investing in real estate, you diversify your portfolio, reducing risks associated with other investments.
- Earning While You Sleep: With real estate, you make money without constantly working for it. Renting out your property, for instance, brings in income while you’re not actively doing anything.
- Leverage Opportunity: Real estate allows you to leverage your assets. You can use your property’s value to get a loan, providing funds for other investments or business needs.
- Security: Owning real estate gives you a tangible asset, providing a sense of security. You can sell it when necessary, and the passive income it generates offers financial stability in emergencies.
From interest rates to loan-to-value ratios (LTV), we’ve put together several comparison charts for investment property loans.
How To Make Passive Income From Real Estate
When you’re looking to earn passive income from real estate, there are various options to explore, each with its own characteristics. Let’s take a look at some of the most ideal ones:
Publicly traded real estate investment trusts (REITs): REITs are companies that own as well as operate income-producing real estate. They must distribute 90% of their taxable income to shareholders in the form of dividends. This makes them a good source of passive income. REITs are also relatively low-cost and liquid investments.
REIT exchange-traded funds (ETFs): REIT ETFs are baskets of REITs that trade on stock exchanges. They offer investors diversification and lower risk than individual REITs. However, they are still subject to stock market volatility and may charge fees.
REIT mutual funds: REIT mutual funds are similar to REIT ETFs, but they are managed by a fund manager. This means that they may have higher expense ratios than REIT ETFs, but they may also offer superior performance.
Non-traded REITs: Non-traded REITs are not traded on stock exchanges. They are typically sold through financial advisors and have higher minimum investment requirements than publicly traded REITs. However, they can offer higher income yields and may be less volatile than publicly traded REITs.
Real estate syndications: This allows investors to pool their money to invest in a single real estate asset or a private equity real estate fund. Syndications can offer higher income yields than publicly traded REITs, but they are also illiquid investments that require a long-term commitment.
Debt and debt-like investments backed by real estate: Real estate-backed debt can be a lower-risk investment than equity investments in real estate. However, it does not offer any potential for capital appreciation.
House hacking: This one is a strategy that involves buying a home and living in one unit while renting out the others. This can help to offset the cost of your mortgage and generate passive income.
Short-term vacation rentals: Short-term vacation rentals can be a lucrative source of passive income, but they also require a lot of work. You will need to manage bookings, clean the property between guests, and deal with any maintenance issues.
Rental properties: Rental properties are a classic way to generate passive income from real estate. However, they can also be a lot of work. You will need to find tenants, screen them, collect rent, and deal with maintenance issues.
Ground leases: Ground leases are a type of investment that allows you to generate passive income from owning land. You lease the land to the owner of a building, and they pay you rent in exchange. Ground leases are a low-risk investment, but they also offer lower income potential than other real estate investments.
Wrapping up!
All in all, real estate offers a variety of ways to generate passive income. You can invest in REITs, ETFs, mutual funds, syndications, or debt-like investments. You can also house hack, rent out your property, or lease the land to the owner of a building. The best option for you will depend on your individual circumstances and goals.