5 Ways to Make Passive Income Through Real Estate

by / ⠀Entrepreneurship Personal Finance / November 2, 2021

Earning passive income from real estate transactions could be an excellent way to achieve financial independence. But choosing the right type of investment can be daunting, especially if you’ve never done it before.

The good news is that there are ways to grow your money without having to spend your entire savings or needing hands-on involvement from you. Depending on your risk appetite and the kind of investment you choose, you’ll be able to repay your bills and make significant purchases in no time. Read on to find ways to generate passive income through real estate investments.

What Is Passive Income?

Passive income enables one to have another source of revenue other than a regular job or an employer.

Most passive income sources include rental properties, royalties, and investment portfolio returns such as stock dividends. Making the correct choice allows investors to gain financial rewards without having to quit their full-time jobs. If you’re eager to learn about all your options, consider these real estate investment tips.

How To Generate Real Estate Passive Income

After learning the basics of real estate investing, you can start earning passive income from it in the following five ways.

1. Real Estate Investment Trust Shares

In the past, investing in real estate meant buying a property and managing it. Investors can turn to a real estate investment trust (REIT) to earn passive income with the changing industry landscape.

REITs work like mutual funds in that investors buy shares and earn once the property performs well on the market. The company that manages the trust typically has income-generating real estate and other related assets, from shopping malls and hotels to resorts and warehouses.

Investors who don’t have a lot of cash to spare or those who don’t want to go through the hassles of managing physical property will find REITs attractive. REITs are publicly traded investments offered in stock exchanges, so investors can easily buy and sell them in person or online. On the downside, REITs have the lowest returns compared to other investment options.

2. Real Estate Crowdfunding

A crowdfunding real estate investment is another attractive choice for individuals who don’t have adequate funds for costlier alternatives. It’s a straightforward concept: a group of individuals pools their capital together to purchase a real estate property.

Sometimes, a real estate developer or investor who identifies a great opportunity may not have enough cash to fund the investment. In this case, they can use social media platforms to connect with potential investors to raise the capital needed. Like REITs, this doesn’t require a significant investment, but returns in investment may not be guaranteed as with other investment types.

3. Real Estate Syndication

Before the rise of crowdfunding, the practice of pooling resources from several investors came in the form of syndication.

In this setup, the syndicator or general partner looks for a deal and coordinates all transactions, including managing all of the investments. Each investment has corresponding equity, and investors won’t be actively involved in the daily operations. Private companies operate these syndications under the supervision of the U.S. Securities and Exchange Commission (SEC).

Unlike crowdfunding, syndication is subject to stricter rules and requires higher investments, typically at $25,000 USD. The level of risk is also transparent. Passive income investors know where their money’s going and the persons they’re investing with. Additionally, real estate syndication offers higher returns for both passive income and the profits on the sale.

4. Residential Rentals

Venturing into residential rentals is a stable income-producing option if you have enough cash set aside for investment. In the United States, the demand for new houses keeps increasing as the supply hasn’t been able to keep pace. Currently, the housing market is short of 5.24 million homes, a deficit that the pandemic has exacerbated.

This is a good signal for real estate investors to embark on rentals for individuals and single or multiple families.

  • Single-Family Homes: These rental properties may be a small house or condominium unit leased to individuals, couples, or small families. Purchasing a single-family home is a lucrative investment as the demand for it tends to stay high.
  • Multi-Family Units: These housing models may come as duplex housing or any property that can accommodate several families, where walls often separate the units. Townhouses and semi-detached homes are multi-family units that allow an investor to earn from several tenants in a single physical property.
  • Apartment Buildings: Investors may opt to place their money in an apartment building to streamline management efforts while increasing earning opportunities.

Property rentals can be a good source of passive income, but your revenues will be impacted by taxes, repairs, permits, and other maintenance costs. These real estate investment options require involvement from landlords unless you decide to appoint a property manager for such units.

5. Commercial Leases

A commercial lease is a contract that allows business tenants to use a property for commercial activities within a specific period and for a certain amount every month. Both landlord and tenant have responsibilities that are underlined in the contract. If you’re an investor, it’s best to hire the services of a lawyer to draft the agreement.

Commercial properties, by definition, are spaces used for nonresidential purposes. Investors can lease commercial properties that may serve multiple functions such as the following:

  • Office Space
  • Retail Store
  • Restaurant
  • Gym
  • Storage Facility
  • Clinic
  • Warehouse

Business owners need to lease an office or rent out warehouses to run their companies. A physical office will give added legitimacy to a small business. At the same time, a stock room or a warehouse is necessary to hold all sorts of merchandise. If investing in this type of property appeals to you, make sure to purchase a commercial unit located in a strategic area.

Conclusion

Earning passive income through real estate is an excellent way to obtain financial stability in the long run. If you want to keep your job and have an additional revenue stream, investments such as REITs, syndication, and crowdfunding can prove to be an attractive proposition. If you want more involvement, consider property and commercial property rentals, which can yield higher returns.

Before choosing any of the options discussed in this article, a rookie investor must speak with a financial adviser or an investment expert for consultation. Doing this helps reduce the risk of losses and ensures that investors understand what they’re getting into.

About The Author

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James Larkin works for a real estate company. He also dabbles in investing on the side, an endeavor that has allowed him to purchase a property in his dream location.

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