If you want to earn passive income through real estate investing, you are in the right place.
In this article, we are going to discuss 12 examples of passive income real estate investing that work. They include classic examples, such as residential rental properties, as well as more exotic examples like triple net leases, note investing, and real estate syndication.
We will provide an introduction to each strategy, pros and cons of using that strategy, and some insider tips on how to get started.
We’ve got a lot to cover so let’s get into it!
If you would like to see a condensed version of this article in video format, check out my YouTube video on the topic below.
This post may contain affiliate links. If you click on a link and complete a transaction, I may make a small commission at no extra cost to you.
The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
What is Passive Income?
I assume that most of you know what passive income is, but it doesn’t hurt to provide a quick definition, so we are all on the same page. Passive income is money you make through assets or investments without active involvement on your part.
1. Traditional Residential Properties
Perhaps the best-known strategy for generating passive income through real estate is investing in single family rental properties.
I am including within this strategy single family homes, small multifamily properties (like duplexes, triplexes and fourplexes), townhouses, condos, co-ops and any other dwelling that is suitable for renting out to individuals, families and small groups.
Although rental property investing is not completely passive, it can be mostly passive. I own nine rental properties and manage them myself. I only spend around 5-10 hours per month on average handling issues from these rentals. That’s because I have a reliable team of competent handymen, plumbers, etc. that handle nearly everything that comes up with a simple phone call.
If you want to make this investment almost completely passive, you can simply hire a property manager who will basically take care of everything for you. A lot of out-of-state investors use property managers in this way.
Benefits of Traditional Rental Property Investing
This type of investing is my favorite form on passive income investing because it gives so many powerful benefits.
The key benefits of rental property investing are:
Cash Flow: If you buy right, the rent that your tenant pays you should cover your mortgage, property taxes, insurance and other expenses associated with owning your property. You should even have money left over each month. That left over money is called cash flow and it is one of the main reasons why rental properties are terrific vehicles for passive income
Debt Pay Down: As mentioned, your tenants wind up paying your mortgage each month and that means they are paying down your debt. Once that debt is paid off, you own the property free and clear. Think about that – you took out a huge loan and somebody else paid it off. That’s amazing!
Appreciation: Real estate tends to go up in value over the long term. Granted, the pace of appreciation is modest (around 3.7% per year), but you are talking about 3.7% on a property that is worth a lot of money. If you bought a $200,000 property and it appreciated 3.7%, you made $7,400. And you probably only paid a down payment of around $30,000. That’s a pretty sweet return.
Leverage: We already started talking about the benefits of leverage in the last section, but I’ll elaborate. Most people criticize rental property investing by citing that the real estate appreciates at lower rates than the stock market. But that’s only half the story.
The reason why people get rich through real estate is because they only need to put down 15% or so of the total purchase price to buy their properties. The rest is bought with other people’s money (usually the bank). That means for every dollar you put in, you can buy $6.66 in real estate. What does this translate to in terms of return? Well, if we take our example of a 3.7% appreciation rate on our $200,000 property, we would earn 24.6% off our $30,000 down payment investment.
Tax Benefits: Real estate investors can enjoy significant tax benefits, including deducting operating expenses, mortgage expenses and even depreciation. This can actually result in paying no taxes on your rental income. Of course, I am not an accountant and your tax situation may vary, so consult a qualified accountant to learn more.
Inflation Hedge: One of the great advantages of owning real estate is that time is on your side. Not only is more and more of your debt being paid down each month, but as inflation rises (which tends to happen over the long term), your property values and rents tend to rise as well. I don’t need to point out that a home in a decent neighborhood is selling for significantly more than it was 15 years ago. The same thing for rents – they have risen quite a lot over that same period.
One other thing I would point out is that as inflation rises, the value of the dollar declines. A dollar today doesn’t go as far as a dollar 15 years ago. So if your mortgage payment stays roughly the same because you have a fixed rate mortgage, you are actually paying off your loan in cheaper dollars as time goes by.
Risks of Traditional Rental Property Investing
Of course, there are risks in rental property investing too.
They include tenants who don’t pay, tenants who trash your property, expensive repairs and maintenance, and declining property values to name a few. But you can mitigate many of these risks by buying in great neighborhoods and properly screening your tenants.
Location is the key here. The better the location, the better quality of tenant you will attract, which will dramatically reduce the risks of non-payment and other tenant-related headaches.
Tips on Getting Started
If you want to learn how to get started investing in traditional rental properties, check out my step-by step guide on how to start investing in rental properties.
2. Cheap Out of State Rentals
The idea here is simple.
Some states have properties that generate far better cash flow than other states. For example, California has very high property values. That makes investing for cash flow very difficult. So a lot of California real estate investors look elsewhere to find high cash flowing properties. These locations evolve over time as demographics change, but generally they are in areas that have a lower cost of living and lower property values.
Companies have flocked to these locations and bought up properties that will cash flow. They package these deals to investors who are looking for out of state properties. These companies usually buy these properties very cheaply, renovate them, find tenants, and then hire a property manager to manage the properties.
The companies are happy because they make money by selling these properties to investors for a profit. The investors are happy because they are getting a low-priced property (at least compared to properties in their state) and they are getting cash flow each month.
But there are risks.
Some of these companies don’t do what they say. They may buy a terrible property in a terrible neighborhood and just slap on some paint and rent it out to awful tenants who will trash your place. Plus, some may overcharge you for the property because you may not know the local market values very well. In short, you need to work with a company that has a proven and long-standing reputation.
Even then, you should do your own due diligence to ensure you are not getting taken. Fly out to the property and inspect it yourself or hire a trusted service to do so for you. Make sure you know what you are getting into.
3. Vacation Rentals
This option has been gaining more and more popularity with the emergence of Airbnb and VRBO. Investors can buy properties in destination cities or locations and rent them out to tourists for a very nice profit.
You can use the platforms I mentioned above to do this pretty easily. But if you want to make it passive, you will need to hire a property management company to take care of the property (including handling “turns” whenever a renter moves out).
4. Lease Options
Lease options (also known as “rent-to-own” arrangements) are another strategy that investors can use to generate passive income.
A lease option is basically a lease combined with an option to buy. So when you offer a tenant a lease option, they get the right to live in the property (that’s the lease part) and they also get a right to buy the property at a mutually agreed upon price during the term of the option (which is usually a few years).
Let’s take an example.
You can offer a tenant a rent to own arrangement where they sign a 3 year lease for $1,500. The option to buy allows them to purchase the property for $100,000 during that same 3 year period. The tenant pays you upfront a non-refundable fee for the option (usually between 1%-5% of the option price).
The idea here is that the normal rent may only be around $900 and the property may only be worth $90,000. So not only do you get between $1,000 to $5,000 for the option fee right off the bat, you also enjoy a higher than market rent each month and lock in a long-term lease. You also can make $10,000 in profit if the tenant exercises their option (because of the difference between the market price at the time of the option agreement and the exercise price).
This type of arrangement can also be more passive than a standard rental arrangement because the tenants are often expected to take care of minor repairs and maintenance (they are being treated as “owners to be”).
Of course, there are risks to using lease options. Some states frown on lease options and you have to structure them very carefully or be in violation of the law. You also are usually dealing with tenants that cannot qualify for financing yet, so their credit may be poor. That’s always a risk as a landlord. And if the price of the property shoots up, your tenants may exercise their option and capture the upside instead of you.
That being said, plenty of investors use lease options to great effect and it can be a profitable way to invest in real estate if done properly.
Tips on Getting Started
If you want to learn more about how to use lease options to invest in real estate, check out my article on the topic here. It covers the three most common lease option strategies and a detailed discussion of the pros and cons of lease option investing.
Apartment investing is the holy grail of real estate investing for many investors. The premise is simple: buy an apartment that has positive cash flow and collect checks.
If you buy the right apartment, you can enjoy huge economies of scale, potentially life changing cash flow, and the ability to dramatically raise the value of your investment by modestly increasing your revenue or decreasing your expenses (called “forced appreciation”).
The reason why apartments are great vehicles for passive income is that they are usually large enough to support a full-time, onsite property manager. This basically eliminates the day-to-day headaches associated with managing that many tenants.
But apartments come with drawbacks too.
If the neighborhood declines, your entire investment is affected (as opposed to individual houses which may be scattered across different neighborhoods). You are also usually dealing with lower income tenants and could experience higher rates of non-payment and vacancy.
Finally (perhaps most importantly), they are expensive and financing can be a challenge. It’s why they are usually for more advanced investors.
Tips on Getting Started
If you want to learn more about apartment investing, check out my article on the topic here.
6. Commercial Properties
Apartments are a form of commercial property, but there are other kinds as well. I am talking about office buildings, strip malls and any other real estate that caters to business tenants.
Similar to apartments, you can hire someone to manage the property because the rents generated by the property should be enough to cover the costs of the property manager. So from a passivity perspective, commercial properties are pretty good.
And the lease terms are usually pretty long, so you can enjoy uninterrupted cash flow for years. Finally, the tenants are usually businesses so they can often weather financial difficulties a bit better than individuals (plus the landlord tenant laws are far less protective for businesses than individuals).
But they have their cons too.
Vacancies can be disastrous. In an apartment, if a tenant leaves, it’s not too hard to replace that tenant. If nothing else, you can reduce the rent and fill it pretty quickly. But if you own a commercial property that has lost an anchor tenant, it can be years before you find a replacement. Plus, the initial costs to buy one can be really high.
In short, this type of investing is not for beginners.
7. Triple Net Properties
A form of commercial property that I really like is triple net properties. These are properties that are rented to commercial tenants but the lease is a triple net lease, which usually means the tenant covers everything. This includes repairs, maintenance, insurance and even taxes!
I am sure you can see the appeal of this type of lease agreement if you are looking for passive income. Because the tenant pays for everything, you don’t get calls from them to fix this or pay for that. It almost operates like a bond. You just get your rent check each month, period.
To top it off, you usually have very long rental terms (can be 20 years or more). You also usually get rent escalators every five years or so depending on what’s negotiated, so your rent increases over time.
You usually see large pharmacy chains and fast food restaurants operating under triple net leases, although triple nets are not limited to just these types of tenants.
On the down side, these types of properties can be expensive. And if the tenants goes under, you could be facing a long vacancy.
Tips on Getting Started
If you want to learn more about triple net lease investing, check out my article on the topic (where I explain triple net investing in more detail and do a deep dive on the pros and cons of this investing strategy).
8. Real Estate Syndication
Another passive income strategy that can generate some great passive income is real estate syndication. In simple terms, real estate syndication is when a general partner (or sponsor) finds a real estate deal and asks other investors to put in money to help them purchase the investment. They then split the profits.
You will usually invest as a limited partner (which means you are a passive investor and just collect money). The general partner is the one who is responsible for sourcing the deal, completing the project, and managing it once complete.
Apart from its passivity, you can make some great returns if your sponsor is skilled at finding deals and managing the property. But of course, there are risks – the investment can go south (and you could lose your entire investment) or you could become the victim of fraud (with the sponsor running away with your money). You need to carefully conduct your due diligence on both the deal and the sponsor to make sure you are investing wisely.
If this structure sounds familiar to you, that’s because this is the old school version of real estate crowdfunding. Speaking of real estate crowdfunding…
9. Real Estate Crowdfunding
Real estate crowdfunding has become a popular way for people to invest in real estate without directly owning or managing the underlying properties.
It is a method used by companies to raise money for real estate investments from a broad range of investors. These companies typically operate online platforms where investors can review real estate investment options.
If the investor finds something that they like, they can invest in it.
Investments can span across a wide range of real estate, including individual houses, apartments, shopping centers, and office buildings. The offerings can be structured in a variety of ways but are typically structured as equity or debt deals.Returns can be handsome (in some cases, well in excess of 10%).
The downside to this strategy is that many real estate crowdfunding platforms have steep minimum investment amounts and often require that you are an accredited investor (which is basically someone who is a millionaire or very high earner).
To learn more about real estate crowdfunding and to see how it compares to traditional rental property investing, check outmy article on the topic here.
REITs are, in many ways, the predecessor to real estate crowdfunding.
They typically invest in cash flowing real estate and pay out most of their earnings in the form of dividends to their investors. You can usually just buy them through your stock brokerage account. It doesn’t get more passive than that.
As with any securities investments, the pros are that you can make pretty good money without any ongoing work or involvement and you don’t need a ton of money to get started. The downside, of course, is that you have no control over your investment and can lose money if the underlying properties are poorly selected or managed (or if the economy turns bad and corporate tenants start defaulting).
11. Unmanned Self-Storage Facilities
If you want to invest in real estate that produces passive income, but don’t want to deal with tenants and toilets, owning an unmanned self-storage facility can be the perfect solution. With the advance of technology you can have renters book their storage units online, key in their access code, and move in their stuff, all without you being there.
It’s a cool business model and one that can be really profitable.
Some things to be careful about are buying in an area that doesn’t have high crime and taking precautions to protect the tenants’ possessions from theft.
Tips on Getting Started
If you want to learn how to start a passive self-storage business, check out my step-by-step article on the topic here.
12. Mortgage Note Investing
This is a slightly different take on real estate investing, but can be a great way to make passive income. Instead of buying properties, you can buy the underlying mortgages (referred to as “notes”) on those properties. In many cases, you can buy these notes at a discount, which can really boost your returns.
Another nice thing about note investing is that there is no property maintenance or any sort of tenant-related issues. You are dealing with an owner who is motivated (presumably) to keep their house. That being said, you always have the risk of non-payment, in which case, you will have to begin foreclosure proceedings. That can take a long time and be a real pain.
Tips on Getting Started
If you want to start exploring note investing, check out Paperstac. They are an online marketplace for buying and selling notes. Definitely worth exploring if you want to get a sense of what these notes look like.
So there you have it – 12 examples of passive real estate investing strategies that work. Hopefully, some of them resonate with you and help you on your real estate investing journey!
If you want to explore more great passive income ideas, check out my ultimate guide to passive income, which covers more than 25 awesome passive income strategies.
Greetings, fellow real estate enthusiasts! As someone deeply immersed in the world of passive income through real estate investing, I bring forth not only a wealth of knowledge but also practical experiences that have shaped my expertise. I've successfully navigated various strategies, from traditional residential properties to more advanced approaches like real estate syndication and note investing.
Let's delve into the concepts outlined in the provided article:
Traditional Residential Properties:
- Pros: Cash flow, debt paydown, appreciation, leverage, tax benefits, inflation hedge.
- Cons: Tenant-related risks, maintenance costs, declining property values.
- Tips: Emphasize location, screen tenants carefully.
Cheap Out of State Rentals:
- Idea: Invest in states with better cash flow.
- Risks: Poor property selection, overcharging.
- Tips: Work with reputable companies, conduct due diligence.
- Platforms: Airbnb, VRBO.
- Management: Hire property management for passive income.
- Definition: Lease combined with an option to buy.
- Benefits: Higher rent, option fee, potential profit.
- Risks: Legal complexities, dealing with tenants' poor credit.
- Advantages: Economies of scale, positive cash flow, forced appreciation.
- Challenges: Neighborhood impact, dealing with lower-income tenants.
- Types: Office buildings, strip malls.
- Pros: Longer lease terms, business tenants.
- Cons: High initial costs, potential disastrous vacancies.
Triple Net Properties:
- Lease: Tenant covers repairs, maintenance, insurance, and taxes.
- Pros: Predictable income, long rental terms.
- Cons: High upfront costs, risk if tenants go under.
Real Estate Syndication:
- Structure: General partner finds deals, investors provide funds.
- Returns: Profit sharing, potential high returns.
- Risks: Investment failure, potential fraud.
Real Estate Crowdfunding:
- Platform: Online platforms for broad investor participation.
- Returns: Structured as equity or debt deals, handsome returns.
- Requirements: Minimum investment amounts, often for accredited investors.
REITs (Real Estate Investment Trusts):
- Investment: Cash flowing real estate through stock brokerage.
- Pros: Passive, no direct property management.
- Cons: Lack of control, potential losses.
Unmanned Self-Storage Facilities:
- Advantage: Technology-driven, minimal tenant interaction.
- Considerations: Crime rates, protection of tenants' possessions.
Mortgage Note Investing:
- Approach: Buying underlying mortgages (notes) at a discount.
- Benefits: No property maintenance, potential for discounted notes.
- Risks: Non-payment, foreclosure proceedings.
In conclusion, these 12 examples encompass a diverse range of passive real estate investing strategies, each with its unique set of advantages and risks. Whether you're a seasoned investor or just beginning your journey, there's a strategy that can align with your goals and preferences. Feel free to explore further and find the right path for your real estate investing endeavors!