passive real estate investing
Updated May 27, 2020

Best Ways to Earn Passive Income Through Real Estate

Real Estate

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While traditional investment accounts can generate a strong and reliable yield, there’s no question that real estate is one of the most effective ways to increase your net worth. While it might sound like a big investment, you can start investing in real estate with less money than you think.

This article will cover a few ideas for earning passive income through real estate. Different tactics offer unique pros and cons, and some require significantly more work than others.

With that in mind, there’s no “best” way to approach real estate—the right strategy for you depends on a variety of factors including your budget, schedule, and investment goals.

Real Estate Investment Trusts

The work involved in maintaining real estate is one of the main barriers to entry for new investors. Real estate investment trusts, or REITs, allow you to earn money from real estate without managing it yourself, making them the perfect way to start investing.

REITs pool money from a group of investors and use it to invest in a wide range of real estate. A single real estate investment trust could manage everything from retail spaces to offices and apartments.

On the other hand, some REITs focus on a particular type of investment.

The Pros and Cons of Real Estate Investment Trusts

Along with offering a more passive option, this approach leads to a number of advantages compared to more conventional methods of investing in real estate.

Since REITs invest in multiple properties, they offer substantially more diversity than you can get from buying individual properties on your own. You won’t lose as much money on a single property, and you won’t need real estate expertise to generate reliable returns.

Many trusts are available on exchanges, so you can invest in a trust in just a few seconds.

That said, you’ll obviously have less control over a real estate investment trust than you would have over an individual property.

Furthermore, REITs are legally obligated to pay shareholders 90% of all profits. While this requirement leads to short-term dividends, it also takes away money that could be used to invest in new properties.

Renting out Rooms

Another simple option for new investors is to rent out individual rooms in your own house or apartment. This is particularly relevant for parents whose children have moved out, but it can work for anyone with extra rooms.

By renting individual rooms instead of buying a second property, you’ll start earning money without spending any money upfront. From there, you can save that additional income to pay for future real estate investments.

Keep in mind that it’s easier than ever to make money by renting out space in your home for storage. This strategy involves significantly less work than it takes to manage property for tenants, and you won’t have to live with roommates.

Buying New Properties to Rent

If you’re already planning to buy a new home, consider looking for one with additional rooms that you could rent out after moving in. You’ll have to spend a little more at first, but their monthly rent will go a long way toward covering your mortgage and any other expenses.

These options are ideal for people who don’t have enough saved up to buy a second home, and they can get you closer to that goal over time. Maintaining a rental is also much easier when the tenants live in your own home rather than in a second property.

Vacation Rentals

Vacation rentals typically require much more work than long-term rentals, but they can result in even better returns. Of course, this can vary widely from one location to another, so do some market research in your area to identify the most lucrative option.

It’s also important to consider any local regulations or restrictions on vacation rentals. For example, NYC has taken an aggressive approach against Airbnb and similar services.

It’s illegal to rent entire apartments in buildings with three or more units unless the owner is present.

Airbnb accepts both entire properties and individual rooms, so you could get started with vacation rentals by listing a spare bedroom. If you’re able to keep the property consistently occupied, you may end up earning substantially more money than you would with a traditional rental.

Flipping Properties

Buying properties with the intention of flipping them for more money involves more risk and work than any other option on this list. Of course, they also offer the opportunity to generate incredible returns in a relatively short amount of time.

With that in mind, you should only begin flipping once you feel confident in your knowledge of real estate.

Alternatively, you could start by working with someone who has more experience in the field. They’ll help you identify the best values and learn the skills you need to start flipping properties on your own.

Increasing the value of a home usually takes a lot of work, but you can still earn a large amount of money for each project. Part of the learning curve is simply understanding which properties are likely to provide a decent return on investment.

Flipping properties is the most time-intensive option on this list, and it comes with the highest degree of risk. Selling a home can also take weeks or months, so you’ll need to have enough cash on hand to cover a down payment and mortgage for as long as it takes to find a buyer.

All things considered, flipping homes should be viewed as a side hustle rather than as a traditional investment. In fact, it could even replace your main source of income or help you transition from full-time employment into part-time work or retirement.

Holding Properties for Appreciation

Whether you’re renting a property out or using it as your primary residence, homes tend to gain value over time. Simply owning real estate can be a reliable investment, especially if you live in an area where property values are growing quickly.

Of course, you’ll also have the chance to make improvements to a property in order to increase its sale price. While the average annual increase has slowed down in recent years, it’s still more than enough to cover inflation, and some areas are experiencing much more rapid growth.

Properties will generally increase in value as long as you perform basic maintenance, so this is a relatively passive method of investing in real estate. Combined with income from either long-term or vacation rentals, it can also lead to one of the highest overall returns of any investment strategy.

The key downside of waiting for your property to gain value is that you won’t earn any money year-over-year unless you’re also renting it out.

This is only a realistic option for people who can afford to sink a lot of money into a single piece of real estate without expecting an immediate return. Keep in mind that housing markets can be extremely unpredictable.

Some types of real estate investments require spending a large amount of cash upfront or putting time into the project, but there are also ways to invest on a tight schedule or budget. These are just a few of the most effective ways to start investing in real estate.

Alex McOmie

Alex McOmie currently serves as the Managing Editor for Money Done Right. He joined the Money Done Right editorial team in summer 2019. Learn more about Alex.

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