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How to Create Passive Income from Real Estate Investing [2022]

2. Short-Term Rentals


traveling for business working in hotel room

With short-term rentals, you can often charge more on a nightly basis than you would with longer-term tenants and you don’t need to spend time chasing down rent. If you use a third party, such as Airbnb, for short-term rentals of a property you already own, you can earn money relatively passively. 

Airbnb isn’t your only option. There are competitors, such as Booking.com and TripAdvisor rentals, but Airbnb is the clear leader. 

The average Airbnb host makes about $924 a month and in some countries Airbnb’s Host Guarantee program gives you protection up to a million dollars in damages if guests aren’t thoughtful. 

Most full-time Airbnb real estate investors started out by using Airbnb as a part-time side project. You can even rent just a room in your home, rather than an entire house or apartment. 

Personally, my wife and I rented out a spare bedroom in our home for two and a half years to add some extra income to our bottom line.  This money, when combined with rent collected from long-term tenants living in another unit on the property, completely covered our mortgage and living expenses.

We managed to save a significant amount of money during this time to put us on the path toward buying our first home together as a family.  We can directly point toward these rented units as how we managed to make a substantial contribution to our down payment fund.

When we hosted guests, one of the major downsides of the short-term rental were the hassles of constant scheduling and cleaning requirements, but there are ways to minimize this. We planned ahead and developed an efficient routine to flip the room between guests.

However, you have ways to combat these problems.  You may increase the passiveness of renting out your space by setting higher minimum night stays for guests.

We found setting a 3-night minimum kept us booked most weekends during busy season (October – May in New Orleans) and netted us around $500 – $800/month.

The logic is simple: instead of allowing single-night guests, you can set a two or three-day minimum. The fewer turnovers, the less work. 

You can also hire cleaners who know to automatically clean when guests leave and stock up on needed supplies. 

One thing we did to make our listing stand out was bringing in a freelance photographer to take attractive photos of our space. You might consider hiring a freelancer from Fiverr to improve your listing as well to grab your potential guests’ attention.

These services can include writing detailed and compelling listing descriptions, taking photos of the space for rent, promoting your listing, creating a welcome book for guests when they arrive, and much, much more.

The more unique and value-added services you can provide, the better reviews you will receive from guests. These little details will make your listing special and help you get on your way toward becoming a Superhost and earning a respectable side income with space you already have available.

 

3. Real Estate Investment Trusts (REITs)


A real estate investment trust (REIT) is a company that owns income-producing real estate and pools investors’ money to gain and manage real estate properties. Typically, REITs are high-end or commercial properties and they can fluctuate in correlation with the stock market. 

REITs allow you to invest in the real estate sector in a completely passive manner as you essentially own a share of the fund.  The rental payments pass through to REIT owners on a monthly, quarterly, or annual basis. 

People who invest in REITs receive dividends in the same way you receive dividends from certain stocks and these returns are usually higher than most other stocks.

A benefit to REITs that you don’t have with a lot of other real estate investments is that your money stays liquid because you can sell at any time. 

The upfront costs for investing in a REIT are relatively low and they are simple to purchase through a brokerage account. 

If you find choosing between hundreds of publicly-traded REITs intimidating, you might consider investing in a real estate exchange-traded fund (ETF).

With ETFs, a professional fund manager decides which REITs to invest in and uses investors’ money to buy groups of REITs. There are far fewer options to choose from if you want an ETF instead.

For both real estate investment trusts and real estate exchange-traded funds, income is taxed as a capital gain tax rate rather than as passive income. Despite the tax categorization, it’s about as passive of income as it comes. 

There is always the possibility a REIT investment could go down in value in a tough market so make sure to research top funds first and be financially able to hold investments long-term to avoid selling during a dip.

You can buy publicly-traded REITs through most major online discount brokers. I recommend using the free stock trading app, Webull.

The platform has a long list of commercial REITs to choose from and comes with free stocks for signing up to the service after making an initial qualifying deposit. 

Webull will provide you with any REIT’s current price, volume, % turnover, market cap, analyst ratings, recent news stories, and more. This makes it easy to conduct market research on several REITs before choosing which one you can invest in confidently.

 

If you you’d like to consider a non-publicly traded REIT option, you may want to look into Streitwise, a professionally-managed REIT service targeting commercial real estate properties.

The service caters to accredited and non-accredited investors alike and charges up to 80% less than the company’s non-traded REIT competitors.

4. Mortgage Notes


Another way to create passive income through real estate is by creating or purchasing a mortgage note. You can buy performing and non-performing mortgage notes from other investors, commonly with a small discount. 

Alternatively, you can create a note from a property you own using owner financing. Mortgages and notes are two separate contracts used by lenders to provide buyers with money to buy real estate.

A promissory note outlines the repayment of a debt and the mortgage secures the lender’s property as collateral if the buyer defaults. Some home buyers choose to take out a home loan as a private note instead of a traditional loan.  

You can think of investing in notes like you’re taking the place of a bank. Each month, the buyer pays you a monthly principal and interest (if the borrower wants to pay off the mortgage faster, it can eat into your returns). 

It’s the buyer’s responsibility to maintain the property, have insurance, and pay taxes. Your job is to collect a check every month and keep records of the payments and debt balance. 

In the event the property owner fails to make payments, you take ownership of the property. 

Income earned from mortgage notes is categorized as “interest income.” The interest collected on the loan during the given tax year is taxed as ordinary income. 

Overall, this form of passive real estate investing can be very complex and likely is a better fit for people already somewhat familiar with mortgage notes.

5. Crowdfunding Real Estate (Residential and Commercial)


Real estate crowdfunding is still a relatively new way to earn passive income. It lets you invest in assets you might not otherwise be able to, such as a high-rise apartment building. 

You also benefit from the expertise of people who know how to add value to the property in cost-effective ways. 

Investing in real estate through a crowdfunding platform allows you to find deals, usually debt-based investments, that pay you a fixed payment for a set amount of time. These platforms allow you to make money while you sleep as opposed to concerned over managing tenants.

Depending on the investment opportunity, dividend returns may be paid monthly, quarterly, or annually. Other opportunities offer you a slice of future profits from the property’s sale or distribution while some provide a combination of both. 

Remember, these types of investments are usually illiquid, so they are meant as a long-term investment.

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