Real estate can be used in a variety of ways to generate passive income. They range from more involved ways to make money from real estate investments to low-cost, really passive options. There are possibilities for every budget and level of time commitment in the real estate industry, thanks to the abundance of ways to generate passive income.

We’ll discuss how real estate investing can provide passive income and show you how to use real estate as a source of income. We’ll also talk about several common blunders that can hinder your capacity to generate passive income from real estate.

Any money received from rentals and other real estate investments is considered passive income from real estate. A one-time investment that yields ongoing income is frequently necessary for real estate passive income. While some real estate investing strategies are genuinely passive, others require more active management.

Here’s a quick overview of a few of the numerous real estate-related passive income streams:

1. Publicly traded real estate investment trusts (REITs)

Real estate investment trusts (REITs) that trade publicly on stock market exchanges are traditionally the easiest and lowest-cost way to invest in real estate to collect passive income. REITs must distribute 90% of their taxable net income to shareholders via dividends to maintain their tax-advantaged status with the IRS. That makes them a great source of income.

REITs are also a low-cost investment since shares of most REITs trade for less than $100 each. They’re passive investments because you don’t need to do any work other than research and follow the investment. Public REITs are also highly liquid because you can buy and sell shares through a brokerage account any day the stock market is open.

There are more than 200 publicly traded REITs. Many focus on specific property sectors, such as industrial, office, retail, or residential, or they focus on certain markets, such as the Sun Belt region or the West Coast. That provides investors with lots of passive income investment options.

There are some downsides to publicly traded REITs, including exposure to stock market volatility. While there are many REIT options, it can be daunting for beginning investors to know which ones to buy. Finally, a poorly managed REIT can find itself in financial trouble during a recession, which would cause the REIT to reduce or even temporarily pause its dividend while it works through the issues.

2. REIT exchange-traded funds (ETFs)

A great way for beginners to start generating passive income from real estate is through REIT ETFs. They hold a broad basket of REITs, which reduces the risk of losing income if a single investment cuts its dividend due to deteriorating market conditions.

REIT ETFs are relatively low cost since you only have to buy one share. They trade on the stock market, making them highly liquid. ETFs are one of the most passive ways to invest in real estate. However, like public REITs, they expose the holder to stock market volatility. ETFs also charge investors a fee, known as the ETF expense ratio.

3. REIT mutual funds

REIT mutual funds are a lot like REIT ETFs. They hold a basket of REITs, enabling investors to gain broad exposure to the sector. A manager actively manages the mutual fund, aiming to buy shares of the REITs they believe will deliver superior performance relative to a benchmark index.

Because of that active management, REIT mutual funds often have a higher expense ratio than REIT ETFs. They also tend to have a higher minimum investment, typically around $2,500. Usually, you’ll need to purchase a REIT mutual fund through a broker.

4. Non-traded REITs

Non-traded REITs don’t trade on stock exchanges. Instead, investors purchase shares through a direct-to-consumer online portal such as Fundrise or Realty Mogul or through a financial advisor. Private real estate investments have historically offered a higher income yield than publicly traded REITs, and they’re also less volatile.

However, many private REITs have a higher minimum investment ($2,500 or more) and require a relationship with a financial advisor. Non-traded REITs are relatively illiquid investments, meaning you can’t easily buy or sell shares. Many non-traded REIT sponsors only redeem shares once a quarter and set a limit on the amount of redemptions they’ll complete.

5. Real estate syndications

Real estate syndications enable passive investments in commercial real estate. They allow an investor to become a limited partner in a single real estate asset (such as a multifamily property, office building, or self-storage facility) or a private equity real estate fund managed by a real estate sponsor.

Read Also: How to Make Money While You Sleep: Passive Income Strategies

The partners get to share in the passive income generated by the property or fund. Private real estate investments tend to offer a higher income yield than publicly traded REITs and aren’t as volatile. Investors can participate in single real estate syndications and funds through online portals, e.g., CrowdStreet and EquityMultiple, or directly with real estate deal sponsors.

However, most real estate syndications are only open to accredited investors. An accredited investor must have a net worth of $1 million, excluding their primary home, or more than $200,000 of income ($300,000 if married).

Further, they often have a minimum investment of more than $10,000. Syndication deals are also illiquid investments, often requiring long-term holding periods of five to 10 years.

6. Debt and debt-like investments backed by real estate

Real estate-backed debt can be another way to generate passive income from real estate. You’re lending money to finance the purchase, renovation, redevelopment, or ground-up construction of a property. There are many options, including:

• Buying mortgage notes.
• Being a hard money lender for a house flip or a development project.
• Investing in mezzanine debt or preferred equity on a single asset syndication deal.

Real estate debt tends to be a lower-risk investment. However, because it’s a fixed-income investment, it doesn’t offer any capital appreciation potential.

7. House hacking

House hacking is a way to generate income from your current home. There are many forms of house hacking, including buying a duplex or fourplex and living in one unit while renting out the others, renting a room in your home to a family member or college student, or converting a garage or basement into a small rental unit. House hacking provides rental income to help offset part or all of your living expenses.

However, it’s not entirely passive income. For example, you might need to fix something a renter broke, and it can be an invasion of privacy. House hacking can require a large up-front cost to purchase the investment property or make a space for renters, and it has some additional tax implications.

8. Short-term vacation rentals

Short-term vacation rentals are an increasingly popular way to generate passive real estate income. You buy a home or condo in a vacation destination and rent it out to leisure travelers. Web portals such as Airbnb (ABNB -0.36%) make listing a property and finding renters easy. Short-term rentals tend to command higher rental rates than long-term rentals, making them a potentially lucrative source of income. As a bonus, you can use your vacation rental when it’s vacant.

However, short-term rentals aren’t exactly passive since there’s lots of work involved in managing a rental. A vacation rental is more like a hospitality business than a real estate investment. You can hire a property manager to turn it into a passive investment, but they charge a significant portion of the rental income in fees.

Short-term rental properties have a high up-front cost. You’ll typically need a 20% down payment, plus closing costs and some cash in reserve for vacancies and repairs. Vacation rentals also experience high vacancy rates, especially in off-peak times and during a recession, making the passive income rather lumpy.

9. Rental properties

Owning rental properties is another way to generate passive real estate income. Many people own condos or single-family homes that they rent to long-term tenants (12 months or more) to generate relatively steady rental income.

However, rental properties aren’t entirely passive investments. You might get a 2 a.m. call to fix a broken toilet unless you hire a property manager. Further, the income can fluctuate from month to month depending on expenses, and you might not generate any passive income if there are a lot of unplanned costs. Finally, rental properties often require a significant up-front investment similar to short-term vacation rentals.

10. Ground leases

Ground leases enable you to generate passive income from owning land instead of a building. You own the land underneath a building that you lease to the building’s owner. A ground lease generates predictable passive lease income and tends to be a very low-risk investment. Ground leases offer less income potential in exchange for a lower risk profile. They also have a relatively high up-front cost to purchase the land.

While real estate can be a great way to generate passive income, there are some pitfalls to avoid. These include:

• Not doing enough due diligence to understand the risks involved with a real estate investment.
• Taking on too much debt to purchase a real estate investment that you can’t service if the income declines.
• Failing to account for the potential expenses to maintain a real estate investment.
• Not being comfortable with the volatility of stock prices or rental income.
• Not properly screening tenants.
• Choosing a real estate investment that involves more active management than you can give.
• Not diversifying your real estate portfolio beyond one investment — unless it’s an already-diversified investment such as an ETF or mutual fund.

What is the Most Lucrative Form of Real Estate?

The typical income range for a real estate investor is between $70,000 and $124,000. Pay, however, will differ greatly depending on the kind of investing you undertake. The amount of time you invest in it, the number of deals you take on annually, etc. are additional aspects.

A lot of Americans think that investing in real estate is a terrific method to increase one’s own fortune. A recent CNBC Make It: Your Money study in collaboration with Momentive found that 23% of individuals believed that real estate investing is a good approach to accumulate wealth. As a result, purchasing real estate is the most preferred way to accumulate wealth, surpassing stock investments (16%), launching your own company (15%), and taking on a second job or side project (12%).

How likely is it that you will make a sizable profit from real estate investing, then? Which kinds of real estate will yield the biggest returns?

Let’s examine five real estate investing strategies that could lead to a successful career and provide you with a healthy profit margin.

1. Rental Properties

One of the most common (and financially rewarding) real estate investments is rental properties. They work exceptionally well for those who want passive income and positive cash flow. There are two main types of rental properties: long term and short term rentals (also known as vacation rental properties). 

Long term rentals are properties that are rented out for a period of at least a year. Short term rentals, on the other hand, are rented out for a period of a few days or weeks. The latter is especially popular among tourists looking for a more comfortable and affordable alternative to hotels and resorts. 

And then there’s another type of rental property that became more popular during the pandemic: the mid-term rental. Mid-term rentals are rented out for several weeks to a few months, depending on the guest. The rental period is a little longer than vacation rentals but is much shorter than long term rentals. 

Plenty of real estate investors buy properties to convert into rentals because they give them an extra income source. The most important thing to take note of when buying a rental property is to make sure that its location is profitable for your preferred rental strategy. Whether it’s a long term rental or a vacation rental, you need to perform due diligence to ensure success.

In most cases, since investing in rental properties is expensive, real estate investors take to lenders to apply for loans to buy an investment property. 

When shopping for a loan, make sure to check out several lenders and what they offer. Resist the urge to settle for the first lender you meet. Remember that once you take out a loan to buy an investment property, you are stuck with mortgage rates for several years. 

Current mortgage rates are hitting 7.16% on a 30-year fixed-rate mortgage. Even if you decide to go with a 15-year fixed loan, mortgage rates are still high at 6.49%. Given the higher rates today, you need to be wiser with your decisions. Due diligence is vital. 

2. House Flipping

Another great way of investing in real estate and getting a good return on your investment is the fix-and-flip strategy or house flipping. 

Typically, investors buy distressed or undervalued properties to rehabilitate and resell at a profit. The return on investment on a fix-and-flip can be quite lucrative. The only downside is you won’t know how long the property will sit on the market before it sells. 

House flipping will also cost you a greater amount of money compared to a rental property. In most cases, when you buy a rental property, you only need to make the necessary repairs and updates to make sure the property is within the local housing standards. 

House flipping is a bit different. If you want to make a decent enough profit on your investment, you will need to go the extra mile to make the property attractive to homebuyers. 

3. Real Estate Investment Groups (REIGs)

The next type of real estate investment is Real Estate Investment Groups or REIGs. REIGs are the best option for investors who want to get into the real estate investing game without the hassles of maintaining an actual property. All you need is access to funds and a capital cushion. 

REIGs are like mutual funds. The only difference is they invest in rental properties. Typically, REIGs buy rental properties, such as apartment buildings and condos, and invite investors to purchase them through the company. 

An individual investor may own multiple rental properties while the company takes care of the management and administration of the properties. In exchange for their property management services, REIGs take a small percentage of the monthly rental income. 

4. Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts, or REITs, are quite similar to REIGs with a small difference. REITs are companies that own different types of income properties, such as commercial buildings, apartments, hospitals, shopping centers, warehouses, and other similar structures. They are basically companies that own or finance income-generating properties. 

In 1960, the US Congress created REITs to give everyone a chance to invest in income-producing real estate through buying and selling on major exchanges like stocks. Investors in REITs receive regular dividends, making it a solid investment for investors who wish to realize a regular income. 

Another benefit of REITs is they are highly liquid. It means you don’t need any realtor or title transfer to cash out your investment. 

5. Online Real Estate Platforms

Those who want to get a piece of the real estate action but don’t have enough capital to buy an actual property can consider online real estate platforms. Also known as real estate crowdfunding, such platforms allow individual investors to become co-investors in bigger commercial or residential real estate deals. 

While it will still require a certain amount of capital, it is not as expensive as a typical down payment on a property. The lower (and much more affordable) capital makes real estate crowdfunding very attractive to investors who cannot afford to buy real estate. 

Final Thoughts

The best kinds of real estate investments are rental homes. They have the highest profitability of any company.

But, you must first put in the work before you decide to purchase an investment property. Due diligence is essential to the success of investing in rental properties, as we have already mentioned. Even if it might be the ideal kind of investment property, you risk being let down if you ignore what the markets are saying.