Passive streams of income are the holy grail of investing and personal finance.
With enough passive income, you no longer need to work and earn active income. You reach financial independence and are able to cover your living expenses solely with streams of passive income from investments. At that point, you can spend your days traveling, playing golf, playing with your kids, volunteering, or working on passion projects.
But how do you create passive income?
17 Passive Streams of Income from Real Estate
Sure, there are other sources of passive income, such as dividends from stocks, interest from bonds, or business revenue from digital products or affiliate links. But at SparkRental, we’re all about passive income through real estate.
As you start building passive streams of income to replace your day job income, keep the following ideas in mind. And remember, you don’t have to pick just one — I earn streams of passive income from many of the sources below!
1. Long-Term Rental Properties
Everyone understands the classic model for passive income through real estate: buying a property and signing a lease agreement with long-term tenants.
But the very simplicity of the premise is what gets so many new investors into trouble. They think that because they get the concept of rental income, they also know everything they need to know about the business of buying and managing rental properties.
Which is why so many new real estate investors make so many costly mistakes.
As you look into buying your first rental property, learn how to run the numbers to calculate cash flow accurately. Use a free rental cash flow calculator, and include expenses like vacancy rate and property management fees. While you can buy a rental property with no money down, watch out for too much leverage. Learn exactly what real estate due diligence you need to perform before sinking tens of thousands into a single investment.
For all those warnings, rental properties make an excellent passive income source. So much so that rentals can help you retire early with their ongoing income that rises over time and serves as a hedge against inflation.
2. Short-Term Vacation Rentals
No one says you have to sign a long-term lease agreement with tenants. It’s your property, and you can rent it short-term on Airbnb if you prefer. At least, you can in most parts of the country — some cities don’t let you use your property how you see fit.
Depending on your city and neighborhood, you can earn higher returns renting your property short-term as a vacation rental. You can even use tools like Mashvisor to compare cap rates and returns on a property used either as a long-term or short-term rental. See our full Mashvisor review for details.
But the short-term vacation rental business requires more labor on your part as well. More frequent turnovers mean frequent cleaning, plus a much higher vacancy rate.
You also have to furnish and decorate the property, unlike long-term rentals.
If the idea of running a vacation rental business appeals to you, start with these tips to become an Airbnb host.
3. Mid-Term Corporate Rentals
Who says you can’t have your cake and eat it too? As a hybrid between the long-term and short-term rental business models, consider corporate rentals.
You provide a furnished rental property to corporate renters, such as travel nurses or business travelers, who need an extended stay of 2–6 months. You don’t have to constantly clean or do laundry, and you don’t have to worry about frequent vacancies.
But the renters pay a premium, and take great care of your property — because your client is typically the employer, not the guest. Your occupant knows that it will get back to their employer if they mistreat the property, so they take excellent care of it.
For a free webinar explaining the business model and how to use rental arbitrage, see this webinar we hosted with Al Williamson. If you’re looking for passive income ideas that don’t require much cash, learn Al’s rental arbitrage strategy.
4. House Hack with an ADU or Basement Apartment
In the traditional multifamily house hacking model, you buy a 2–4 unit property, move into one unit, and rent out the other(s). Your neighboring tenants pay enough rent to cover your entire mortgage payment, so you effectively “live for free.”
But that’s not the only way to house hack and score free housing. You can also house hack single-family homes by adding an accessory dwelling unit (ADU), basement apartment, garage apartment, or in-law suite.
Or by bringing in housemates, or renting out storage space, or even hosting a foreign exchange student like our cofounder Deni did. Check out our free house hacking calculator to run the numbers, no matter how you plan to house hack.
For that matter, you can also add passive streams of income by renting out parking.
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5. Rent Out Parking Spaces
In urban areas short on parking, you can rent out your parking pad or other space for neighbors to park their car. But your options for earning passive income from parking don’t end at the city limits.
Suburban and rural residents can also earn money by renting out parking spaces for large vehicles like trucks, boats, RVs, and beyond. Covered parking commands a higher premium, but uncovered parking works too.
You can also earn good money renting out a space for mobile homes to park, whether in passing or long-term. Water and electric hookups help, but they aren’t necessary if you only serve RVers passing through.
It may not seem like much extra cash each month, but even an extra $50 or $100 each month adds up when compounded over years.
6. Mobile Home Parks
For that matter, you could service an entire community by buying a mobile home park.
Regulations have prevented many new mobile home parks from opening in recent years, restricting supply even as demand for cheap real estate has grown. Throughout the pandemic, mobile home parks have done particularly well.
It’s a business like any other, and requires certain skills and knowledge to succeed. If it appeals to you, take a course on it — we recommend Mobile Home University as a reputable option.
7. Invest in Individual Mobile Homes
Rather than investing in entire mobile home parks, some investors buy individual mobile homes. They turn around and rent these out to families on a long-term lease agreement, often with an option to purchase.
They cost far less than a single-family house and offer much higher returns. And with far less competition, because they’re not “sexy” investments. Often you earn the best returns from the most “niche” passive income strategies!
8. Undeveloped Land
Of all the types of real estate investments, land comes with the least regulation, and in many ways the fewest headaches.
You don’t have to worry about maintenance or repairs. You don’t have to worry about tenants damaging your property. For that matter, you don’t have to worry about going through the lengthy and expensive eviction process if your renters don’t pay. If someone rents your land for the occasional camping trip or hunting, and they stop paying rent, you simply cancel the rental agreement with them and they lose the right to use your land.
Plus, land is cheap. At least relative to single-family homes or a commercial property. That makes it far easier to buy in cash and avoid investment property loans, while still earning extra money each month from direct real estate investments.
If you’re interested in learning how to invest in raw land, take Seth Williams’ excellent land investing course over at REtipster. And if you’re on the fence, check out this land investing case study, where a corporate worker replaced his 9-5 salary in just 18 months.
It makes for another “unsexy” investment, which is precisely why it can be so profitable. Investors earn money by flipping land, either in one up-front payment or as a stream of passive income by signing a seller-financed note. (More on private notes shortly.)
9. Self-Storage Facilities
Self-storage facilities offer another not-so-sexy way to invest in real estate, with similar advantages.
While you do have to maintain a physical structure — unlike land — the buildings are far simpler than residential properties. They come with minimal mechanical systems like electrical, plumbing, and HVAC, sometimes avoiding them entirely. You don’t have to worry about long eviction processes or complex landlord-tenant laws either.
Instead, the business largely comes down to marketing and keeping your vacancy and turnover rates low. If you can find a good deal on a self-storage facility, and keep your vacancy rate low, you can earn strong cash flow and an easy passive income stream.
10. Commercial Real Estate
Commercial properties range in use from office space to retail, restaurants to industrial. You can go as small as a corner shop, or as big as a skyscraper.
The category also includes residential buildings with five or more units. When you buy an apartment building with at least five units, you have to take out a commercial loan, rather than a residential investment property loan.
If the high cost troubles you, keep in mind that it also deters much of your would-be competition. Commercial real estate investors face far less competition than residential investors, which often leads to higher cap rates and returns. Even so, expect a much higher minimum investment than many other passive income opportunities on this list.
Like any other type of real estate investment, consider starting small then scaling up as you build confidence and expertise.
11. Real Estate Syndications
With many commercial properties costing millions of dollars, investors don’t always go it alone. Sometimes they pool their funds to buy a large property together.
These deals are usually structured as real estate syndications. They work like this: an expert real estate investor (the syndicator) finds a good deal, and then approaches potential partners to raise most of the money. The syndicator puts in some of their own money and raises the rest from these silent partners. Despite owning a minority share of the property, the syndicator maintains most of the control and responsibilities of renovations and day-to-day property management.
The silent partners earn passive streams of income from the rents each year, as partial owners. When the property sells, everyone gets paid out according to their ownership percentage, although sometimes the syndicator gets a bonus for their extra work.
Beware that under federal law, most real estate syndications can only accept money from accredited investors. If you don’t yet have a net worth of $1 million or annual income over $200,000, you probably can’t invest in a syndication. (But you can potentially partner with us on a co-investing deal — more on that later.)
12. Publicly-Traded REITs
Alternatively, you can buy shares in a real estate investment trust (REIT). These companies trade on public stock exchanges, so anyone with a brokerage account can buy shares.
You can invest in equity REITs, which own real estate properties directly, or mortgage REITs, which own debts secured against real property. Either way, REITs tend to pay extremely high dividends.
That’s because the SEC requires REITs to pay out at least 90% of their profits each year to shareholders, in the form of dividends. That makes it easy to create passive income streams with REITs, but it also limits their potential for share price growth. The companies can’t reinvest profits to grow their portfolios, limiting their ability to rise in value.
Their instant liquidity also comes with a downside: volatility. Because they trade on public stock exchanges, they also tend to move in close concert with stock markets. That limits their usefulness for diversifying away from stocks.
13. Crowdfunded REITs
If only you could buy shares in a REIT without the volatility or limits on growth potential… Oh wait, you can.
Over the last decade, real estate crowdfunding investments have skyrocketed in popularity. Most of these sell shares in pooled REIT funds, which either own properties or real estate-secured debt or both.
But you buy shares directly from the company itself, rather than buying and selling shares on stock exchanges. That reduces volatility to nearly nothing, but it also makes it much harder to sell shares. In most cases, you sell shares back to the company rather than on the secondary market, but they restrict you from selling shares in the first 2–5 years of owning them. That makes real estate crowdfunding investments a long-term commitment.
Still, they have far more flexibility to grow their funds’ value by reinvesting profits. That gives share prices plenty of room to grow over time.
Just as easy to buy as public REIT shares, real estate crowdfunding shares offer true diversification from the stock market. They earn you returns based on income yield and real estate market fundamentals, rather than moving in correlation with stocks.
Some crowdfunded REITs allow you to invest with as little as $100, or $500 or $1,000. Regardless of the exact number, it’s far lower than a down payment on a rental property. I personally invest in Fundrise and Streitwise, both reputable private REITs. But see our full list of real estate crowdfunding investments for all the options available.
14. Crowdfunded Real Estate Loans
Not all crowdfunded real estate investments work like pooled funds where you buy shares.
As an alternative model, you can invest money toward specific loans, secured against real estate. You pick and choose the loans you want based on the interest rate, the loan term, the property location, the LTV (loan-to-value ratio), and the borrower’s qualifications.
My favorite of these real estate peer-to-peer lending platforms is GroundFloor. They allow retail investors (non-accredited investors), and you can make an initial investment as low as $10.
Best of all, GroundFloor issues short-term loans, so you don’t have to lock your money up for five years at a time. As a hard money lender, they provide short-term fix-and-flip loans for house flipping or the BRRRR strategy. You can invest in loans ranging in term from 6–18 months.
15. Private Notes
Of course, you could also skip the middleman and lend directly to the borrower.
A promissory note is the legal document that borrowers sign when they take out a loan. You can lend money to other real estate investors directly, and sign a private note with them.
I do this with investors I know and trust, who have a track record of success. For example, I lent $25,000 at 10% on an interest-only note to an investing couple I know. As an interest-only loan, they don’t make payments toward their principal balance — they pay me 10% of the loan balance each year as interest. That means $2,500 per year as a passive stream of income for me.
Often, sellers offer owner financing to their buyer when they sell a property. That way, they not only earn a profit from selling the property, but also interest on it as a stream of passive income.
You can negotiate any terms you like with the borrower. That includes interest rate, loan term, amortization versus interest-only, and any up-front fees such as points. So, you can invest for any period of time, as negotiated with the borrower. If you like, you can also record a lien against the property so you can foreclose if the borrower defaults.
Word to the wise, however: only lend money to experienced real estate investors you know and trust well. If they default, it falls to you to enforce the note and recover your money. “Neither a borrower nor a lender be,” and all that.
16. Joint Venture with a Partner
Not an accredited investor, and don’t qualify to invest in a real estate syndication?
You can always form your own partnership with another real estate investor or two and go in on a property together.
In fact, you don’t even need any real estate investing experience. You can partner with a veteran real estate investor and lean on their expertise and network of lenders, contractors, real estate agents, and beyond. You learn the ropes on a partnered deal or two, to build confidence before buying properties on your own.
For that matter, you don’t necessarily need any investing capital, either. You can offer to contribute your labor toward the deal.
And in the meantime, you can start building passive streams of income.
Speaking of partnering on a joint venture real estate deal, sometimes we let novice investors partner with us.
We launched a real estate co-investing program in 2021, after years of talking about it. It works like this: if you’re a course student of ours, or someone else we’ve established some sort of relationship with, you can partner with us on deals we’re doing. You buy in as a partial owner of the property, whether it’s a flip, a BRRRR deal, or a turnkey rental property.
Make no mistake, these are long-term investments. But if an emergency comes up and you need to pull your money out, we can buy you out.
We only allow junior partners to join us on deals if we’re willing to put in at least 51% of our own money. Our skin is very much in the game — these are our deals, we just occasionally open them up to a few members of our community that we’re close with.
How do these differ from a real estate syndication deal? First, the financial investors don’t sign away any rights. Each partner maintains full voting rights in the LLC that owns the property. Second, partners split the cost dollar for dollar: if you put up $2,000 toward a $100,000 property, you get 2% ownership interest. We keep the upfront investment low, while letting you learn by doing and still earning additional income.
By structuring these deals as joint venture partnerships, not syndications, we can keep them open for non-accredited investors. Which is precisely our mission: helping middle-class people learn and build passive income through real estate.
How close are you to reaching financial independence? Are you close to building enough streams of passive income to cover half your living expenses? All of them?
Play around with our financial independence calculator to see where you stand.
Whether you’re just starting out or making fast progress toward financial freedom, aim to create a passive income stream every single month. That could be as simple as buying more shares in a REIT or setting up recurring investments with a real estate crowdfunding platform, or as involved as buying a new rental property. Each dollar of extra income you earn makes it easier to save and invest more, to compound and grow exponentially over time.
Where you stand today doesn’t matter. Just start making tangible progress every single month, and you’ll find yourself reaching financial independence faster than you’d think.♦
What are your questions about how to create passive income streams? What challenges do you face in building passive streams of income? Chat with us below!
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental, who spends 10 months out of each year overseas with his family. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.