3 easy ways to earn $50,000 in passive income with real estate
EEarning $50,000 a year in passive income — money you don’t have to physically work for to earn — might seem like a pipe dream right now. But with a little money and some strategic investments in real estate, that lofty goal could be much closer than you think.
Real estate has unique advantages through its ability to use leverage and the potential for passive income to grow over time. While you certainly need some initial capital to hit the $50,000 mark, here are three easy ways to do it.
Buy a long-term rental property
Rental real estate is a proven method of passive real estate investing. It is a strategy that can increase earnings exponentially over time through the power of leverage. As an investor and owner, you only have to make an initial investment of 20% to buy the property, while borrowing the rest. The tenant pays the remaining expenses, maintenance and mortgage of the house. Any money left over after these costs is passive income that you receive each month.
You can raise rents to meet market demand or adjust for inflation to increase your income, but many rental investors choose to use the extra cash flow to pay off the mortgage faster. By doing this, you can increase the passive income you earn by eliminating debt and turn what could have been $200 of cash flow into $1,000 or more at no additional cost.
Own a vacation rental
The vacation rental business is booming right now thanks to a shift in where consumers stay while on vacation. More space, amenities, and unique destinations are becoming the norm, allowing everyday investors to earn plenty of passive income by renting vacation property and hiring a third-party property manager to rent it out.
Investors have the same benefit of only needing a 20% down payment, with tenants paying the ongoing cost of the property and mortgage over time. But the potential for passive income is even greater because vacation rentals are typically based on nightly rates, not monthly.
Seasonality and demand will determine the rate per night, and revenue can fluctuate significantly from month to month with higher vacancy rates compared to a typical rental. But if you’re buying into a booming vacation market and have competitive amenities, vacation rentals can be a cash cow from the get-go.
Invest in REITs with high dividends
Real Estate Investment Trusts (REITs) are by far the easiest and most accessible way for you to start earning passive income. REITs invest in and own real estate and real estate-related securities, providing everyday investors exposure to institutional-grade real estate portfolios across all sectors of commercial and residential real estate.
In order for REITs to benefit from certain tax advantages offered in the REIT structure, they are required to pay out 90% of taxable income in the form of dividends. This leads to super-reliable, above-average dividends – many of which are increased as the business grows, increasing returns and passive income over time.
The path to $50,000
The rate of return you receive in an investment is important. The higher the return, the faster you will reach your annual passive income goal of $50,000.
As an investor, I aim for an 8% to 12% return on all rental properties I buy. Assuming the property is around the median price of $300,000, I would bring in $6,000 in passive income each year assuming a 10% return on my $60,000 down payment. This means that to reach $30,000 in passive rental income, I would need to invest about $300,000 in five properties that are earning at least 10% return. It’s not $50,000, but it’s more than half.
Higher dividend REITs offering a 5-10% yield are quite common, but they are not without risk. For instance, Simon Real Estate Group, the world’s largest shopping center operator, currently offers an attractive dividend yield of 8%. But the continued recovery of malls raises concerns, particularly if the U.S. economy slips into a recession, which could further hurt its already slumping sales and foot traffic.
REITs that offer safer dividend yields are generally in the 2% to 4% yield range. Prologis, the largest REIT by market capitalization and the largest industrial REIT specializing in the operation of warehouses, industrial racks and distribution centers around the world, currently returns around 2.9%, but with much less risk . Before you buy, make sure you understand each REIT’s unique risks, opportunities, and business model in relation to its return. Higher returns aren’t always better in the long run, especially considering a REIT’s ability to grow.
A yield of 2% or 4% today has the potential to increase further in the future as the company increases its dividend. Real estate income (NYSE:O) is a dividend aristocrat, which means he has increased his dividends for at least 25 consecutive years. It currently has a dividend yield of 4.7%, but that doesn’t mean that’s the yield investors face if they hold for the long haul. A $300,000 investment in the business 10 years ago would net you $1,861 in dividend income per month today, a 7.4% return, and a whopping $22,336 every year.
As you can see, $50,000 a year in passive income isn’t that far off. If you have $600,000 to invest, your goal can be achieved with the potential to become so much more.
10 stocks we like better than Realty Income
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They just revealed what they think are the ten best stocks investors can buy right now…and Realty Income wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
View all 10 stocks
* Portfolio Advisor Returns as of June 2, 2022
Liz Brumer-Smith holds positions at Prologis. The Motley Fool fills positions and recommends Prologis. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.