In personal finance circles, people love to say that the average millionaire has seven streams of income.
As far as I can tell, it’s neither a hard fact nor a quote by a famous person. But it still has a nice ring to it — and it conveys a deeper truth.
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 streams?
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. Real Estate Syndications
Most of us don’t have millions of dollars to invest in an apartment building or other commercial property. The good news: you don’t need millions if you buy fractional ownership in real estate.
It works like this. A professional 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 financial investors — known as limited partners or LPs — earn passive streams of income from the rents each year. When the property sells, everyone gets paid out according to their ownership percentage, although the syndicator earns extra for their extra work.
On the plus side, investors typically earn high returns, in the 15-30% range, and get full tax benefits. Unfortunately, syndications usually require a minimum investment similar to the down payment and closing costs for a rental property, in the $25-100K range. Strict federal regulations also cause many real estate syndications to only accept money from accredited investors.
But plenty of syndicators (AKA sponsors) do allow non-accredited investors, even though they can’t market to them. Which is why we launched our Co-Investing Club: to allow everyday people to invest small amounts of money in these sorts of large real estate projects. Non-accredited investors can participate, with as little as $5K per deal.
That makes it far easier to spread money across many different properties, compared to buying a rental property or investing in a real estate syndication by yourself. If you want all the benefits of real estate investing without becoming a landlord, consider investing passively in syndications.
2. Fractional Ownership in Rental Properties
If $5,000 still sounds like a lot to invest, consider starting smaller by buying fractional shares in single-family rental properties.
Platforms like Arrived, Ark7, Lofty, and Concreit let you buy ownership shares for $20-100. You collect cash flow, each property adding a stream of passive income. And when the property sells, you earn your share of the profits.
Some platforms, like Ark7 and Lofty, even offer secondary markets to let you sell shares to other investors. Both require a minimum holding period, but after that, you can sell shares whenever you like.
Don’t expect returns as high as real estate syndications. But you still get the tax benefits of property ownership, albeit without the accelerated depreciation that comes with syndications.
3. 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.
4. 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. You don’t even necessarily need to buy the property. You could lease a property and then rent it on Airbnb, a strategy known as rental arbitrage. Just beware that you need to forecast your cash flow accurately, or else you risk losing money rather than making it.
5. 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.
6. 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 or storage.