3 Simple Ways to Make $50,000 in Passive Income With Real Estate

Earning $50,000 a year in passive income — money you don’t have to physically work for to earn — may seem like a pipe dream right now. But with a little bit of money and some strategic investments in real estate, that lofty goal could be a lot closer than you may think.

Real estate has unique benefits thanks to its ability to use leverage and the opportunity for passive income to grow over time. While you certainly need some capital upfront to get to the $50,000 mark, here are three simple ways you can do it.

Buy a long-term rental property

Rental real estate is a time-tested method for passive real estate investing. It’s a strategy that can increase income exponentially over time thanks to the power of leverage. As the investor and owner, you only have to make an upfront investment of 20% to purchase the property, while borrowing the rest. The tenant pays for the remaining expenses, maintenance, and mortgage for the home. Any cash left over after those costs is passive income you receive each month. 

You can raise rents to match market demand or adjust for inflation to boost your income, but many rental investors choose to use the extra cash flow to pay down the mortgage faster. By doing this you can compound the passive income you earn by eliminating the debt, and turn what may have been $200 of cash flow into $1,000 or more without any additional cost.

Own a vacation rental

The vacation rental business is booming right now thanks to a shift in where consumers stay as they vacation. More space, amenities, and unique destinations are becoming the norm, allowing everyday investors to earn a lot of passive income from renting a vacation property and using a third-party property manager to rent it.

Investors have the same benefit of only needing a 20% downpayment with renters paying for the ongoing cost of the property and mortgage over time. But there’s even greater passive income potential because vacation rentals are generally based on nightly, not monthly, rates.

Seasonality and demand will determine the nightly rate, and income can fluctuate greatly from month to month with higher vacancy rates compared to a typical rental. But if you buy in a hot vacation market and have competitive amenities, vacation rentals can be a cash cow right from the start.

Invest in high-paying dividend REITs

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, offering everyday investors exposure to institutional-quality portfolios of real estate across every sector within the commercial and residential real-estate industry.

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 and higher-than-average dividends — many of which are raised as the company grows, boosting returns and passive income over time.

The path to $50,000

The rate of return you receive in an investment matters. The higher the return, the faster you will achieve your annual passive income goal of $50,000.

As an investor, I aim for an 8% to 12% return on any rental properties I purchase. Assuming the property is around the median price of $300,000, I would net $6,000 in passive income each year assuming a 10% return on my $60,000 down payment. That means to reach $30,000 in passive rental income, I’d need to invest around $300,000 across five properties that earn at least a 10% return. That’s not $50,000, but it’s more than halfway.

Higher-dividend REITs paying a 5% to 10% return are fairly common, however they are not without risks. For example, Simon Property Group, the largest mall operator in the world, is offering an attractive 8% dividend return right now. But there is concern over the continuing recovery for malls, particularly if the U.S. economy enters a recession, which could hurt its already slumping sales and foot traffic further.

REITs that offer safer dividend returns usually fall in the 2% to 4% return range. Prologis, the largest REIT by market cap and the largest industrial REIT specializing in the operation of warehouses, industrial bays, and distribution centers across the globe, is yielding about 2.9% right now — but with much less risk. Before buying make sure you understand each REIT’s unique risks, opportunities, and business model as it compares to its return. Higher returns aren’t always better in the long run, especially when you consider a REIT’s ability to grow.

A 2% or 4% return today has the potential to rise more in the future as the company raises its dividend. Realty Income (NYSE: O) is a Dividend Aristocrat, meaning it has raised its dividends for at least 25 consecutive years. It currently has a 4.7% dividend yield, but that doesn’t mean that’s the return investors are stuck with if they hold long term. A $300,000 investment in the company 10 years ago would net you $1,861 of dividend income per month today, a 7.4% return, and a whopping $22,336 each year.

As you can see, $50,000 a year in passive income isn’t that far out of reach. If you have $600,000 to invest, your goal can be accomplished while still having the potential to grow into much more.

Liz Brumer-Smith has positions in Prologis. The Motley Fool has positions in and recommends Prologis. The Motley Fool has a disclosure policy.

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