Nov 24, 2024
Lining up a source of passive income is a great way to supplement your paycheck and work toward your financial goals, and it's not uncommon to turn to real estate as an income-generating tool.
That's what Idaho-based Edward French, 55, did a few winters ago. He discovered a cat-infested train car buried in a barn and began to see dollar signs once he learned about its interesting history. He then decided to buy the train car for $2,000 and sunk $147,000 into its restoration.
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Now, French's property rents for $350 a night on Airbnb. And if you read guests' reviews, it's clear that they're enamored with its uniqueness and charm.
In addition to incredible views, the property offers a well-appointed living room, sitting room and kitchenette. A covered porch surrounds the property, and the one bedroom features a king-sized bed.
The property also doesn't skimp on amenities. It features heating and central air conditioning, and it even has Wi-Fi.
If French’s venture is inspiring you to restore an old property and rent it out for money, you should know that it may end up being a lucrative prospect. But it may also be more work than you’ve bargained for.
Passive income — but not in the truest sense of the word
Real estate is often considered a form of passive income, but that’s a bit misleading. It takes money to rehabilitate a property like French’s train car. And even if you find a newer property to buy that’s in decent shape, there’s still a host of maintenance items you’ll need to tackle throughout the year.
Plus, if you’re renting out a property on a platform like Airbnb, there’s work involved. You need to advertise, update and maintain your rental calendar, arrange for cleanings between guests (or do that work yourself), and address issues as they arise.
All told, the work is far from passive. Not only might you spend a lot of money in the course of maintaining a rental property, but the time investment could be overwhelming. So if you’re interested in earning passive income from real estate, there may be a better way.
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Big rewards with less work
If you have the stomach for being a landlord, then by all means, restore an old property or buy one in a unique location and offer guests a one-of-a-kind stay. You may find it to be a labor of love and a financially successful one at that. But you should also know that there are ways you can earn passive income from real estate in the truest sense of the word.
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For one thing, you can invest in REITs or real estate investment trusts. REITS are companies that generate income through the portfolios of properties they own. And the nice thing about REITs is that they’re required to pay out at least 90% of their taxable income as dividends. So if you hold REITs in your portfolio, not only might they gain value over time, but you can enjoy a steady stream of income.
Another option is to invest your money in real estate ETFs, or exchange-traded funds. Instead of choosing REITs individually for your portfolio, with an ETF you can buy a collection of REITs or real estate companies with a single investment.
When comparing your options for real estate ETFs, make sure to pay attention to each fund's expense ratio and dividend yield. An expense ratio measures how much you'll pay to own a given ETF, while the dividend yield shows you how much to expect in dividends relative to an ETF's share price.
A combination of a low expense ratio and a higher dividend yield is generally optimal. But sometimes, you may have to sacrifice one for the other — meaning, accept a slightly higher expense ratio for a more generous dividend yield.
While there can be work involved in researching REITs or real estate ETFs and keeping tabs on your portfolio, it might pale in comparison to the effort needed to restore and maintain an actual investment property. So if you like the idea of true passive income through real estate, REITs or ETFs are probably the way to go.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
