10 Ways to Build Passive Real Estate Income in 2024

Continuous changes in market dynamics forge one of the most stable methods of creating passive real estate income. The global growth of the real estate market has been quite positive since 2022 and for the first time exceeded $379 trillion in investments. The U.S residential real estate market alone grew by more than 19%, due to the fact that strong demands were evident despite economic headwinds. 

A 2020 study signals real estate as one of the fastest-growing passive income sources. In it, investors identify rental properties and real estate investments as the main means of generating their passive income. As investment platforms have risen to make fractional ownership models more accessible, more people can delve into real estate without active management burdens. Below, we look at ten proven methods to build passive real estate income in 2024.

1. Traditional Rental Properties

Owning traditional rental properties can be an excellent way to earn passive income through regular rent payments. Buying into high-demand areas, such as emerging cities or suburbs, ensures a steady rental income, aside from having fewer vacancies. CoreLogic reports that in 2023, national rental growth reached 7.5%, while in cities like Austin and Raleigh, the rent price has more than increased 10%. On average, investors realize an annual return on investment ranging between 8 and 12%, although the figure is higher for certain areas, upwards of 15%.

Success in this investment approach is all about the location and property management. Good property management further optimizes passive income through activity tenant screening, rent collection, and maintenance. Although management fees can generally be in the range of 8 to 12% of the monthly incomes, they indicate potential for profit in the long run with minimal involvement by the investor.

2. REITs (Real Estate Investment Trusts)

REIT is meant to offer real estate investors an easy way of creating passive income in real estate without necessarily having to deal in the property directly. An REIT is a company that owns, operates, or finances income-producing real estate across many sectors. This can range from commercial properties and apartment buildings to other projects that generate income. Apart from passive income through dividends produced by the REIT's underlying properties, real estate investors can buy and sell shares of REITs in the same way they can with stocks. That also makes REITs very attractive to those seeking to get a taste of real estate without headaches from managing physical real estate property. The types of REITs include equity REITs, private REITs, and mortgage REITs.

According to NAREIT, REITs extended their rebound into positive returns for the third consecutive month in July 2024 and outperformed broader markets, underlining their potential as one of the diversified income investment options.

3. Crowdfunding Real Estate Platforms

Today, real estate crowdfunding platforms represent one of the most accessible and popular options for passive income in real estate. Crowdfunding allows the possibility of pooling resources from several investors to be able to invest money in bigger projects without having huge capital. Sites like Concreit, Fundrise, and Crowdstreet are considered crowdfunding for real estate investment that enables an individual to invest in whatever real estate, from residential properties to a commercial building. In most cases, the minimums can be as low as $500 to $1,000, which opens up real estate investing to a wider audience. 

Crowdfunding has grown remarkably to attain a value of USD 117.53 billion in the year 2023. This trend is likely to continue in the future, as the market is projected to record growth at a CAGR of 42.3% during the forecast period of 2024-2032. Although crowdfunding does promise consistent returns, one needs to be wary of risks like delays in projects, decline in market, and issues of liquidity. Investors should be cautious and utilize any excellent opportunity but should balance the rewards in respect of the risks entailed.

4. Short-Term Rentals

Short-term rentals through hosts like Airbnb and Vrbo have become one the most lucrative avenues in building passive real estate income. Unlike traditional long-term rentals, which typically involve year-long leases, with short-term rentals, property owners can rent out their spaces on a nightly basis. This flexibility can be more profitable in popular tourist destinations or urban areas that have high demand for short-term accommodations.

Few of the key factors driving profitability are location, seasonality, and platform fees. First, investment properties in prime locations tend to attract more guests, hence commanding better rental prices and higher occupancy. In 2023, demand for short-term rentals globally grew 6.7% YoY, according to AIRDNA data. However, economic challenges and changes in international travel patterns raised the growth rate at a softer pace compared to the previous years. AIRDNA forecasts that economic recovery and a resurgence in domestic leisure travel will push demand up to 10.7% in 2024.

5. Real Estate Syndications

Real estate syndication is a unique avenue of passive real estate income whereby several investors pool resources to acquire and manage larger properties that may be beyond the reach of a single investor. In a syndication, a group of passive investors invest into a bigger project, while the syndicator-a general partner-manages the investment from acquisition through eventual sale.

The implication here is that passive investors avoid the headaches of active management and thus allow them to earn returns. Returns from real estate syndications are usually attractive, but naturally, it would depend on the market and the type of property. Still, investors need to know that with higher returns comes an added element of risk due to market volatility, handling specifics of properties, and so much reliance on the expertise of the syndicator.

6. Mortgage Notes

Note investing in real estate is an investment niche whereby income is passively generated through the buying of the debt against real estate, not directly making investments in the property itself. A mortgage note is a documented agreement between two parties that involves the stipulation of terms in the mortgage loan, including the schedule for payback and the applied interest rates.

In investing in mortgage notes, the investor virtually becomes the lender and starts receiving a series of payments by the borrower. It is a real estate investment strategy that can open consistent cash flow while diversifying an investor's portfolio. Generally, investors make returns found through monthly payments that include principal and interest. 

7. Real Estate Funds

Real estate funds are another efficient means for creating passive income for pool investors to merge their capital into a professional real estate asset portfolio. The funds can be invested in various types of properties, residential, commercial, and industrial real estate. Investors generally invest in shares of the fund whereby they are able to receive property income without the active management required for individual properties. Real estate funds could loosely be classified into open-ended and closed-ended structures.

Diversification is another major gain of investment that comes with real estate funds, as a fund typically owns upwards of several properties in different sectors and locales, thereby generally minimizing the degree of risk for an individual investment. 

8. House Hacking

House hacking is one of the innovative methods to earn passive income in real estate that simultaneously helps the individual decrease burdensome living expenses. This involves buying a multipurpose property or a single-family home and leasing partial portions, such as a spare room or an entirely separate unit, to the tenants. By doing so, the owner will be able to defray the costs of their mortgages while possibly making more money.

An article recently featured in The Washington Post underlined how house hacking helps some buyers transcend their financial hurdles, exemplifying how this could be a practical strategy that many can use to make homeownership accessible. This strategy creates not only passive income but also equity in the property over time.

9. Real Estate Partnerships

Real estate partnerships can be a powerful method of creating passive income while leveraging investors' respective resources, skills, and networks. They might be joint ventures, equity partnerships, or limited liability companies (LLCs). In a joint venture, two or more parties enter into an agreement for a particular project and thereby share the financial risks and profits of that project. An equity partnership will involve one party offering capital, while the other party manages the investment, hence allowing investors to pool their resources.

With a partnership on real estate entities, consideration should be made on both legal and financial aspects. This calls for defining the different roles and responsibilities each partner is expected to play, coupled with the division and agreement on the profit sharing through a legal contract to avoid any misunderstandings that might arise. 

10. Fractional Real Estate

In the case of fractional real estate investing, ownership is held jointly by a number of investors, and thus it is quite functional for investment in real estate markets without large capital. In this model, each investor gains a portion of ownership in the property entitling them to a share of income produced, along with an appreciation in the value of the property. The investment format provided access to higher value properties that, as an independent investor, could be too expensive to invest in. Examples include luxury vacation rental property or commercial real estate.

The key benefits of this type of investment include diversification and a reduction in risk, since the investor can allocate capital across multiple properties, thus improving passive income potential and avoiding the overall hassle of handling the entire property. 

Bonus Strategy: Investing in Storage Units

One of the lesser-known but growing passive income in real estate investment is storage units. During the past years, urbanization caused people to downsize, adding to the increasing trend toward minimalism, hence increasing the need for storage facilities. According to a report from IBISWorld, the self-storage industry has grown during the last five years, reaching a market size of approximately $23.6 billion in 2024.

Investors can directly invest in physical storage units or indirectly through REITs in companies operating storage facilities. An investment in REIT storage units passively gains from the income created by a diversified investment portfolio of properties without an undertaking to manage and operate it personally. While these passive income opportunities are quite inviting, one must also be aware of the certain associated risks that may include market saturation and fluctuating demand on the rise and fall in economic conditions.

Conclusion: Build Passive Real Estate Income Through Investments

Passive real estate income opportunities continue to remain fluid into 2024, offering a wide array of strategies whereby passive wealth and financial security can be obtained. From classic rental properties and REITs to cutting-edge crowdfunding platforms and even fractional ownership, a variety of ways can be taken toward regular income diversification without traditional hands-on management. Each method carries its unique benefits, risks, and potential returns, allowing investors to select the strategies that align best with their financial goals and risk tolerance. 

FAQs

What is Active vs. Passive Real Estate Investing?

Active real estate investment involves managing directly and making investment decisions, such as buying and renting out properties. In essence, investors take up all responsibility for operations, which may well be very time-consuming. Contrarily, passive real estate investment presents an opportunity for one to create income without actively participating in the management of the field. This can be done through REIT investment, crowdfunding, syndication, etc.

How Do Real Estate Funds and REITs Differ?

REITs are corporations that operate, finance, or own income-producing real estates and must distribute at least 90% of their taxable income as dividends to the shareholders. Real estate funds pool the investors' capital to invest in property or real estate projects, but they may also be structured differently. For instance, open-ended and closed-ended funds and are often usually longer-term investment horizons.

When Is the Right Time to Invest in a Rental Property?

The right time for investing in a rental property is usually determined by specific market conditions, interest rates, and readiness of the investor. Basically, what investors search for is an uptick in the market: when the prices of property are low and rentals are highly sought after, plus the indication of economic growth within the locality.  

What Is Residual Income in Real Estate?

In real estate, residual income is what is leftover after all expenses applicable to a property are paid. This includes mortgage payments, property management fees, maintenance costs, and tax liability. 

How Much Should I Budget for a Property I Plan to Rent Out?

Some of the most important costs a small investor should budget for include the following: mortgage payment, property taxes, insurance, maintenance cost, property management fees, and vacancy period. A common rule of thumb is to set aside 1% of the property value annually for maintenance and repairs.