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How to Create Passive Income in Real Estate

One of the primary reasons that people choose to invest in real estate is to create passive income. The monthly cash flow that real estate investment properties can generate empowers many people to retire comfortably or early, or to enhance their lifestyle. 

But what is real estate passive income, really? The truth is that income doesn’t simply hit an investor’s bank account with no effort. Generating consistent monthly income from real estate takes solid purchase and financing strategies as well as reliable property management processes. The good news is that becoming a landlord of buy-and-hold properties can generate the kind of monthly income that people dream of when thinking of passive income. 

Every real estate investor, from the new investor preparing to purchase their first property to a seasoned investor with dozens of doors in their portfolio, needs to constantly focus on monthly cash flow to achieve their passive income goals and ultimately build generational wealth. Here is how to create passive income using real estate. 

Active vs. Passive Investing in Real Estate: Know Your Role 

The first thing a real estate investor needs to know about passive income is what type of properties generate it.  

Fix and flips and ground-up construction projects do not generate passive income. They are short-term projects designed to generate significant profit as the investor adds value to a property. To do this, investors typically must be very active in finding properties, negotiating purchase prices, planning and managing rehab or construction, and marketing the property for sale.  

Rental properties that sit in an investor’s portfolio, on the other hand, can generate passive income. The investor charges a rent for the property that covers the debt service coverage ratio (DSCR), including financing costs, insurance, taxes, HOA assessments, and other recurring expenses. Lenders like Lima One underwrite DSCR loans to ensure this ratio (typically at least 1.2 to 1) leaves room for tenant vacancy or unexpected capital expenses such as roof repairs, HVAC replacements, and the like. 

Many investors are combining these distinct types of investments to add doors to their portfolios. Integrated strategies such as fix-to-rent (also known as BRRR) or build-to-rent investments allow investors to add value to properties and then refinance them into DSCR loans to grow a portfolio. In this way, investors with significant flipping or building experience can create cash flow while playing to their strengths. 

Real Estate Passive Income Investing with Rental Properties 

Investors know that rental properties are the best real estate investments for passive income. These properties can come in many forms, from offices and retail to multifamily. But single-family rentals offer unique opportunities for investors to generate passive income in real estate.  

One reason is that investors can use leverage to scale their single-family rental portfolios. Instead of having to make one big purchase of a large multifamily property, investors can purchase one home at a time when they find good deals on attractive rentals. Then, they can use a cash-out refinance loan to leverage the equity in a property or properties they already own to get cash to purchase new homes. This allows investors to grow their portfolios and their passive income while maintaining healthy DSCR ratios on all their properties. 

Lima One’s rental loans allow investors to do this, with simple financing options for rental purchases or cash-out refinances. Find out more about Lima One’s rental loans here. 

Streamlining Operations  

With the financing piece in place, investors also need to be strategic about managing their portfolios. This includes: 

• Marketing plans for attracting tenants and reducing vacancy 

• Pricing rents at an attractive level while growing them when possible 

• Planning for needed capital expenditures to keep properties  

• Managing needed repairs and upgrades to keep good tenants happy 

While some investors self-manage properties, it may be wiser to use professional property management, especially once a portfolio reaches scale. Investors can also look into proptech solutions meant to make various aspects of rental property operations simpler. 

Creative Ways to Finance Passive Income Real Estate Investments 

The simple-truth math with real estate investing for passive income is that it takes more properties to create more cash flow. While rent increases and streamlined operations can improve cash flow, the big jumps in monthly income will come from additional properties.  

As discussed earlier, investors can use equity from existing properties to purchase new properties. They also need good funding sources to purchase properties quickly when opportunities arise. Bridge loans can help investors make these purchases without having a tenant in place. This is important because rental loans require a tenant to be in place due to the DSCR ratio. At Lima One, investors can use bridge loans to purchase rental properties at the same loan-to-value leverage as rental loans, with a short-term, interest-only structure. Then, once a tenant is in place, the investor can refinance into a permanent rental loan. Even better, investors who refinance a Lima One bridge loan into a Lima One rental loan can do so with no seasoning requirements and can get origination fee discounts on the rental loan. 

Using Real Estate Passive Income for Long-Term Wealth 

Now that investors know how to invest in real estate for passive income, it’s important to consider how this leads to long-term generational wealth.  

The wonderful thing about single-family rental properties is that they can produce monthly cash flow and appreciate in value. This combination of cash flow and appreciation can lead to long-term financial freedom for investors.  

If you’re ready to generate passive income and long-term equity through rental property investing, talk to a Lima One loan consultant. Lima One offers rental loans that work well for new investors or owners of large portfolios, with a variety of options for any investment strategy. Talk to an expert or get a quote today.