6 Ways to Make Passive Income Through Rental Properties

One of the oldest and easiest ways to create passive income is through rental properties. Luckily for investors and entrepreneurs, the property rental market remains strong and continues to grow. Based on data from the U.S. Census Bureau, more than 35% of households in the U.S. rent homes. Additionally, RentCafe reported that multifamily construction in 2022 reached a 50-year high nationwide, and according to Axios, “one million rental units are slated for completion through 2025.”

Additionally, a recent GoBankingRates survey revealed that 14% of Americans don’t believe they will ever be able to afford a home, and 27% have no interest in buying a home, contributing to the demand for rental housing options. This is due to a variety of factors, including a low inventory of homes for purchase, barriers to homeownership such as high prices and high-interest rates, and a growing nomadic workforce that doesn’t want to be tied down to one location.

Although rents appear to be stabilizing, demand for rental properties is still high and on-time rental collection rates recently rose above pre-pandemic levels. That means now may be a good time to rent out property, which may be easier than you think.

Here are six types of rental properties that can help you earn passive income and even begin building generational wealth.

1. Traditional investment properties

Traditional investment properties have long been a popular choice for those seeking to generate passive income through rentals. It’s a rather simple concept: purchase a property, find tenants to rent it out and collect monthly rental income. Investors have the opportunity to decide whether to invest in long-term, mid-term, or short-term (vacation) rentals.

Long-term rentals offer stability in rental rates and cash flow with a reduced risk of vacancies, while vacation rentals and short-term stays allow for higher rental rates with a higher risk of vacancies. Vacation rentals are also less passive, requiring more work to clean and ready the property in between stays and find tenants on a much more frequent basis. But the returns on investment can be much higher.

There’s also a “mid-term rental” investment option, where the lease lasts for more than one month but less than one year (college student housing would fit into this category). Mid-term rentals require a bigger time investment than long-term properties but aren’t as demanding as short-term rentals. Some investors may want to diversify their rental property portfolio by owning a mixture of long-term, mid-term, and short-term rental properties, while others may commit to whichever style best suits their preferences.

2. The accidental rental

Investing in a new property isn’t always necessary to become a rental property entrepreneur. There are instances where you may already own extra property, such as a vacation home, a newly inherited property or perhaps you recently got married and both you and your spouse own your own home. Instead of selling these extra properties, you may consider renting them out.

Sometimes, it’s more beneficial to hold on to a property over the long term rather than collecting a quick payout. Retaining properties for rental purposes cannot only help you build more real estate equity, but it can bring in a significant amount of passive income as well (and you may benefit from tax savings, but consult a tax professional on that). Combining the extra income with long-term equity gains can contribute to building generational wealth.

3. House hacking

Another strategy that has gained traction in recent years is “house hacking.” House hacking involves renting out a portion of your own home. If you own or purchase a property that is bigger than your housing needs, and you’re looking for a way to earn some extra cash, rent out a room (or several rooms).

House hacking allows you to significantly reduce or eliminate your own housing expenses by using the rental income from renting out extra rooms to help pay down your mortgage and/or offset utilities and other costs of homeownership. House hacking can be a great way to start building passive income without the need for a large initial investment.

4. Built-for-rent

A growing trend in real estate is the “built-for-rent” market. Built-for-rent homes are built by companies that specifically design their properties for rental purposes only. These properties are often strategically located in desirable areas, ensuring high demand and consistent occupancy rates, and are marketed to people looking to maximize their returns on investment in the real estate industry.

Investing in built-for-rent properties has become one of the most lucrative ways to generate a steady stream of passive income. By purchasing residential properties specifically designed for rental purposes, you can benefit from a consistent monthly income with minimal involvement. Typically, the…