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Why Rental Property Investing Is a Top Passive Income Strategy

By Lea Uradu – Dec 2, 2021 at 6:15AM

Key Points

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There are a few ways to get involved.

Investing in real estate is one of the most powerful wealth-building tools. The great thing about it is that you do not have to be a millionaire to tap into the industry; any ordinary Joe or Jane can become a real estate investor. One of the simplest ways to get into the market is to hop into the versatile world of rental real estate. 

If you are interested in becoming one of the more than 10 million Americans who own rental real estate, there are many investing options and strategies that you can explore. Let's take a look at how you can start your journey, as well as why this strategy can be a winner. 

Rent out part of your home

When it comes to real estate, way more than charity begins at home. Your next stream of income can start there too. You can use your residential property, i.e., your home, to increase your cash flow without much effort by renting out a room or your basement or turning your garage into an investment gold mine.

According to Census data cited by Pew Research, 36% of the nation's 122.8 million households were renters in 2019, so turning your home into an investment property will give you a large stream of consumers to tap into and you won't have to go further than your front door to start generating an income from rental real estate. You will also do not have to quit your day job! This is why rental real estate is so great -- any homeowner can turn their home into a wealth-building machine.

Two people standing in front of a house.

Image source: Getty Images.

Purchase a rental property

If living with your tenants is not your cup of tea, purchasing an investment property may be the next best thing. Whether it is a commercial property, an apartment building, or a house, purchasing an investment property is a great strategy to use. Much like when renting out a portion of your home, when it comes to purchasing an investment property, you can start as small or large as you like. In fact, 72.5% of single-unit rental properties are owned by individuals, according to that same Pew Research report. 

As a property owner, you can even decide whether to accept tenants who receive HUD's housing choice voucher, thereby guaranteeing a portion of your income every month, or accept tenants who will pay via cash or check.

Whatever you decide, when it comes to investment property ownership, you do not have to go big or go home -- you simply need to acquire a property that matches your budget and risk tolerance.

Hop into the short-term rental market

If leasing to long-term tenants is not for you, working with short-term rental platforms like Airbnb or VRBO, which is owned by Expedia, may just be the best option.

Investing in a short-term rental provides a great deal of freedom and flexibility. Investors can rent out their property and produce an income whenever they want, choosing to rent out the property every weekend or year round.

Whatever decision you make, investing in a short-term rental offers peace of mind because property owners have the opportunity to collect payments directly from the online platform, saving the property owner from the hassle of collecting rent. 

A great tool for tax savings

Investing in rental real estate can also be a winner when it comes to tax savings. There are several sections of the tax code that favor real estate investors that may help them retain their rental income.

Rental real estate investors may be able to take advantage of the following strategies:

  • Tax deductions for mortgage interest paid.
  • Tax deductions for repairs made.
  • Ability to amortize certain expenses.
  • Depreciation of rental property.
  • Deduction for qualified business income.
  • Investing in a "qualified opportunity fund."
  • Investing in a "qualified opportunity zone."

Check with a tax professional to see what strategies you can use.

Generate passive income

One of the greatest benefits of investing in rental real estate can be the generation of passive income. This allows investors to earn an income that does not involve the exchange of time and money, which ultimately leads to more free time.

Having free time is the real pot of gold at the end of the rainbow. If you are strategic enough, you may be able to retire early and have more time to create the life of your dreams.

Lea Uradu has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Airbnb, Inc. The Motley Fool has a disclosure policy.

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