Real estate has long been seen as a great way to generate passive income. The basic concept behind generating passive income from real estate is to buy a property, rent it out, and collect cash for your troubles.
The downside, though, is that like any other investment, being a landlord has risks. You have to cover the mortgage, property taxes, and insurance regardless of whether the property is rented. In addition, repairs, appliance replacement, and a lot of the maintenance items are often your responsibility even when you have tenants in the place. As a result, if you want to generate $1,000 in passive income each month from real estate investing, you need to recognize those risks and invest and operate accordingly.
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Consider multi-family properties
An apartment building or a house that has been subdivided into multiple units is often a better choice for property owners than a single-family house is. This is in large part because the costs you face tend to scale with the number of properties you own, while the revenues you get tend to scale with the number of renters you get.
In addition, if you have a four-family property and have a vacancy, you're still collecting rent on the other three units. That can seriously help your cash flow -- potentially even keeping you breakeven or profitable -- while you're working to fill that other unit. Compare that to being a landlord of a single-family property and having a vacancy. In that latter situation, you'd have no income, but virtually all your expenses, which certainly doesn't help your cash flow.
Save up a sufficient down payment
When you're buying a rental property, you'll generally need a bare minimum of 15% down, but you'll get a better interest rate if you have at least a 25% down. Lenders tend to have stricter requirements for rental properties, since it's easier for someone to walk away from a bad investment than it is for that person to walk away from his or her home.
As an alternative, if you're willing to live in a unit of a multi-family property you're also renting out, you might be able to qualify for an "owner occupied" mortgage. Note that while that can be easier to qualify for and require less of a down payment than a pure investment property loan, you also won't be collecting rent on a unit you live in yourself. In addition, you'll have to decide whether living that close to your tenants is a good thing or could be more trouble than its worth.
Look for reasonably priced properties for the expected cash flows
There's an old saying in real estate investing that "you make your money when you buy, not when you sell." Once you have a reasonable down payment for the type of property you're looking to buy, take a look at rents and anticipated operating costs in the areas you're willing to buy in. With a little bit of math based on your expected rental income and the costs associated with the property, you can get an estimate of how much you're able to pay to buy it.
If you're looking to generate $1,000 per month or more in passive income from renting out property, this up-front work will be critical to your success. After all, you can only charge as much as the market will bear, and if you overpay for the property you're buying, you'll never fully cover your costs
Buy your property and find good tenants
Often, when rental real estate changes owners, there are already tenants living in the property. You will likely have to respect any leases those tenants already have, but when those leases end, you will either look to renew those leases or find other tenants to rent the space out.
It's from those lease payments that you will collect your revenue. If you've done your homework well and found a property -- or group of properties -- that generates sufficient cash, you could very well generate $1,000 per month of passive income from your efforts.
Go in eyes wide open
While it may be possible to rake in $1,000 per month (or possibly more) in passive income as a small-time landlord, often the income isn't really as passive as you might have hoped. Rents may need to be actively collected. Maintenance, repairs, and upkeep are often the landlord's responsibility. And when tenants turn over, there are often costs and efforts associated with making the property ready for the next tenants -- along with the vacancy costs you'll face if the place stays empty for a bit.
As a result, while being a landlord may be a great way to earn some income, that income may not be as passive or as consistent as you would like it to be. Go in with eyes wide open and plan carefully, however, and renting out property can be a lucrative way to generate cash.
