Research has shown that passive income can increase one’s net worth and help them achieve early retirement. For many successful entrepreneurs, it’s a path to financial freedom.
In recent years, the term “passive income” has been used loosely—it is classified as earnings that are generated from a source other than formal or contract-based employment, and may include rental income, royalty fees, copyright fees, dividends, etc.
Note: The IRS offers a formal definition of passive income that’s narrower in scope. For details, please reference our related article here.
A successful passive income idea may originate from your current interests, prior experiences, or deeper passions. However, for it to work the way it is intended—allowing you to “make money while you sleep” so to speak—it should be practical, achievable, and generally require minimal to no effort.
Auto-generating income is the ultimate goal for individuals with an investor mindset.
What’s more advisable: active or passive income?
In short, to each their own. Active income requires constant effort and time (i.e., a 9-to-5 job) but generally results in a reliable paycheck and medical benefits. Passive income may need ideation, significant pre-work and/or monetary investment. However, once established, it can produce a steady cash flow.
Some individuals are more inclined to pursue one income type over the other, while evaluating several key factors such as stability, flexibility, and their personal risk appetite. But a more advisable option is to secure both, optimizing your resources effectively and diversifying your income streams.
How to develop a passive income strategy
There are two typical ways to generate passive income:
Investing (using money to make more money), or
Acquiring assets that earn money passively over time
One such asset is an investment property that can be used for short-term rentals (i.e., Airbnb or Vrbo) or leased on an annual basis.
Let’s explore investment property acquisition. It’s a tried and tested way to generate income and, ultimately, to achieve financial freedom. You may be thinking of a single-family home, a duplex, or a condo, as these are the typical residential properties that appear at the top of a vacation rental search. But there are other lucrative options that may be worth considering, particularly as you look to make the most out of every dollar.
For example, what if you purchased land in an affordable yet attractive area to be used as an investment?
You could gradually construct a complex with various buildings on that land, such as a main structure that can be leased long-term and several smaller studios that can be used as vacation rentals. You could also construct an accessory building (i.e., a separate garage to store a washer and drier, bikes, etc.) for common use of the short-term tenants, thereby increasing the appeal of your vacation rental.
Of course, you’d need to search for the optimal land to make such a build-up a success, as well as architect, design, and furnish the buildings in a way that reliably yields monthly earnings in line with your expectations. While this would be no easy feat even for the most experienced real estate investors, it’s possible—and many have used multi-tenant properties to generate passive income.
Knowledge is power: ask the right questions before investing in a passive income property
The best way to avoid expensive mistakes is to learn about all aspects of the transaction before making a commitment. The following list of questions can serve as a starting point for kicking off a new real estate venture:
How do I find the right property? Should I hire a real estate agent?
Is there construction nearby?
How much should I set aside to cover maintenance expenses?
Should I hire a licensed property management company?
Is the investment property in a good location?
Will the cash flow from this property meet my needs?
Am I making this purchase with an investment mindset or am I emotionally involved?
How BHG Money can help you establish a passive income stream
We offer loans up to $500,0001,2 with repayment terms of up to 12 years.1 This unique combination of features makes it so that you can pursue ambitious projects while still maintaining a high level of affordability.
Furthermore, it’s common for borrowers to take more than one loan from BHG Money—1 of 2 customers return for additional financing. If you are in the process of building a real estate portfolio or gradually constructing a multi-tenant property, we can fund you at multiple stages as you pay back your original loan. And we’ve streamlined the lending process to provide you with a frictionless experience and dedicated concierge service 7 days a week.
¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence. Call for complete program details.
² BHG Money business loans typically range from $20,000 to $250,000; however, well-qualified borrowers may be eligible for business loans up to $500,000.
For California Residents: BHG Money loans made or arranged pursuant to a California Financing Law license - Number 603G493.
No application fees, commitment, or impact on personal credit to estimate your payment.