How Can I Boost My Financial Freedom With Passive Real Estate Income?
Nearly everyone dreams of making money in their sleep. But what does that really mean—and how can that concept help you achieve financial independence?
How Can I Boost My Financial Freedom With Passive Real Estate Income?
Nearly everyone dreams of making money in their sleep. But what does that really mean—and how can that concept help you achieve financial independence?
Among legendary investor Warren Buffett’s most potent fragments of wisdom is the idea that “if you don’t find a way to make money while you sleep, you will work until you die.”1
Essentially, Buffett is saying that it is impossible to achieve financial independence if you rely on exchanging your time and labor for money.
It is difficult to imagine that anyone’s ideal retirement plan involves working indefinitely. However, working past retirement age is becoming more common. According to statistics compiled by the Pew Research Center, nearly one in five Americans aged 65 or older were still employed in 2023; in the late ‘80s, just one in ten were still in the workforce.2
So, how can you sustain your lifestyle without having to work for money? How can you enjoy your golden years—or even retire early?
The answer lies in generating passive income. In contrast to active income from employment, passive income can help you achieve financial freedom. These terms refer to a point at which you’ve accumulated enough resources to cover your living expenses for the rest of your life without ever having to work again. In this article, we talk in detail about passive income, discuss why it matters, and brainstorm ways you can generate passive income and get closer to financial freedom—all with a special focus on real estate investing.
What is a passive income?
Passive income, also known as unearned income, refers to earnings derived from activities that require little to none of your time or labor.
As the Internal Revenue Service (IRS) explains, passive or “[u]nearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust.”3
Distributions or rents obtained from allocations to a private real estate fund, syndication, publicly-traded REIT, or self-managed rental real estate are also considered forms of passive income.
As can be observed, passive income generally involves earnings from invested capital. This stands in contrast to active income, which comes from wages, salaries, or self-employment income.
Why is passive income important?
Passive income matters because it’s the foundation to financial freedom. Specifically, you achieve financial independence when you’re able to generate enough passive income to cover your living expenses for the rest of your life. After that, active income becomes optional—you can downshift your career, work fewer hours, or exit the workforce altogether without financial consequences
In fact, passive income of any amount is beneficial, even if it’s not enough for you to become financially independent. Having passive income to rely on even while you’re actively employed can dampen the volatility of your overall earnings and increase the likelihood that you can count on at least some income even if you lose your job, fall ill, or experience market conditions that are unfavorable to your investments.
To illustrate this idea, consider an individual who earns $300,000 a year in active income from a full-time role as a product manager at a technology company, and $50,000 per year in passive income via distributions from a private real estate fund.
In 2024, the labor market in the tech sector took a turn for the worse, and over 124,000 tech workers—including our product manager—were laid off.6 Our now-unemployed product manager’s active income quickly declined from $300,000 to $0.
Absent any savings, our product manager would have to take on substantial credit card debt or deplete their retirement savings to make ends meet. Thanks to their $50,000 in passive income, however, they were able to keep their nest egg intact by making sharp but temporary spending cuts—like relocating to a lower cost-of-living geography and taking on roommates—while they looked for a new role.
Consistent monthly or quarterly distributions from private real estate funds can provide you with current passive income, which can help you supplement your active earnings as you work towards financial independence.
What passive income isn’t.
A few select forms of income appear to straddle the line between passive and active. But even ostensibly ambiguous methods of making money usually fall cleanly into one bucket or the other. In particular:
A second job or a side gig isn’t passive income
Some workers who have a primary “day job” want to boost their income by taking on secondary employment. Data compiled by the Bureau of Labor Statistics (BLS) showed that in 2024, about 8.4 million Americans—roughly 5.2% of the workforce aged 16 or older—worked more than one job. The most common arrangement, practiced by approximately 4.8 million or 57% of workers with multiple jobs, was to stack a secondary, part-time role on top of a primary, full-time position.4
While a second job, side gig, or side hustle can be a powerful way to augment your earnings, it’s not a form of passive income. Like your primary job, your second job still requires your ongoing involvement—so it’s considered active, rather than passive, income.
Investments that don’t generate cash flow don’t provide passive income
It’s true that most forms of passive income require invested capital—but not all investments produce passive income.
Real estate investments that don’t generate ongoing cash flow and non-dividend-paying stocks, as well as cryptocurrencies or precious metals all have the potential to benefit from appreciation over time, but they aren’t income–producing assets—so they can’t help you generate passive income.
Some private real estate funds—such as the DLP Housing Fund, DLP Lending Fund, and DLP Preferred Credit Fund—provide passive income for investors in the form of ongoing and dependable monthly distributions. Discover more here.
A business you’re actively involved in isn’t passive income
This last form of income can sometimes be truly ambiguous. For example, you can have a semi-passive business that takes just an hour or two a week to run.
If you operate your business part- or full-time—or if your business cannot function autonomously without your input or involvement—you’re earning active income, not passive income.
Self-managing one or more rental properties is a good example here. You may think that rents are passive, but some landlords on Reddit self-report that they spend anywhere between “a few hours a month” to “5 hours per week” managing their properties.5 If you own multiple properties, it can quickly snowball into a full-time commitment—making any rents you earn far from passive.
Interested in a truly passive approach to real estate investing? Private real estate funds give you the ability to invest in rental housing—all without the hassle of being a landlord.
Are there passive approaches to real estate investing?
So what options remain for investors interested in a truly hands-off approach to real estate investing?
Arguably the most passive option available would be to invest in either a private real estate fund or a publicly-traded REIT.
Private real estate funds are available to individuals who meet the U.S. Securities and Exchange Commission’s (SEC’s) definition of an accredited investor, while exchange-traded REITs can be purchased by all investors.7
Both options are effectively passive: beyond selecting a fund manager and an asset class, you don’t have to do anything else. That’s because private real estate fund or public REIT managers handle the rest—everything from entitling, constructing, acquiring, or disposing of properties to improving, repositioning, operating, and leasing them.
In other words, you play a passive (rather than active) role as an investor, and don’t have to worry about any aspects of landlording at all.
Preferred returns: a source of passive income?
But between private real estate funds and public REITs, which should you choose?
When it comes to passive income, private real estate funds have one distinct advantage over their public counterparts: it’s common for private funds to target paying investors a preferred return—an ongoing, contractually guaranteed form of income that takes priority over other distributions.
In other words, a private real estate fund’s income must be used to satisfy your preferred return before the fund’s managers are allowed to earn a performance fee. Even in a year with less-than-stellar returns, your preferred return may remain intact; fund managers, meanwhile, may receive no performance fees during a down year.
This means that private real estate investors can potentially count on their fully-passive preferred returns with greater confidence than investors who allocate to public REITs—a notable protective factor during market downturns.
Preferred returns have the potential to be a stable source of monthly or quarterly passive income. Learn more about Learn more about private real estate investing with DLP Capital today.
FAQs
What is passive income in financial freedom?
Passive income is a form of earnings you generate from activities that require little to none of your time or active involvement. Passive income is the cornerstone of financial freedom—it is what enables you to sustain your lifestyle without having to work to afford it.
What is the meaning of passive income?
Passive income describes a type of income that you don’t have to work to earn. Passive income can come from rents, dividends, interest, royalties, or even distributions from a privately-held business. Passive income is “passive” because, unlike earnings from traditional or self-employment, it can be generated without your active participation.
How to make passive income?
There are many ways to make passive income. Investing in real estate, publicly-traded stocks and bonds, or private business interests are all common ways to generate passive income. However, you typically need money before you can generate passive income—nearly all forms of passive earnings are derived from capital rather than labor.
Why is passive income important?
Passive income is important because it is a key ingredient in becoming financially independent. This means that you can sustain your lifestyle indefinitely without having to rely on income from active employment.
How to build financial freedom?
You can get on track towards financial freedom by assessing your current financial situation, learning how to budget, eliminating high-interest debt, spending less than you earn, and investing the difference wisely.
199 Smart Warren Buffett Quotes That Explain Why People Keep Listening to Him. Inc. Magazine. August 2024.
2The Growth of the Older Workforce. Pew Research Center. December 2023.
3Unearned income. Internal Revenue Service (IRS). February 2025.
4Labor Force Statistics from the Current Population Survey. Bureau of Labor Statistics (BLS). January 2025.
5How much time per month per property? Reddit. November 2023.
6The Great Tech Reset: Unpacking The Layoff Surge Of 2024. Forbes. August 2024.
7Accredited Investors. U.S. Securities and Exchange Commission (SEC). January 2025.
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