3 steps to earn passive income from real estate, according to a 29-year-old who did it

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• 29-year-old software engineer CJ McGlown owns a rental property that earns him $12,000 a year passively.
• He decided to invest in a turnkey home and hire a property manager so it wouldn't become his "job".
• Taking out a new mortgage worked for him, because the rent checks cover the mortgage payment and more.

According to C.J. McGlown, you have two options when entering real estate: "Do you want to be an investor, or do you want this to be your occupation?"

McGlown, a software engineer and self-made millionaire, wanted to get into real estate investing to earn passive income. That way, he could focus his energy on passion projects and his business instead of worrying about income.

There's a big emphasis on the word passive for McGlown. When he bought his first investment property in 2019, he knew he was strictly looking to grow his wealth and not make this his new job.

"My true passion is technology," said McGlown. "I use real estate as a wealth-generation strategy only."

Currently, McGlown only spends about three hours every month doing work for his rental property, but it brings in thousands of dollars every year. And to make this his reality, he followed three strategic steps.

1. He made lifestyle changes to save for the property

When McGlown started saving for the investment property, he wasn't sure if he wanted to finance it or buy it in cash.

He knew that either way, he'd need a good amount of savings stashed away, so he started saving aggressively. That way, if he ended up financing it, there'd be much less risk, but if he did decide to buy in full, he'd have money ready to go.

"I tend to choose the thing that's going to be the most difficult because that's where I'll get the most discipline," he said.

Saving for the investment wasn't easy, but it wasn't new to him. He'd spent the first two years of his professional life paying down $200,000 worth of student loans and already knew how to live frugally.

So, he employed the same strategies he had used back then to save up for his investment property.

2. He learned about financing options through free and inexpensive resources

"I started with a resource called Bigger Pockets," McGlown explained, "I started learning the basic things about how you actually make money from real estate."

Through this education, the topic of leverage kept coming up in conversation after conversation. "I would hear people say things on Bigger Pockets like 'leverage is better' and 'you can go further with leverage,'" said McGlown.

However, the idea of going into debt again scared him. After finally freeing himself of student loans, the thought of signing on to more loans wasn't something he was eager to do. This is part of the reason he even considered paying for the property in full — something most homebuyers don't do.

His parents had taught him the idea that "cash is king," and there was a part of him that still clung to the idea that taking out a mortgage for a house would be risky.

However, he realized that he was wrong after crunching the numbers: If he just invested in the down payment, the monthly rent checks would be more than enough to cover the mortgage. Over time, the property would pay for itself.

"I realized that if you rent it long enough, [it's like] you've never bought it," he said. "You just got it for free."

Financing the investment also meant that he could start sooner and wouldn't have to save additional hundreds of thousands of dollars.

"I started to see how I could build wealth and the money could go further with leverage," he said.

By then, he had saved $75,000, which he used for the down payment.

3. He paid more upfront to save time and energy

Ultimately, McGlown's entire goal was to have as passive an income stream as possible. In order to achieve this, he knew it would be more costly. He initially experienced this when researching mortgage lenders.

"I started looking into different interest rates, seeing what I could get," he said, but nothing seemed fully like the right choice. Eventually, he decided to try working with a mortgage broker, which helped him find a much better interest rate in a shorter period of time.

"They came back with substantially better opportunities than I ever found," he said. "A mortgage broker is definitely worth the money."

Once he started looking for the actual property to purchase, he was also willing to pay a little more for a turnkey property in a popular location that he was sure would rent out. That way, he didn't need to worry so much about the risk that comes with financing.

"I would rather pay a premium for a property that is in the right location than get a good deal for the property," he said. "Even if you get a bad deal, location [makes up for it] because of the [property value] appreciation."

He also hired a property manager to deal with any issues that his tenants experience, in a continued effort to keep the investment passive. He pays the property manager a percentage of the rent price.

Between the mortgage payments, the property manager fees, and insurance he owes about $1,600 every month. However, he rents the home out for about $2,600 a month, so he makes an extra $12,000 annually from this investment. Additionally, his equity in the property only grows over time.

For McGlown, this setup is exactly what he wanted: recurring monthly income with little active energy on his part.

"If you want, you can penny-pinch and get as much value as possible," he said. "But then you've created a job."

This article was originally published in January 2022.