It’s always good to bring in a little extra money on the side, right? Making money outside your day job can give your net worth a boost—not to mention give you some extra peace of mind. Maybe you’ve also heard about passive income and that renting out a property is a popular way to do it.
But before you jump in feet first, there are a few things you need to know when it comes to rental real estate as a source of passive income.
Let’s break it all down.
How to Earn Passive Income From Rental Properties
First, let’s set the record straight on passive income. Passive income is money you earn from a source that doesn’t take a lot of effort from you to earn. It could be investments in stocks or bonds or income from real estate, just to name a few.
In general, passive income is great. It can boost your retirement savings, help you retire early, or simply help you reach your wealth-building goals faster.
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Now, there are lots to ways to invest in real estate, but let’s take a closer look in particular at owning rental properties and why it’s such a popular way to earn a passive income. Rental properties can be a great source of passive income once you get a rental up and running.
We mention that because it’ll take some effort at the start (especially if you need to make some updates at the get-go to make it rental-ready) so it’s not completely passive. But it can provide a monthly income flow without you having to participate in any kind of daily work.
Rental properties can be a great source of passive income once you get a rental up and running.
How Much to Spend
Listen: If you’re looking to buy a property to rent and you’re brand-new to the rental game, think modest, stable and middle of the road. Don’t get fancy with your very first rental.Plan to pay cash for the place you want to rent out. Going hundreds of thousands of dollars into debt in order to “invest” in real estate is never a good idea! If you can, buy something that’s priced at about 70% of what it’s worth in the current market. You’re trying to make money on the investment if at all possible.
Where to Buy
In general, homes in areas with good schools and a good reputation tend to appreciate better than lower-priced properties (like apartments or condos). Look for properties in a solid neighborhood where real estate prices have been increasing over the years.
It’ll also attract the kinds of renters you need—responsible tenants who are less likely to damage the place or be unpredictable when it comes to paying you rent.
Rentals that are close to public transportation or major highways into town are usually popular with renters. Keep your eye out for any big companies moving to parts of a city to open offices or other factories.
Local is usually best for your first rental property so you can keep a close eye on your investment. You don’t want your first rental to be out-of-state in a place where you can’t regularly check on the condition of the property.
Local is usually best for your first rental property so you can keep a close eye on your investment.
If that’s the case, you would need someone else to manage it (more on that in a minute). But if you choose a city with a good rental market and job growth along with reasonable state taxes, it can pay off in certain situations.
What to Buy
First, you need to decide what you want to get out of the rental. Do you want an apartment with regular renters and money coming in for a longer period of time? Or do you want a house that you plan to sell for a profit within a few years?
Buying foreclosures can be a good way to get a good deal on a property if you’re thinking about selling pretty soon after buying and renovating. However, you generally want to avoid money pits and fixer-uppers when you’re planning to rent a place. You want something that’s attractive and almost move-in-ready—not a huge project to take on during the front end of the deal. If you don’t plan to manage the property yourself, a property agent will handle almost everything for you—from collecting the rent to dealing with repairs and complaints and even evictions. You’ll pay a commission to the agent, but it takes the stress off you if you’re too busy to deal with these issues.
Always talk to a real estate agent about how much rent you should charge so you’re not expecting too much. And be sure the rent coming in each month adequately covers expenses like maintenance, HOA fees and homeowner’s insurance. Otherwise, you won’t make any money!
Happy Tenants Are Easier Tenants
If you do happen to manage the place yourself, do the right thing and contact your tenants every few months to make sure they don’t have any concerns. A simple email will usually work. Don’t call them every week and make unannounced visits. You should honor their privacy, but let them know you’re available if they have any issues. Before tenants move in, make sure the hot water and heating and cooling systems work well. If your rental is a house, get a professional home inspection before you rent it to fix any urgent repairs.
Passive Income Real Estate Investing: Breaking Down The Basics
Passive income real estate is known as one of the best ways to gain an additional source of revenue, attain security in retirement, and ultimately design a roadmap to achieving financial freedom. However, passive income real estate investing is not necessarily the right fit for every investor. Would you like to take a more active role in real estate investing or a relatively passive role? Read on to learn all about passive income real estate and see whether or not it sounds like a good fit for your investing personality type.
What Is Passive Income Real Estate?
Passive income real estate is a strategy through which an investor can create earnings without having to be actively involved. The term “passive income” is used loosely, as the level of required activity and involvement varies based on the investment type. Some common examples of this real estate income include rental properties or earnings made from investment portfolios.
Why Do You Need Passive Income?
Passive income is a great way to earn money without having to actively work for it. Collect passive income while you enjoy your life Instead of spending your day working for someone else. Here are some ways you can put you passive income to use:
- Fund your children’s college funds
- Set up and build your retirement fund
- Pay off your debts
- Achieve financial freedom
- Build your savings
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What Is Residual Income?
Monthly residual income is the money that remains for an individual or business after all expenses are paid, meaning the money that is left over. You can create additional residual income through investments such as real estate. By investing in real estate, you will create monthly cash flow that will build your residual income over time. The one-time payment that an investment requires will be returned to you over time as the investment generates income.
How To Invest In Passive Income Real Estate
Passive income can be a great way to supplement your current income and help you create financial streams to help secure your retirement years. One of the most popular ways to generate real estate passive income is through rental properties. Investors who play their cards right can create a steady revenue from rental income, while they also have the option to make improvements to the property and build equity.
There is a common misperception that passive income real estate investing requires little to no work. However, those interested in creating passive income with real estate should take an active role in what should be treated like a business. Whether it be searching through properties, screening tenants, hiring a property manager, or addressing repairs, owning passive income properties does require a certain level of involvement. This especially rings true for those who wish to maximize their profits.
One of the keys to building a successful passive income real estate investment involves planning and creating a sound business strategy. This includes versing yourself in your target market, whether it be the same neighborhood as your primary residence or even out-of-state, so that you know local real estate trends and values. The information you glean from the real estate market will help you pick out the best possible market to hold a passive income property, as well as identify property listings that promise good cash flow. After the research phase transitions into the execution phase, you will also need to have a strategy in place on how you will manage tenants, finances, paperwork, and the property itself. As you can see, passive income real estate is quite a complex process, and perhaps the term “passive” is a little deceiving. However, with plenty of planning, research, as well as knowing the right questions to ask or common mistakes to avoid, you will be well on your way to a sound strategy that can make your life much easier in the long run.
Passive Income Investor Mistakes To Avoid
Passive income can be a powerful wealth-building tool when created successfully. However, many investors make mistakes that hurt their long-term passive income potential. Follow these tips to make sure you avoid rookie mistakes when it comes to passive income:
- Not having enough cash flow: You may have heard the phrase “cash is king,” and any passive income real estate professional would tell you the same. When owning a rental property, your main goal is to gain appreciation while earning steady cash flow. However, the market can fluctuate over time and affect your appreciation. Cash flow becomes your bottom line in terms of providing an income and being able to take care of your property.
- Failing to thoroughly screen tenants: One of the best ways to maximize your passive income from real estate is by leasing only to the best possible tenants. A bad tenant can turn out to be much more expensive than any vacancy, such as through property damage or even a lengthy, expensive eviction process (or worse, a lawsuit.) Take the time to screen your tenants properly, and be sure to check their records and references.
- Not being ready to become a landlord: Newbie investors might choose the approach of a passive income real estate investment vehicle without realizing that being a landlord is tough business that should not be taken lightly. Be sure to understand that managing rental properties should be approached as if it were a small business.
- Not collecting rent promptly : new landlords need to be very clear about rules and hold tenants accountable for following these rules from the very beginning. Tenants may take advantage of their landlord’s kindness and create a pattern of being late on rent payments or even have a problem catching up. Waiting too long to collect rent will not only hurt your cash flow, but it can also lead to a delayed eviction process that can lead to hostile emotions on either end.
- Not keeping an active role in management: Even when going through a property management company, an owner should actively manage their property through keeping in regular contact with tenants and providing regular care and maintenance of the property. Although this may require extra time, effort, and cost, it will help protect your bottom line in the long run. Proper management of a property can help reduce tenant turnover, improve property value, and prevent avoidable repair costs.
Keep Tenants Happy
Whether you choose to manage the property yourself or with the help of a professional, make sure the tenants needs are being addressed. Ensure each unit is in good condition before new tenants move in and respond to urgent maintenance requests. Many landlords even recommend emailing tenants every few months to check in with tenants on the status of the property. This proactive approach can help keep tenants happy, and keep your rental income flowing.