Many investors get drawn into the rental industry by the lure of passive income. After all, who would not be interested in extra money? Real estate is a solid investment, whether your goal is saving for a college fund, retirement, or added peace of mind. That said, investing in the rental industry is not without its fair share of risks. So, join us below as we discover the true meaning of passive real estate income and how you can make it work for you.
What is Passive Real Estate Income?
Passive real estate income refers to an investment strategy that generates earnings without the active involvement of the investor. However, the truth is that the level of participation directly depends on the type of real estate investment. For example, rental property is a popular investment touted as passive income. That said, owning rental property and managing those rentals are two different things.
Renting properties involves marketing, leasing, maintenance, and consistent effort to ensure profit potential. That said, there are several avenues for investors to make money in the real estate industry. Check out these suggestions below to help build wealth through passive rental income and real estate.
- Vacation Rentals
- Single-Family Homes
- Duplexes or Triplexes
- Multi-Family Buildings
- Commercial of Industrial Complexes
- Mixed-Use Developments
- Self-storage Facilities
- Mobile Home Parks
- REIT or Real Estate Investment Trust
- Fix and Flip
How to Earn Passive Rental Income from Investment Property
Although there are many different ways to earn income from the real estate industry, rental properties are a popular choice. However, earning passive rental income from an investment property is not automatic. In fact, managing rentals requires significant effort, especially in the beginning. That said, if owners have a plan, take the appropriate steps, and set up their business for success, the daily stresses become pretty manageable. Often, investors still view the time spent on rentals as worth it, given their ability to generate steady monthly income. Savvy investors can turn this revenue stream into renovations that boost equity or fuel purchasing more rental properties. So, before you take the plunge, let’s take a look at a few things that can help ensure passive rental income.
What are Your Business Goals?
Investors have a plethora of options for real estate investment. Therefore, it is critical to seriously consider your goals, level of commitment, and how much time you intend to devote to the venture. These vital considerations will help investors choose a suitable investment to meet their financial goals. Once the decision is made, it is time to create a thorough business strategy. This involves research and planning that provides a critical foundation for success moving forward.
Are You in Good Financial Health?
Owning property as a means to generate passive rental income is not without its risks. Whether it is an unexpected major repair or a sudden vacancy interrupting income flow – landlords must be prepared. One of the common mistakes investors make is not taking a hard look at their own finances before buying property. Keep in mind that obtaining traditional financing for a rental property includes higher qualification thresholds along with higher down payments. So, it is a good idea to pay down outstanding debts and save up for a down payment and emergency fund.
What do You Want to Buy?
There are a lot of questions a potential landlord needs to evaluate and answer. One of which is the type of property best suits their goals and level of time commitment. For example, owning one single-family home is far different than managing a twenty-unit multi-family building. Also, the type of unit investors choose may be based on long-term goals. For instance, buying a single-family home with the intent to renovate, rent, and eventually sell for profit. On the other hand, multi-family units provide passive rental income but generally require more oversight. However, whatever you choose, make sure the monthly rent will adequately cover all expenses.
How Much Can You Afford?
Investing in real estate is a great way to generate passive rental income. That said, if that investment lands an individual with hundreds of thousands in debt – it is not a good start. If you have the means to buy a house in cash, that is great. However, no matter where the investment money comes from, owners must evaluate how much they can reasonably afford. Keep in mind; rental owners should have a minimum of 6 months’ worth of rent in savings to cover unexpected circumstances.
Starting out, many investors think bigger is better. Thus, a more expensive property with all the bells and whistles will generate more income. However, this is not necessarily the case. Successful investors know that modesty is a better place to start.
Where Do You Want to Invest?
Rental owners no longer need to be right around the corner, thanks to comprehensive software and professional solutions. Nowadays, landlords can be across the street or the world just as easily.
However, not every neighborhood has the ideal opportunities to generate passive rental income and, more importantly, profits. So, carefully evaluate each potential community as well as each listing to determine what falls within your goals. Some key signs of a promising location for rentals include –
- Reasonable property tax history
- Rental friendly zoning and compliance laws
- Proximity to public transit, commuter routes, amenities, and necessities such as grocery stores
- Job and employment growth
- Quality school system ratings
- Low crime rates
5 Common Mistakes that Ruin Passive Rental Income
When handled effectively, owning investment property is a great way to create passive rental income. However, if owners do not start with a solid plan or make the right moves, rentals can cost more than they bring in. Successfully building wealth is just as much about what not to do as it is what to do. So, check out the common investor mistakes below that can hinder your ability to earn passive rental income.
- Failing to Prepare
- Not Realizing that Business is Business
- Lack of Cash Flow
- Not Prioritizing Screening
- Not Upholding Lease Terms
Failing to Prepare
Purchasing any real estate for any purpose requires due diligence. In particular, buying rental property requires owners to evaluate various metrics to ensure a good ROI. Not to mention, they must also take the time to consider their financial standing carefully. After all, investing in real estate is a significant financial commitment not to be taken lightly.
Not Realizing that Business is Business
Unlike purchasing an owner-occupied home, a property intended to generate passive rental income cannot be an emotional decision. Instead, investors must approach these decisions as a business. Failing to do so could result in deals that do not provide the ample cash flow needed to be profitable.
Lack of Cash Flow
No matter how much investors prepare, the real estate market can fluctuate. So, not preparing for these ups and downs is a big mistake. After all, the goal of rental properties is to earn steady cash flow as the property appreciates. The key is to use discretion with opportunities and go for the ones with the best profit potential. Thus, helping to weather any changes in the market.
Not Prioritizing Screening
Thorough screening policies are a landlord’s best defense against troublesome tenants. Unfortunately, a common mistake is to rush or completely abandon these screening measures in favor of filling the unit as fast as possible. That said, this will inevitably lead to a greater chance of lost income, property damage, or extended vacancy. So, to preserve the flow of passive rental income, prioritizing finding the best tenant possible is critical.
Not Upholding Lease Terms
As we mentioned above, business is business. Therefore, the safeguards landlords have in place, such as a legal rental agreement, must be upheld. Although tenants may have an emotional story, receiving on-time and complete rental payments is critical to your success. That said, landlords must be sure to enforce consequences if the tenant pays late or violates any of the lease terms. Failing to do so sets a potentially disastrous precedent.
The Best Advice for Rental Property Investors
Truly passive rental income may be the goal of many investors, but the best way to achieve it is through professional management. After all, managing rental property has unique challenges that other forms of investment do not. Therefore, hiring a reputable and experienced property management firm can allow owners to turn over the daily stresses to a third party.
At Bay Property Management Group, our team provides owners with peace of mind that their investment is taken care of. With a dedicated staff offering experience in every aspect of the industry, we provide a full-service and comprehensive approach to rental management. For more information or to schedule your free, no-obligation home analysis, give us a call today.