Everybody talks about passive income. These days it’s almost impossible to go on the internet and not encounter phrases like “side hustle” or “make money online.” Almost everyone you know talks about earning passive income, but very few people do it.
That’s because even though passive income is money earned with minimal labor, it takes work to set up any passive income stream. It would be best to put in a lot of work at the starting stages of setting up the vehicle to earn you passive income.
Part of that work is deciding which income-producing assets to focus on. For most people, the available options will be stocks and equities, bonds, creating a product that earns royalties, selling stuff online, and investing in real estate.
While all the above options are viable ways to earn passive income, this post focuses on the steps to earn passive income by investing in rental properties. Why do we single out rental property ownership as our preferred vehicle for earning passive income?
Benefits of rental property as a source of passive income
The most significant advantage of real estate over other passive income sources is that lenders will give you money to invest in real estate. When investing in real estate, you only need a fraction of the value of a property to purchase and control the property.
2. Tangible Asset
Unlike paper assets (stocks, bonds, certificates of deposits, etc.), real estate is a tangible investment that will not suddenly evaporate. When you invest in rental properties, you buy a physical building whose value will always be retained.
3. Utility Value
Demand for rental properties is based on actual needs rather than felt needs. People need a home to survive, and rental properties meet that need. Unlike stock investing, the asset can lose value if the company’s product is no longer in demand.
When you invest in rental properties, you directly control the property’s day-to-day operations. You don’t get this with shares or mutual funds since those assets are under the management of professional managers.
5. Steady Income
The rental property produces passive income predictably and sustainably. The rent from the property can be more than enough to cover your daily needs. Furthermore, you can increase that income by raising the rent on your property.
6. Value Appreciation
The value of real estate always goes up in the long run. This
increase in value can be realized in the form of higher rents, or you can sell the property for a profit. Investors can also boost the value of their rental property by improving it.
Getting started as a landlord
What do you need to get started as a rental property investor?
1. Property financing
You will need a loan unless you have the cash to pay for your property. An investment property mortgage is more complicated to get than a residential mortgage. Lenders impose stricter terms on people borrowing to buy a rental property. The credit score and down payment requirements are higher. Having enough cash reserves and a reasonably high debt-to-income ratio would be best.
2. Define your niche
There are two types of rental properties: residential and commercial properties. Although commercial property investing is more lucrative, getting started is more challenging. Most new investors start with residential properties. But even when investing in residential properties, there are many subcategories. In order not to spread yourself too thin, it is vital to focus on a specific subcategory.
3. Know your numbers
Knowing how to analyze a rental property before buying is one of the skills you must develop as a property investor. Some numbers you want to run on any property you are considering include monthly gross income, monthly operating expenses, cap rate, and cash-on-cash return, among others.
4. Learn how to evaluate a location
The most critical factor in the performance of a rental is its location. Location determines the demand for the rental and the prevailing rental rate. You’ll need to know how to evaluate an area’s potential before buying a property in that location. There are several parameters for analyzing the relative profitability of a site; learn them.
5. Property management
Much work needs to be done to make a rental property succeed. The owner does that work or transfers to a property manager. Property management is the key that unlocks a rental’s potential as a source of passive income. Without it, your rental property is not a passive investment. If one of your goals for investing in real estate is time freedom, you need a property manager.
Finally, getting your first rental property right is crucial to success as a property investor. That‘s because the disappointment and financial loss accompanying an investment mistake can be so devastating that they can make you give up altogether.
This is why as you begin this journey to becoming a rental property investor, you want to start by talking with…
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.