Investing in real estate to generate passive income is a fantastic way to obtain an additional stream of revenue, obtain retirement security, and design a plan for creating financial freedom. It’s not, however, always the right path for each investor.
If you’re thinking about taking a more passive approach to real estate investment, then you’ve come to the right place. We’re going to take a look at what it means to invest in real estate for passive income, and whether it’s the right move for you.
- A Brief Overview of Passive Income Real Estate
- The Benefits of Passive Income
- Residual Income – What is It?
- Investing in Real Estate for Passive Income
- Mistakes to Avoid as a Passive Income Investor
- Types of Passive Income Properties
A Brief Overview of Passive Income Real Estate
Real estate passive income is an investing strategy wherein an investor is able to create earning without actually having to be involved in any active way. The phrase ‘passive income’ is one that’s used loosely, since the amount of activity and involvement that is required from the investor will depend on the type of investment.
Some of the best examples of this include rental properties or earnings that are made from investment portfolios.
The Benefits of Passive Income
Passive income makes for an excellent way to generate income without actually having to do much work. Collect income passively while you get to enjoy life rather than spending most of it working for somebody else. Here are a few of the wisest ways to put your passive income to use:
- Pay off your debts
- Set up and build your retirement fund
- Build your savings
- Fund your children’s tertiary studies
- Achieve financial freedom
Residual Income – What is It?
Residual income earned each month is the cash that remains for a business or individual after all of their expenses have been paid – it’s essentially the cash that’s leftover each month. You can generate more residual income via passive investments, like real estate.
When you become a real estate investor, you’ll be creating a monthly flow of cash that will, over time, develop your residual income. The one-off payment that is required when you first make an investment will be paid back to you tenfold as your investment creates income.
Investing in Real Estate for Passive Income
As we’ve already mentioned, passive income makes for an excellent way for you to bolster your existing income, helping you create new streams of income to assist you in finding security when it comes time for you to retire. An effective, common way to create passive real estate income is via rental properties.
If you play your cards right as an investor, you can generate a steady stream of revenue from your rental properties, while also having the ability to improve your properties and build your equity. There’s a fairly common misconception that real estate passive income investment requires almost no work.
But, if you are truly interested in generating your own passive income through real estate investment, you should take a more active role and treat your investments like a business. Whether you do this by screening tenants, sorting through properties, addressing repairs, or enlisting a property manager, owning a passive income property will take a certain degree of involvement on your part, especially if you want to maximize your profits.
Creating a business strategy
Of the most important factors when creating a successful stream of passive income through investing in real estate involves creating and planning a solid business strategy, then putting it into action. This includes educating yourself about your niche market, whether it be in the neighborhood of your main residence, or perhaps even out of the state, so that you can gain an understanding of local property values and trends,
The information that you are able to gather from your property market will assist you in choosing the most suitable market to maintain a property for passive income, as well as find listings that offer attractive cash flows. After you’ve completed your research and transition into the action phase, you are going to need a sound strategy for how you are going to manage finances, tenants, the property itself, and paperwork.
It also helps to be on top of the latest news and trends in the real estate and related markets, which is why we suggest signing up for the Insider Newsletter.
It’s not all passive
It’s clear to see that the world of generating passive income through real estate investment is fairly complex, and the term ‘passive’ might even be a bit deceiving in this case. However, if you plan ahead and are diligent in your research – and also know which questions you should be asking – you will be able to develop a robust strategy that will make your financial life much more enjoyable long term.
Mistakes to Avoid as a Passive Income Investor
When executed successfully, passive income investment has the potential to be a fantastic tool for building wealth. But, a lot of investors make common mistakes that hinder their passive income potential in the long run. Here are a few of the mistakes that you should avoid at all costs.
Insufficient cash flow
By now we all know that cash is the ruler of all. Any passive real estate investment veteran will tell you that much. When you own a rental piece of real estate, your primary goal should be to obtain appreciation (an increase of property value) while also earning a steady flow of cash.
But, the market may and will fluctuate as time goes on, which will influence the appreciation of your property. Your own bottom line will then become your cash flow when it comes to being able to maintain a property and having an income.
Being unprepared to become a landlord
Novice investors may choose the path of passive real estate income without understanding that working as a landlord isn’t a walk in the park, and certainly must not be taken lightly. Make sure that you understand you should approach your rental property management in the same way that you would your own small business.
You want to take a proactive approach to your passive income investment and take advantage of the chaos of the current economic climate.
Failure to screen tenants thoroughly
A highly-effective way to make the most of your passive ways through real estate investment is to lease to the best tenants possible. Leasing your property to a tardy, unruly tenant can be far more costly than any potential vacancy might be, through damage to the property or even an expensive and lengthy eviction process.
Poor choice in tenants might even lead to a devastating lawsuit, so you should really take the time you need to screen your tenants property and make sure that you check their references and records.
Not playing an active management role
Even when you partner with a company to manage your properties for you, you should be managing your properties actively by contacting your tenants regularly and offering consistent care for your property. While this might require a little extra effort, time, and cost on your part, it will secure your bottom line for the future.
Proper property management can reduce the turnover rate in your tenants, prevent repair costs that could otherwise have been avoided, and increase your property value.
Failure to collect rent promptly
As a new landlord, you must be crystal clear about your property rules and must hold your tenants accountable for following your rules as soon as their lease starts. Tenants might take advantage of the kindness of their landlord and get into the habit of making late rent payments or develop an issue with catching up.
Waiting to collect your rent is not only going to hinder your income but will also result in a delayed process of eviction, which can cause hostile emotions to boil over for all involved parties.
Types of Passive Income Properties
There are various paths for you to go down when considering real estate investments for passive income. The one that you land on is going to depend on the cash flow you have available, your level of experience, and the time that you are able to dedicate to the investments you make.
If you want to generate passive income on a larger scale, apartment buildings – which are properties with five units or more – could be the right choice for you. As with the previous option, this investment option can be more streamlined in certain ways, increasing your potential for passive revenue income.
Multi-family units are another option for rental properties, and they include duplex, triplex, or quadruplex properties. These units allow you to generate income from several different tenants while only having to manage one physical property.
This can make things a little easier in some ways, and can also help you generate more revenue than a single-family property. Multi-family units also allow you to spread the risk of vacancy out over multiple units, which buffers the financial impact of this event.
However, it also means that you will be responsible for managing multiple tenants, leases, and potential vacancies simultaneously.
An SFH, or single-family home, is a standalone rental property, like a house or condo. These properties can be purchased and then rented out to a single tenant, a couple, or even a small family, providing both long-term asset growth and additional monthly revenue in most cases.