There are many cool ways to build passive income with real estate. Some of the most common ways people generate income through real estate include: buying and holding rental properties, flipping properties for profit, and wholesaling. You don’t need to be an expert to start investing in real estate, but you do need a solid foundation around the basics.
I personally don’t own any rental properties, but I plan to invest in real estate in the near future. After reading multiple books, and every podcast I could find on iTunes I became passionate on the subject. A great resource that I recommend for any area of real estate you decide to become involved with is BiggerPockets. In this article I’ll briefly cover how you can build passive income through the “buy and hold” strategy with residential properties.
So what does buying and holding rental properties have to do with passive income? The simple answer is because you receive constant revenue at the end of each month. There are a few steps involved to make this happen, but it’s definitely doable.
Before you learn how to generate passive income though buying rental properties, you need to understand what passive means. As you might already know, passive income involves generating money without having to be present. Sounds cool right? To make this happen you would need to buy one, or multiple rental properties. You can scale this with different types of rental properties such as: apartment complexes, commercial properties, and residential properties. In the examples below I will explain this process through acquiring residential properties.
Buy and Hold
The buy and hold method includes buying properties, and holding on to them. A great way for people to start investing is through residential properties. This is because at some point everyone needs to purchase a new home. However, a major difference from regular home buyers, and investors is how the deal is closed. For example, when buying a home, you may look at common numbers such as APR, down payment, and monthly payments. From an investor’s point of view you will look at vacancy rate, and monthly income to name a few.
In both deals you’re looking at similar numbers, but as an investor you’re more focused on your ROI (return on investment). You can purchase the best looking house, but if you’re not making positive cash flow at the end of the month then you’ll be losing money.
Depending on your financial situation, you could purchase your first rental property tomorrow. However, many experts state that one should look at 100 houses before purchasing one. This might sound overwhelming, but once you become familiar with calculating the numbers it becomes easier. You can break down your investment property purchase to 100 days (researching 1 home per day) or 1 month (3 houses per day).
Realistically you’ll require anywhere from $5,000 – $10,000 to purchase your rental investment. This is going under the assumption that you’re purchasing a $100,000 property, and putting 10% down payment. This is a generic example, and your down payment can vary on many different factors. You should check this book out to learn creative ways on how you can finance your rental property:
Now it’s time to do some math.
Breaking down the numbers
So at this point you’re probably wondering what numbers you need to calculate before purchasing rental property. Here’s is a high level overview of the most common type of expenses you can expect to incur for your rental property. You can check out BiggerPockets for more information.
Monthly income: This is the amount you’ll anticipate charging each month to your tenant. You can usually find this out by comparing the rental prices of other houses nearby, or by asking a real estate broker.
Monthly expense: These expense can include property taxes, insurance, and mortgage payments.
Vacancy: Usually a percentage of your monthly income that takes into account 1-3 months that your rental property may be vacant. This usually happens if a tenant fails to make the monthly payment, or decides to terminate the lease early.
Repairs: Just as with any house, you’ll need to anticipate any miscellaneous repairs that you might incur for your rental property.
After calculating all of your expense you’ll subtract them from your monthly income.
For example: $1250 (monthly income) – $950 (expenses) = $300 (monthly profit)
Congratulations you’re in the green!
Finding your tenant
At point you’ll have accomplished some of the most challenging tasks. Your next step is to find someone to rent out your property. Take some nice pictures, and advertise your property on Craigslist or Zillow. There are many options available so make sure you advertise on the most effective platforms for your area. You can check out more information here.
Think of this process as hiring an employee to work for your company. Only because you find an interested tenant to rent out your rental property doesn’t mean you should. For example, what if your prospect tenant has had a bad history with paying his/her rent? You wouldn’t want to go through the hassle of having to remind someone to pay you, so do your due diligence.
Keeping your tenant happy
Keep in mind that you should stay in contact with your tenant. This will make your job easier if an issue should arise, and it will increase the chances that you receive your payment on time. Although this is your investment property, to your tenant this is their temporary home.
Make it easy for your tenant to pay you.
Waive application fee (just my choice).
Make it easy for your tenant to reach you, but set guidelines on when they can.
As you may have already noticed keeping your tenant happy requires work. The good news is that you don’t have to do this if you don’t want to. Once you begin to grow your portfolio it would make more sense for you to focus on finding new investments vs managing them. You always have the option to hire a property manager to manage your properties. As with anything you need to ensure you hire the right one.
After reading this article you may or may not decide to become involved with real estate investing. If you do decide to buy your first rental property make sure that you check out BiggerPockets. I keep recommending this source because it provides solid value. They even have a great tool that allows you to calculate your cash flow for each property under 5 minutes.
A great book I’ve read and recommend is:
This book covers everything there is to know about rental properties. It even creates a 5-10-year plan for you to build your rental investment portfolio.
Building passive income through real estate requires hard work. However, there are many resources, and people who you can learn from. Whether you start creating passive income through real estate, or another source I challenge to build multiple income streams to achieve financial freedom.
Questions for you:
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What other streams of income do you currently have?
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