Last time we talked about passive income and how there was only one true source of passive income. Interest. Take a look at the post to see if you need to upgrade your passive income knowledge. Today we are going to delve into an area that I have spent a lot of time learning about. Real Estate Rentals
There are a lot of people that make money in real estate, but it’s not passive.
Not in the beginning.
If you are thinking, “But Andrew, I know a guy who has 32 rental properties and has a property manager take care of all of them. He just gets a check once a month to spend”
You’re absolutely right, that is passive.
But it didn’t start out that way. Because I know that guy who has 32 rental properties. I actually know a couple…
When I was learning about rental properties, the most passive income stream out of the whole real estate genre, I took them out for a coffee and picked their brains.
I got to know about our city’s local market, what they thought of the current conditions. I asked them what it was like starting out and what was the best way to get started. What to look for and what to avoid.
Then I realized, it just wasn’t for me right now. I helped a few of my friends get started with real estate rentals, and after a bumpy first year or two they are seeing the benefits more and more. So it is possible. But it’s not passive, at least not at first.
Here’s a few things that you will need to consider getting into real estate.
Evaluating properties
The saying goes “You will need to look at 100, offer on 10 , and out of those buy 1”. At least now you can do a lot of it online, but still good to know.
If you are impatient you can buy the first one you look at and “figure it out as you go” but I would strongly suggest not doing that.
Downpayment
When you find one, you will need to come up with a down payment. depending on what country you are in, that can go up to 25% or more of the house price.
Which isn’t cheap. There are always people saying there are ways around this, there is another word for this, mortgage fraud. I’m sure, but if you are going to do this type of investing you will want to keep everything on the up and up. The goal is passive income, not to commitmortgage fraud.
Finding Renters
Then you will need to get the place ready for rent. Which could be a lot or a little, depending on how you buy. Then you will need to find renters.
That’s where the fun begins. Everyone I spoke to that has made rental properties a cornerstone of their passive income has said you need to train your renters. They will make or break you. Most people I know in real estate, get up to around the 3 house mark, and don’t go any further.
Why? Because they pick bad renters and then they are constantly dealing with them. This was a big take away for me. People who had dealt with tenants all said the same thing. Find good tenants. A good pre-emptive way to help your potential tenants is to provide them with a rent affordability calculator. This will help them know if they can truly afford their place, you will want to use it too and make sure their budget is workable.
Delegate to a Property Manager
Eventually you canget a property manager but it’s a good idea to do it yourself the first year. You will learn the ins and outs of managing a property. So when you go to hire your own you can interview the prospects with a better knowledge of what involved with your property and what’s involved with the tenants.
Pick a Great Property Manager
Then you will have to interview property managers, this can be a big task but it’s not as bad as you would think. You will know what to ask because you have already been dealing with tenants for a year and will be better for it.
If you are ok with all of this, then consider real estate.
Are you ready? Because next up we are going to start with stocks.
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FAQs
Investing in rental properties offers numerous advantages, such as steady cash flow, long-term equity growth, and specific tax perks. In most cases, rental income is considered passive for tax purposes, exempt from payroll taxes, with taxes determined by the investor's tax bracket.
What is the 1 rule in rental real estate? ›
The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.
How do you make passive income off rental properties? ›
With a REIT, you earn a share of the income the properties produce without having to buy, manage or finance them—making it a truly passive real estate investing option. REITs can be a good option for people who want to invest in real estate outside of their retirement accounts, but don't want to be a landlord.
What is the best way to calculate rental income? ›
Use the One Percent Rule. If you cannot obtain actual figures for a potential property, you can use the one percent rule of rental real estate to determine cash flow. Simply put, a property's rental rate should be at least 1% of the total property value. For a $200,000 property, rental income should at least be $2,000.
What is the difference between passive income and rental property? ›
Passive income is revenue that takes negligible effort to acquire. It includes earnings from rental properties, limited partnerships, and other projects where you're not involved in the continued generation of earnings.
Is renting a house passive income? ›
In most cases, income received from a rental property is treated as passive income for tax purposes. That means an investor generally doesn't need to withhold or pay payroll taxes because most investors own rental property in addition to having a job.
What is the 50% rule in rental property? ›
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
What is the 80% rule in real estate? ›
It's the idea that 80% of outcomes are driven from 20% of the input or effort in any given situation. What does this mean for a real estate professional? Making more money in real estate is directly tied to focusing your personal energy on the most high value areas of your business.
What is the rule of 72 in rental property? ›
What Is the Rule of 72? The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.
What is the simplest way to make passive income? ›
25 passive income ideas for building wealth
- Create a course. One popular strategy for passive income is creating an audio or video course, then kicking back while cash rolls in from the sale of your product. ...
- Write an e-book. ...
- Flip retail products. ...
- Sell photography online. ...
- Dividend stocks. ...
- Rent out a parking space.
You're on the right road to rely on your rental income if it comfortably covers all of your expenses, including personal living expenses, mortgage payments, property taxes, insurance, and maintenance fees.
Is Airbnb rental passive income? ›
Airbnb lets you generate passive income from your home or spare room. Being an Airbnb host involves listing your property on its platform, which handles bookings and communications with guests. Hosts are paid out based on guest stays.
How much should rental income be? ›
The 1% rule is a helpful tool for investors to evaluate the viability of a potential investment property. The rule states that the monthly rent should be at least 1% of the total purchase price. For instance, if a property is bought for $300,000, it should generate a minimum of $3,000 in monthly rent.
Do you count rental income as income? ›
You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them.
What is the formula for rent? ›
The simplest way to determine how much rent to charge for a house is the 1% Rule. This general guideline suggests that you charge around 1% (or within 0.8-1.1%) of your home's total market value as monthly rent payments.
Is short term rental income passive or active? ›
Short-term rentals are considered to generate passive income. However, based on the work that you do for the rental property, you are considered to be active participants.
What is legally considered passive income? ›
Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.
Is my income passive or non passive? ›
In the world of personal finance, understanding the distinction between passive and non-passive income is incredibly important. Passive income is generated with minimal effort and offers financial freedom, while non-passive income often demands more active involvement.
Is capital gains income active or passive? ›
Income is usually categorized into one of two main groups — passive and active. Passive income is typically earned from interest, dividends, capital gains, rental income, etc. Active income is typically derived from wages, salaries, tips, and commissions.
There are a lot of people that make money in real estate, but it’s not passive.
The saying goes “You will need to look at 100, offer on 10 , and out of those buy 1”. At least now you can do a lot of it online, but still good to know.