How To Make Passive Income with Rental Property

To most people investing in real estate means rental properties. This could be because rental properties are probably the most common of this type of investment. However, it’s not the only way to invest in real estate. There are several ways to invest in real estate like REITs, RELTs, real estate trading and real estate mutual funds among others. Not all these can make you passive income though. That’s why this article will focus on rental properties, which is one of the best ways I know that can make you a monthly income without trying so hard.

 

How Rental Properties Work

Simply put, rental properties involve you (the investor) buying a property, residential or commercial, and renting it out to a tenant. Rental property investing is one of the oldest forms of investing and the fact that it has thrived for so long is proof that it works. Ideally, as the owner of the property, you’re responsible for paying off the mortgage, property tax, damages and all the expenses involved in owning the property. From a financial standpoint, the only way to make this investment work and make you money is for you to charge rent that covers all these costs and have a little extra left over every month which becomes your profit or income. And of course the best part is that apart from a few check ups on your property and dealing with a few problems here or there (if any at all) the income is passive. If the rent doesn’t cover these costs then the investment won’t give you any profits and it might even leave you with a negative cash flow because you have to dig into your own wallet to cover the costs yourself.

 

Why It’s Great for Passive Income

It only feels natural that I tell you that the best thing about investing in rental properties for passive income is the passive income itself. But no, it’s not what I like most about rental properties. I do like the passive income of course but there is something else about rental properties that I like more. I like them because of something that they give that most other investments can’t, and that’s leverage. In its simplest, leverage in buying real estate properties means you don’t have to pay the full value of a house to buy it. All you need to do is pay a down payment, which is usually around 20% of the full amount required and the rest is paid as a mortgage over time. Leverage gives you the ability to control the whole property while you still pay for the property.

This is good for you the investor because that way you get to pay off the rest of the property using someone else’s money instead. That’s really cool but it’s not the coolest thing. While you pay for the rest of the property with someone else’s money, you get to keep a profit from those payments every month. That’s the passive income part.

Now I get to tell you about that part, the passive income. Rental properties provide you with a passive cash flow every month for years when done right. Usually the first several years after buying and renting out a rental property are not very profitable because a lot of the rentals received have to cover expenses and mortgage payments. But because this is a long term investment, there are brighter days ahead.  If you hang on patiently for a couple of years until the mortgage is all paid off, then the investment starts to really pay off. The majority of the rentals now become pure profit.

Rental properties are also great because they are low risk. Like any other investment, rental properties don’t come without risk. However, most of the risks involved with this type of investment are fairly easy to deal with in comparison to other investments. Probably the biggest risk involved with rental properties is a crash in the real estate market. The most recent crash happened in 2009 in the US. But market crashes are a very rare occurrence because real estate is less volatile compared to other markets, like the stock market for example. That’s always great to know when you’re an investor because the last thing you want is a risky investment that might lose you money when your main objective is to get paid.

 

What’s at Stake?

Very little if you ask me. The upsides outweigh the downsides so there is a little to lose when you invest in rental properties. But however little, as an investor you should be aware of these downsides so you can try and avoid them before taking the leap into rental property investing.

One of the most frustrating things about renting out real estate is dealing with bad tenants. Having a destructive tenant or one who is always late with rentals can be a terrible experience. It takes out the passive part of the income because dealing with such a tenant is quite a job.

But that’s not the worst thing though. Having a bad tenant is certainly bad, but not as bad as having no tenant at all. If for some reason you can’t find a tenant, you’re left with a property that needs to be paid for with your own money which leaves you with a negative cash flow. Both these occurrences can be really stressful but there’s an easy way around them.

You can hire a property manager who’ll take care of the management of the property. This is a great resolution too if you don’t want to manage the property or you’re bad with people or if you simply want to make the whole process completely passive. A property manager deals with everything to do with the property including hiring and maintenance. The decision to hire a property manager should be made when really necessary and when the cash flow allows it because hiring a property manager can be pricey. Most property owners only hire property managers when they own several properties so it doesn’t bleed their income.

Owning a rental property sometimes means continuously repairing damages so there’s a need to have some cash in hand for these emergences when they arise. Even if you don’t have a destructive tenant, there is need for you to keep maintaining your property and this too requires cash in hand but be sure it doesn’t upset your cash flow. You want to make sure that you keep your property in good shape but most importantly don’t forget why you’re doing what you’re doing; your passive income.

Housing market crashes are not a very frequent occurrence, which is great. This means investing in real estate is a somewhat safer investment compared to other volatile markets. But that’s no guarantee that it won’t happen. It has happened before and it can happen again but looking at the odds, buying a property is worth a try.

 

Conclusion

There are not many investments out there that are as good as rental properties or real estate as a whole. Rental properties are good for investing and for passive income alike. If you play your cards right rental properties will give you a solid return on your investment and a good extra income passively that you can pass on to your children even long after you’re gone. All you need to do is get started.

Dream Passive Income does not give financial, tax or investment services and advice. All the information you see here is produced and presented with no consideration of the readers risk tolerance, financial circumstances and objectives. The information might not be suitable for all readers and or investors. Past performance is not indicative of future results. Investing involves risk and possible losses.