Growing Your Passive Income Stream with Rental Properties
Passive income is income that does not require you to work at the income source in the same way that would need to work on a job. A passive income source does not need your time or physical presence to keep producing money. Instead of being directly involved in the process of creating that income, the money you have invested in that income source does the work for you.
Passive income is the most important key for building sustainable wealth; it lets you disconnect your income-earning ability from your time. When the amount of money you make is tied to how much time you give to the source of income, your money making potential is limited. That’s because you only have a specific number of hours you can give to a job or business daily.
But this limitation is removed when the income source does not need you to be there in order for the income to continue. This is why every successful investor makes more money from passive income sources than they do from active income sources. For a lot of these savvy investors, a substantial part of that passive income comes from investing in rental properties.
Can you do the same thing these investors are doing? Can a significant portion of your income come from rental properties? Can you use rental properties as a tool for preparing for retirement? Can your investment properties produce enough money to cover your kids’ college education? The answer is yes and this article will show you how to earn passive income from real estate.
How to earn passive income from rental properties
The following are the steps you must take to get started on earning passive income from rental properties.
1. Where should you buy?
The most critical factor when selling a product or service is need; there must be a big enough market for whatever you are selling. There will always be a market for rental properties as long as people need homes to live in and offices to work from. But how many people will actually need your rental property is a factor of the location of the property.
The viability of any location as a place to buy a rental property depends on the level of demand for that type of property. Some of the criteria for assessing the potential of any location include employment opportunities in the area, number of good schools, proximity to different modes of transport, social amenities, and crimes rates.
2. What kind of property should you buy?
After you determine the best location for your property, you must decide what kind of rental property to buy. Broadly speaking, there are two categories of rental properties – residential and commercial – and each comes with its specific benefits or challenges.
Some examples of the options you have include single-family dwellings, multi-family complexes, mobile parks, self-storage facilities, and different types of commercial properties. The best rental property to invest in will depend on the characteristics of the location, how much money you have, and several other considerations.
3. How much can you potentially earn from the property?
It is vital to get an actual idea of how much you can reliably earn from a rental property before you buy it. If the building is already being used as a rental, you can get this information from the current owner’s records. You can also determine the potential earnings from a rental by looking at the rental rates in that location.
In addition to the potential income from the property, you also have to look at the cost of operating the rental, maintenance, taxes, wages professional fees, etc. Lastly, you want to factor in the effect vacancies will have on your rental’s performance.
4. How will you finance the property?
Unless you have saved enough money to pay for the property, you will need a loan. The challenge with rental property financing is that loans have more difficult approval criteria attached to them.
Rental property mortgages have higher credit score requirements than residential property loans. You will also need to provide more in-depth income and tax information. The lender will also expect you to provide around 20 - 25% of the value of the property as a down payment for the property.
5. How will you manage the property?
Unlike digital assets, rental property is not a wholly passive source of income. You must be actively involved in the operation of the rental. To keep the rental fully occupied by tenants, you need to do a lot of marketing. You need to stay on your toes to keep the system or structures of the building in good condition and keep the home attractive.
All these, not only take time, but they also require expertise. But you can get around this challenge by hiring a property management company for the rental. Handing your rental property to a property manager is what transforms a rental property into a source of passive income.
Guest post By Sean Parker of Alltrade Property Managment