Are there any easy ways to create passive income with real estate? Yes, if you consider “passive,” not being hands-off.
The buy-to-rent strategy is not passive, but your workload is dramatically reduced when you outsource property management.
With all real estate, there is maintenance and replacement of everything.
Over time everything deteriorates, and you may wish to do the maintenance or let a third party do it. Once again, your choice determines how ‘passive’ your real estate investment is on your time.
Why do people choose to invest in real estate?
Leveraging your savings into an investment with a much higher ROI is the overriding motivation to invest in real estate.
Your savings will make up a lower portion of the property sales price with the rest of the funds borrowed, i.e., a mortgage.
The rental income should be enough to pay all outgoings, including maintenance, rates, and management fees. Ideally, there will be some rental income leftover, which you can use to improve the property or take additional personal income.
Plus, when the time comes to sell the property, it will most likely have increased in value, so your savings will significantly boost when you return the profit made from the sale to your bank account.
To support yourself and maybe your partner through retirement, you’ll need to put something away regularly. That something is money that should be making money.
Everyone knows leaving savings in the bank is the last resort as the interest rate paid is meager.
For example, do you want to earn less than 1% of your money? Currently, the best savings rate is .6%, so if you had $30,000 in a savings account, expect $180 interest or $15 per month.
You can do a lot better than that with a rental property. You can get more money after expenses per month, but you also get to hold onto the asset for as long as you can and time the sale to get a much higher price than what you paid for the property.
What’s not to like about investing in real estate?
Calculating The Risks
One of the risks is not knowing anything about investing in real estate. There are many different strategies, and not all property deals are the same.
Remember you’re borrowing a large chunk of money to buy the asset – and you will need to pay the repayments and return the loan when you sell up or earlier if you default on the mortgage repayments.
Increasing your debt
When you don’t know what you’re doing – if you already have a mortgage on your own home or perhaps struggling to pay off outstanding debt, taking on a second mortgage may not be the wisest action.
However, if you get the numbers right – it could be exactly what you need to do. For example, when there is surplus rental income after all the outgoings, you can use it to help meet your home loan or other loan repayments.
This works when you engage a real estate accountant who understands property investment and can crunch your numbers. Once you have the formula, you can use it to assess the viability of further rental property purchases.
Taxes, fees, and maintenance costs
Don’t forget to pay your taxes. Some experts suggest a contingency fund that will see you through six months. Your emergency fund doesn’t have to be money in the bank – it can be a loan that is not used until you need it. These funds really should be just for emergencies which may include:
- Urgent repairs or replacement
- Rental property vacancy
- Safety upgrades required by law
There are quite a few expenses with owning a rental property. It’s where many novice investors go wrong – they don’t calculate outgoings correctly and end up with less rental income than needed for the property to be financially viable. When the rent doesn’t cover costs, the property owner has outstanding expenses, some of which include:
- HOA or property management
New property investors have no idea how much time is required to manage their new asset, so the word ‘passive’ is often misused. Managing tenants may or may not be needed if you use a third-party provider. However, you will still have admin work to do to keep track of all incomings and outgoings for your tax calculation.
Plus, every time there is a property inspection, all you need to do is read the report – that does take time, and you may need to assess and approve maintenance jobs.
Say you decide to manage the property yourself – finding tenants is not as easy as it may seem, even when many people are looking for a home to rent. How do you know you have chosen the best tenant?
There is an element of risk as even when you complete a screening process, conduct financial background checks, and undergo routine checkups, and the tenants may still not be a good fit.
No longer can you evict your tenants – even when they haven’t paid the rent regularly. There is a hefty legal procedure that you as a landlord need to follow before being able to get the tenants out of your property so you can start the process of tenant selection again.
Using a property manager with experience with tenant selection and the local tenancy law and agreement can make a world of difference to your success with a rental property.
Decreasing property value
Not all things go up – while if you choose the location and property well, you’ve got the best opportunity to sell the home for a profit eventually.
However, there may be some unknowns to deal with, including the degradation of an area due to increased crime, suspicious activity, or lower employment rates. These and other factors can impact the value of your property over time and may impact rental income if you struggle to get tenants.
What do you do if your property is dropping in value?
Don’t panic. Assess why it’s happening. Is the property market going through a downturn, or does your home need a major renovation to make it more desirable? Knowledge is power, and with it, you have options. Aim to sell in an upturn market – where property values are going up.
Buy-To-Rent Real Estate Options
What are the property types and investing options?
The standard buy-to-rent apartments in larger cities and more densely populated metropolitan areas make good rentals.
Apartments are affordable, meaning their market price is lower than some single-family homes. Additionally, upkeep and general maintenance are more manageable and can be more cost-effective. Building maintenance and upkeep of common areas is a shared cost with the other owners.
Detached and Semi-Detached Single-Family Homes
Perhaps a bit more expensive to purchase, but homes attract more tenants, so the tenant pool is generally more prominent than apartments.
With a faster turnaround, you can rent this property to either a couple, a single person, or a small family.
Single-family homes can be found in areas with good schools, public parks, and other nearby amenities, which means that you’ll be able to get long-term renters.
Single-family homes may attract higher mortgage payments, maintenance costs, and property taxes, so make sure you use the formula to check the viability of this type of home as a rental.
Detached and Semi-Detached Family Homes
As with single-family homes, larger family units are growing in popularity as more and more people are looking to leave the inner-downtown areas of busy cities.
A large detached or semi-detached family home can be rented to a specific family or perhaps subdivided among various tenants.
With a large family, you may have more renter consistency and passive income, whereas, with subdivided renters, you can have overlapping rental income during vacancy periods.
Larger homes do offer a higher form of passive income, but upkeep and maintenance can be expensive, and in the event of a prolonged vacancy, you may lose more money, which may take a while to make up for.
Residential property is the usual go-to for property investment. Many residential investors eventually also have commercial properties.
Commercial property in areas with high foot traffic and popular anchor stores, generally large big-box commercial stores, can be a potential investment opportunity. There’s constantly a growing need for commercial property, and as neighborhoods expand, newer and more modern commercial spaces will become available.
Commercial property is not without risk, and extended periods of vacancy and higher renter turnaround might impact long-term financial goals. There are also third-party investors usually involved, such as corporate property management groups that can quickly dominate the playing field or easily buy you out.
If you’re lucky enough to own already a secondary home, or perhaps a vacation home, you’re in the perfect position to use it, maybe to grow your passive income.
Vacation homes are a great way to use a property that is unused most of the time, especially during peak seasons. These homes can be rented day-to-day or perhaps something more short-term.
While renting out your vacation home does not seem like the obvious choice at first, it means you will still need to declare any passive income to the local tax regulatory authorities.
Additionally, renting out a vacation home shared among other family members can make things a bit more complicated, as various parties of interest will need to be taken into consideration first.
Real Estate Investment Trust
These might not be the traditional or standard property investment practices you’re used to, but REITs are one of the more passive income investment options available.
REITs allow you to invest in mutual funds, usually, companies that already own properties and mortgages. Investing in a REIT means that you are indirectly purchasing a portion or percentage of a property, which in the long run will allow you to benefit from the growth of the property.
As the property grows in value and the company acquires more real estate, your investment will grow. This is one of the easiest and less frequented ways to invest in real estate.
Nothing worthwhile is easy, and using your savings to make money does take know-how, hard work, and time.
Make sure you have a good team of experts helping you, including an accountant, property manager, and lawyer.
Also, make sure what you’re doing fits your goals, including your family goals. Your partner needs to be on board with your plans and have a basic understanding of what you’re doing, why, and how it will improve the family’s financial security.