When most people start looking at the advantages of real estate investments, passive income emerges as the most popular reason investors jump into the property market.
Property returns can aid you if you wish to accumulate funds for your retirement years, provide a supplement for your family, or simply wish to create a fortune.
So, how can you generate passive income from property, especially if you are highly interested in rental properties? Let’s find out below!
What Is Meant By Passive Income?
Passive income is any money you earn through secondary streams. It is called passive because you are not exactly inputting work as you would on a job.
Secondary streams include:
- Property returns.
- Bonds or stocks.
- Business profits.
An income flow that is not heavily reliant upon work can help you live peacefully during your old age. Passive income is also very important to consider if you have a mediocre salary or know that a pension will not suffice later.
Can You Make Passive Income From Rental Property?
Passive income generated through property involves property purchase and renting it out to suitable tenants. Maintaining several rental properties is a great way to make a fortune.
Rental income is considered passive because the IRS says the cash flow is similar to licensing and royalties. Investors can also avoid self-employment tax and save up tons.
How To Invest In Real Estate Rental Properties in St. George?
As a landlord, you will have to input a certain amount of work and effort to maintain your rental properties. The job is not completely passive; you will have to care for your properties through regular upgrades, cleaning, and maintenance. Before you can get to this point, you will also have to thoroughly research the real estate market to pick and buy suitable properties you can rent out.
A series of steps must be followed to purchase property and use it to generate rental income successfully. Let’s look at these below:
Input Thorough Research
Proper research before jumping in to buy a suitable property is of utmost essential. Always start with your local neighborhood and look for homes or units around the area. This will make it easy for you to monitor your tenants and even collect payments.
You can also make use of a real estate database to know how much rent you will be able to charge for a certain property. Make sure to also account for the location, neighborhood, size, amenities, taxes, and other factors that influence how much rent you can charge.
Learning about local laws and rules you will need to follow as a landlord is also a good idea. State laws also have regulations regarding housing so make sure you are aware of these to avoid getting penalized.
- In most regions, it is against the law to refuse to rent a property to tenants based on their social class. Knowing the laws can help you find suitable tenants without unintentionally breaking the laws.
- City or town laws where a property is situated will also influence how you treat your tenants and what rules are allowed during an eviction. Always consult a lawyer to understand landlord-tenant laws better and be at the forefront in all eviction cases.
- You should never perform self-eviction or threaten your tenants. Jeopardizing their safety or threatening to shut down utilities is always bad. You can end up being penalized and charged for criminal acts.
- It is also a good idea to sign up for learning classes or workshops that can help enlighten you regarding rental laws. A law course will make your responsibilities evident as a landlord. You will also be able to find out how you can successfully maintain your property and rule out long vacancies. Once you have the correct information, you can start looking for a property to invest in.
Pick A Property And Calculate Your Budget
Once the research is done, it is time to select a property you want to invest in. Pick one that is within your budget and can be put up for rent. Also, make sure that the neighborhood is suitable and that you will be able to charge enough rent to cover maintenance, tax, and other expenses.
Calculate local utility costs and see if any renovation or refurbishment work will need to be done. Any money you invest would be easy to earn back and will be covered later through the monthly rent.
- If you borrow money, calculate how soon you will be able to return it through rent before making a property investment.
- You will have to get landlord insurance if your tenants are going to stay long-term. A landlord’s insurance has advantages similar to homeowner’s insurance but is a bit more expensive. This is because it covers additional risks. Always get in touch with an insurance agent to guide you through the process, so you know what to expect.
- Any property taxes also need to be managed by a landlord. Property tax pays for schools, firefighters, police, or other things that make your property valuable. Make sure to add up taxes and calculate before deciding on a monthly rent amount.
- Maintenance and utilities are also the landlord’s responsibility. Most owners pay around one percent of their property’s value for maintenance each year. So make sure to account for this too.
Gather Money And Acquire Your Property
Once you have the right knowledge and a suitable property in mind, it is time to gather money and purchase it. You can hire an agent to help you make a deal with the other party or contact them directly.
Make sure you have proper knowledge of documentation and always get the property signed to your name. Also, discuss requirements and pay the amount in cash or cheque.
It is also a good idea to study laws regarding property transfers so that you are not cheated. Deal with people that seem fair and have good reviews. If you are uncertain, always hire an agent or attorney to help you out.
With your desired property and papers in hand, you can start advertising. However, make sure to see if renovations need to be done and whether all utilities are available. Get the place cleaned and make it ready for tenant visits.
Make use of real estate database websites and local marketplaces to let people know your property is available for rent. Always place your name and contact information with your adverts so interested people can reach out to you easily.
Once applications start pouring in, carefully review each tenant and perform background checks. Always wait for a few options before you make your pick.
Strong tenant laws can land you in trouble, so be vigilant about who you pick. Make sure to comply with the Fair Housing Act’s prohibition. This disallows discrimination due to race, gender, ethnicity, or other factors.
- Make sure to run credit checks for each applicant to see if they missed any bill payments or faced eviction before. This can help you identify the troublesome ones.
- Reach out to the old landlords of an applicant for reference. You can also contact employers, teachers, or neighbors of people that have not rented a property before.
- Check income data if you have permission to see an applicant’s monthly income and credit score. This way, you can make sure they have enough to pay long-term rent.
- The next step is getting the tenant to sign a lease agreement if you can make a pick. This document clarifies the monthly rent, how long the tenant will stay, and what utilities they will have to pay. You can make use of ready-made online templates or get a lawyer to draft one for you. Since this document is legally binding, thoroughly read and double-check all the points before you sign.
Prove That You Are A Great Landlord!
Once all the documentation is finalized, and your tenants finally move in, the last thing you need to do is prove you are a great landlord.
Make sure you communicate the rent amount and any changes beforehand to avoid issues later on. Respond to maintenance requests immediately and respect your tenants so they can respect you in return.
How To Generate Income From Rental Properties?
Similar to various property types, rental properties also offer multiple ways to earn. Each strategy is different and requires a suitable plan. Let’s look at what these are below:
Purchase Land And Rent It Out
This method implies purchasing land in a major city and renting it out to any interested party. You can also construct and improvise cash flow through additional features.
You can turn your land into one suitable for events, parties, or weddings. Contact a suitable catering service to help you with venue management, add decor, build a garden, add fountains, and you should be good to go.
You can divide your land into smaller pieces and sell it for profit. If your land is in a suitable spot, you can also lease it to petrol stations and make millions.
Purchase A Single-Family House
Single-family houses are easy to rent out as loads of families are interested in suitable spots to live in. Smaller homes are also easier to purchase, maintain and sell.
The house itself may depreciate over time, but the land will always be the same value.
Rent Out A Duplex/Triplex
Renting out a duplex or triplex means having more than one tenant and earning a higher rental income. This could be your own house or purchased property.
You will also have less competition, and your duplex or triplex can be sold later for a hefty price tag.
Invest In An Apartment
Investing in an apartment can be great for a beginner as it requires little maintenance and smaller investments. The best part is that you can still generate a suitable monthly income through rent.
Some buildings have managers and maintenance people to take care of maintenance issues. These people can do the job for free or for a small fee.
Small apartments are quickly becoming popular due to inflation and are also popular amongst small families, couples, and singlets.
Invest In Commercial Office Space
If you are not interested in residential buildings or homes, you can opt for commercial offices. A commercial office or any space rented out by a business or company that needs an office will bring in monthly income.
Plus, you are likely to profit very well and will earn more when compared to rent generated from residential properties. There are also fewer chances of long-term vacancies.
Invest In A Vacation Rental
Purchasing property in a popular tourist spot is a great idea if you want to generate an excellent rental income.
The best part is that you can stay there and rent it out when you are away. Also, you can raise the rent as the spot becomes more popular and make significantly more during peak seasons.
However, make sure you are aware of local laws and have a budget for maintenance and cleaning. Vacation rentals demand a lot of services to make them look appealing.
Purchase A Warehouse
You can also rent a commercial or residential property to a warehouse company or distributor. This is the easiest way to make money, especially if you do not want to worry about tenants, maintenance, and utility issues. Often, warehouse people are okay with what they get and may also fix some of the things themselves.
However, it is important to make sure you do not break any laws, the company you rent out to has permits, and that they do not disturb or disrupt the activities of people in the nearby areas. If they do, you may face legal issues.
Can Real Estate Passive Income From Rent Replace A Job?
Most people dream that the passive income they earn through rent will one day be enough for them to leave their job. The truth is that it can take several years to achieve this. You need substantial savings to take care of expenses and inflation costs.
Plus, you may need to invest in multiple properties and collect rent from more than one tenant to save up faster. However, this requires a good initial investment that can pay off later.
Another thing to note is that the money you generate from rent has different benefits for different people. The location, amount you collect, taxes, insurance, lifestyle, and current financial standing will ultimately decide how much money you will need through investments to survive without a job.
People with a strong financial background and those that live in an affordable neighborhood will require less money to cover expenses. Those living in higher-end areas and having a lavish lifestyle will require more money.
Therefore, it is always a good plan to have multiple streams of income to rule out the risk factor.
Alternate Ways To Invest In Real Estate Without Renting
You will be glad to know that making money through real estate is not solely limited to purchasing and renting out properties; there are other ways to earn too. Some of these include:
REITs or Real Estate Investment Trusts allow you to own a share in large investments or managed properties. These investments can be both commercial and residential.
You can also pick specific niches like hotels, storage facilities, or medical offices. A share can be purchased simply like a mutual fund.
Make sure to consult a financial professional or open up an online brokerage account that deals with REITs for added safety and ease.
ETFs or Real Estate Exchange Traded Funds allow investors to purchase several REIT shares instead of one. The risk diversifies through this. Always get a financial advisor on board and make use of online brokerage for safety, security, and ease in purchasing ETFs.
What Are Some Other Options To Invest In Real Estate?
- Renting out small multifamily dwellings like duplexes and triplexes.
- Short-term vacation rental properties like Airbnb.
- Fix and flip.
- House-hacking by renting out a room in your home.
- Commercial real estate.
Advantages And Disadvantages Of Renting A Property
Let us now take a look at what rental properties have to offer in terms of both pros and cons:
- Monthly passive income generation.
- Property appreciates and may also double in value over time.
- Suitable choice for remote real estate investments.
- Renting allows you to obtain tax benefits.
- A 25% down payment is required for the property purchase.
- Real estate investments are illiquid and cannot be sold in a short span.
- Being a landlord can be taxing and time-consuming.
- Some neighborhoods may deteriorate over time.
- Some cities or towns are not business-friendly. They have high taxes and strict laws.
- Investments require time, money, patience, and lots of research.
- You will have to pay monthly expenses even if a tenant moves out.
Smart Tips To Earn Steady Income Through Rental Properties
- Minimize long-term vacancy by picking tenants that wish to stay for long periods.
- Try to retain tenants by providing proper services and being fair and professional.
- Always increase your rent logically and strategically to avoid problems.
- Collect rent on time and give warnings for late rent.
- Always start small initially so you can see whether rental properties are your cup of tea
- Always invest in neighborhoods and areas you are aware of.
- Always input thorough research and demand suitable rent according to the market price.
- Get help from financial advisors, insurance agents, and lawyers when the need arises.
Every country or region has popular cities and societies. And, there will always be properties that are suitable to invest in. The amount of time, money, effort, and reading you are willing to input ultimately decides what kind of rental property income strategy you can opt for.
Once you find a suitable strategy and property, make sure you keep the expectations real. It may take several years to finally build a fortune that can support you in your old age.
The best part is that if you invest smartly, you can also end up buying further properties through your savings. Good luck!