Wondering how to make passive income from your real estate investing property? Well, fear no more! You’ve come to the right place. We all know that passive income is a great tool for building retirement income faster, paying off debts, and, in the long run, retiring early and comfortably. If you have passive income during your retirement years, you potentially could live as well as you did during your peak earning years.
So, what is passive income? Well, many people define it as the money you earn without doing actual labor. Often times, it comes from investments, such as in rental properties, stocks, bonds, annuities, and other investments. We’re going to quickly discuss with you how to make passive income from your real estate investment properties and provide you with the best tips and advice.
The investment world has changed regarding real estate investing, and that means that you are not limited to owning residential or commercial rental properties firsthand if you want to make money with real estate investments. On top of that, owning real estate rental properties can be very time consuming if it’s not done with a passive income method in mind. Here we will talk about owning rental properties directly as one source of passive real estate investment income, but you can also consider other options for passive income through real estate investing.
Related: How Can You Generate Passive Income in Real Estate Investing?
Two Ways to Profit
How to make passive income depends on many factors. When you have several rental income properties, you make your money in two ways. The most obvious is the income stream created by rental income. As long as the amount collected in rents exceeds the amount paid for mortgages, taxes, insurance, maintenance, repairs, and property management services, you will earn a good amount of rental income each month. The other way you can profit is by increasing the value of a rental property and mining the equity that you build. You either can take low interest loans against the equity or sell a property outright if you have others that will continue producing a good stream of passive income.
Out-of-State Investing
One of the great things when it comes to leaning about how to make a passive income through rental properties is the ability to buy properties throughout the country instead of just in your general area. Because you will hire others to manage, maintain, and repair the investment property, you don’t have to be in the same location and can maintain passive ownership from practically anywhere. That gives you the ability to better choose rental markets where you stand the best chance of profiting the most due to lower local and state property and business taxes.
When you want to learn how to make passive income, the first most important thing to keep in mind is finding an ideal location. Ideal locations are those that have relatively high incomes in communities that have strong local economies, low unemployment rates, and high-occupancy rental markets. Empty rental units cost money. Keeping them full with responsible and well-employed long-term renters will help to ensure your long-term success and continued passive income. How to make passive income in these locations? It’s simple! Look for markets with high job growth, companies that will soon be the home of a major new factory, or large corporation as this can lead to a higher demand for housing than the present inventory can handle. The result is an increase in property value and a stable pool of potential tenants and home buyers.
Related: Why Are Rental Properties Among the Best Passive income investments?
Avoid the Money Pits!
Being successful in generating passive income from real estate is an important step when learning how to make a passive income, and it requires doing a great deal of homework beforehand so that you don’t wind up buying a money pit. A money pit will eat up all of your potential rental income, cost even more for constant repairs, and make it harder to keep your rental units full. You can avoid them by doing your footwork and making your money when you buy.
So, how to make passive income and avoid money pits? Easy! That means you visit properties, review their tax histories, ensure the local market is strong and has sound long-term potential, and check that the local rental market is one that is favorable to landlords and property owners. If you have to compete to fill your rental units and pay high taxes in areas where potential rental income in limited, you made a bad business decision and will have trouble making passive income from your real estate investment. But as long as the property and market are good, you can make money!
Have a Plan to Generate Passive Income from Real Estate Investments
Wondering how to make passive income? Well, all successful investments require planning. Whether you’re buying stocks, bonds, or real estate, a good plan up front helps you avoid mistakes. When you buy an investment property, there are several known issues that you should keep in mind before making any purchasing decisions. Here are three of many.
Related: What Are the Best Passive Income Investments in the Real Estate Market?
#1. Cash Flow
Not all properties are equal when it comes to cash flow. When you track the numbers on your expenses, expected rental income, and profits for a rental property in a less ordered neighborhood, your return looks good. However, as with any investment, your high return comes with increased risk. On the other hand, an investment property in a greater area with good public schools is less risky and will offer higher appreciation over time even if your monthly profits are smaller.
#2. Good or Bad Tenants
When you want guarantee how to make passive income from your rental property, you want the best tenants you can find. If you’ve chosen an investment property in a more affluent and stable neighborhood, your tenants are more likely to be responsible with your property and reliable about paying the rent. Properties in lower income areas are more likely to attract tenants who become delinquent in paying the rent, move out without notifying you, and damage your rental property. This is part of the higher risk of this type of investment property. You’ll end up with the expense of repairs and less income to spend on those expenses.
#3. Vacancy Rates
An investment property with a high vacancy rate isn’t really much of an investment. Yes, the property may appreciate over the long run, but will it be enough to cover your expenses as a property owner? It’s better to invest in a property in an area that will attract stable and responsible tenants.
To learn more about rental properties and passive income in real estate investing, sign up for Mashvisor.