It is the dream of any prospective real estate investor to achieve “financial freedom” and start earning a passive income without having to invest any time and effort in his/her income properties.
This, however, might be a dream that is too good to be true in most cases, as owning income properties with a positive cash flow requires at least a minimal amount of time and effort to be invested in; otherwise, it will be an investment that is destined for failure.
So, what are the active and passive components of owning income properties? And how can you, as a landlord, find the balance between being sufficiently involved in your investment property but also not letting it drain away your energy?
Let’s find out.
Income Properties: The Active Side
The main reason why real estate investors resort to investing in income properties is, obviously, to make money. There are numerous types of income properties that investors can invest in for the purpose of generating a monthly income, the most popular being rental income properties. However, investing in a rental property and becoming a landlord might not mean that you will start generating rental income while sitting around, traveling, or working a full-time job without having to invest any time and effort in your investment property.
On the contrary, becoming a landlord would mean that you will have to be prepared to invest A LOT of time and effort into managing your income properties and tending to your tenants to keep them happy; otherwise, your investment property will be destined to fail.
So, what are the active components of being a landlord in order for your property to actually start generating rental income for you? The responsibilities of being a landlord are nearly limitless, which is a reason why many real estate investors either try to stay away from investing in rental properties or face failure thinking that their income properties will run themselves.
Being a landlord means that you will have to care for your investment property as if it was your pet dog, and a needy one for that matter. For example, you will always have to be on top of things when it comes to maintaining the rental property and implementing any required repairs that might affect the quality of life of your tenants. Whether it is a broken pipe, a broken window, or a leaking roof, you will be the one responsible for fixing the problem and keeping your property in a good shape.
Another aspect of being a landlord is having to tend to your tenants and their needs as if they were your pet cat; they will ignore you most of the time, but once they need something from you, they won’t stop calling, and you are obliged to answer. Even if it means that you will have to pick up the phone at 3 in the morning and go fix their toilet yourself, the needs of your tenants have to be met, and their stay in your income property has to be comfortable, otherwise your investment is going to suffer.
Income Properties: The Passive Side
On the bright side of being a landlord, and with good planning, you WILL actually be earning a monthly positive cash flow. Since the amount of cash flow you will be getting might not be enough for you to quit your day job and rely solely on the profit you’re making from your income properties, you should not purchase your first rental property thinking it will be enough for you to retire afterward anyways.
It is important to keep in mind, however, that a well-managed income property will be earning money for you, and that is enough for now. But, if you’re looking to maximize that profit at a minimal amount of effort, you will have to develop a solid financial plan and take into consideration any expenses that might arise before they happen, if they happen at all.
Related: How passive is your rental income?
It will not be enough to calculate expenses that you are certain about such as taxes, water and electricity bills, or mortgage payments. But you should also plan around unexpected expenses such as the AC breaking or a roof falling apart for whatever reason. This allows you to increase the passivity of your income property by reducing the amount of time and effort needed to come up with solutions for unexpected problems and will give you a sense of security when these problems arise by having a pre-set plan to deal with them.
But, back to the downside of being a landlord: How can you actually make your income property as a passive investment in order for you to enjoy the passive income with the least amount of effort?
Hire professional property management.
Income Properties: Hiring Property Management
As a landlord, one of the best services available for you to hire is a professional property manager or management company. Professional property management will handle all the active components of your investment property: from managing your income property, through following up on it, to tending to your tenants and their needs. Professional property management services will reduce the number of worries related to your real estate investment and will let you sleep in peace at night, knowing that your investment property is being well taken care of.
This, however, comes at a price, and you should always keep it in mind when planning the finances of your investment.
Professional property management will typically cost you 10% of your monthly rent. So, if your property’s cash flow is barely on the positive side, hiring property management might lead your cash flow to fall below the acceptable limit, and you will start losing money on your investment property.
Additionally, professional property management is a business, and just like any other business, property managers aim to make money as well. This means that they will use whatever opportunity that they come across to take any extra cash right out of your pocket; they can be opportunists, and they can even be scammers.
So, how can you avoid getting cheated by professional property managers?
Income Properties: Finding the Balance
In order to avoid getting cheated by professional property management while also enjoying the passivity that comes with hiring these services, you will need to find a balance between being an active landlord and a passive one.
How do you do that?
It’s simple. All you will need to do is spend a few hours each week on reviewing and following up with everything related to your income property. From reviewing bills and payments, to actually visiting the rental property or calling the tenants to ask if everything is going alright with them, you need to be on the lookout for any changes in expenses, any bad experiences, or anything that might indicate you being scammed by the professional property management or that they are not doing their job as they are supposed to.
An example of this would be to review the water and electricity bills for your rental property and try to notice any changes or anomalies that might arise. Is the power consumption on your property abnormally higher this month? Then perhaps there’s a broken window in the rental property that’s causing it to be cooler than usual, and fixing it would reduce the amount of power consumption, while your property management company is not doing anything about it.
Having truly passive income properties might not be a possible thing to achieve. The more passive you are about your income property, the higher the chances are that your property is heading downwards with regards to its quality, or that it’s not making you as much of a profit as it’s supposed to. In order for your income properties to be as profitable as possible with the least amount of effort from your side, it is important to not neglect your properties and always keep yourself up to date on all things related to them.
While this might not mean that you can travel the world while still enjoying a positive cash flow from your investment property, in the real estate business nothing comes without a cost, and you will need to find the balance in terms of the time and effort that you invest in your property in order for it to provide you with the income that you are hoping for.
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