Investing in rental property seems to be the most popular real estate investment strategy, but is it a form of passive real estate investing?
There’s a general opinion that rental properties don’t generate passive rental income. Technically, passive income is what you receive on a regular basis with little effort on your part. Many believe it’s impossible for an owner of a rental property to achieve passive income since there’s a lot of work linked to this real estate investment strategy. Instead, they only associate passive real estate investing with other strategies like crowdfunding, REITs, and tax liens.
However, while the idea of passive rental income is a myth to most people, investing in rental properties actually can be a source of passive income – when done right. Don’t believe us? Here’s a story of how one ex-grad student did it and retired at 30!
Keep reading this blog post as we show you what you need to do to generate passive income from a real estate investment property.
1) Financing Your Real Estate Investing Business
While some real estate investors pay all cash for their investment properties, one of the biggest benefits of real estate investing is the ability to buy using borrowed money. This gives you the leverage to buy more properties with less money. Many wouldn’t consider the return on investment worth the risks if it weren’t for this leverage of financing.
Beginner property investors with good credit typically take out a conventional mortgage on their first property, paying between 10% – 30% as a down payment. Remember, a higher down payment can decrease your monthly payment and increase your cash flow!
In addition, special types of mortgage financing may also offer lower rates and lower credit standards. These are only available for owner-occupied purchases, but property investors can get around that by buying a duplex, triplex or even a four-plex. These small multi-family investment properties are good for passive real estate investing because they’ll give you multiple units that generate multiple incomes and can be easily managed.
If you’re not able to get a mortgage, there are still a few investment property financing options available to consider, such as:
- Depending on how much equity you have available in your own home, you can refinance or get a home equity line of credit (HELOC) to finance your rental property investment.
- Try approaching the seller for owner financing, where they sell the property in exchange for monthly payments.
- Consider bringing in a private money lender to finance the property. While this isn’t usually recommended for beginner investors with no experience and no connections, it’s an option to think about as you build your real estate empire.
To learn more about financing your real estate investing business and discover more options, read: 7 Easy Methods for Investment Property Financing
2) Finding Rental Properties for Sale
There are several ways to find properties to start your real estate investing business. The most popular and widely used is the Multiple Listing Service (MLS), a platform for real estate agents to advertise their listings. Consider building a relationship with an agent to get good deals through the MLS. However, make sure that your agent understands exactly what you’re looking for. Otherwise, he/she might have a “steal” to show you that will likely only waste your time.
To find a top performing real estate agent anywhere in the US, click here.
Moreover, successful real estate investing, just like any investment, is all about buying low. Buying a rental property for a lower price means your rental income will be a larger percentage of your price. In turn, this means stronger cash flow and the ability to hire out more of the management to save you a lot of hassle. After all, this is what passive real estate investing is all about.
Wondering how to find investment properties for sale that are cheap and without the help of an agent? You’ve come to the right place!
Mashvisor is an online real estate investment tool that’ll help you find the best properties in your city and neighborhood of choice in a matter of minutes. Using our Property Finder, simply set your own criteria (location, property type, budget, rental strategy, and the number of bedrooms and bathrooms) and you’ll be given a list of the best properties for sale that match what you’re looking for. Not only that, but you can also see each property’s potential return on investment!
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
3) Hiring Professional Property Management
This is where passive real estate investing starts. You’ve done your part as a real estate investor in securing the financing and finding the best rental property for sale. Now, you want to make money from your property investment with a minimum amount of work, so what do you do? Hire a property manager.
There are professional management companies that specialize in managing and taking care of the daily tasks associated with rental properties. Many part-time property investors turn to these companies to invest in real estate while keeping their full-time job. All they do is receive a monthly check and reports on their rental properties.
Keep in mind, however, that professional property management comes with fees -you need to include these in your financial plan. Typically, these companies charge the first month’s rental income as well as a monthly fee afterward in exchange for their services. Nonetheless, while it could eat into your cash flow, hiring a property manager only moves you closer to a truly passive real estate investing business.
Which Property Is Best for Passive Real Estate Investing?
We already mentioned multi-family investment properties as a good type of rental property to generate passive rental income. Still, there are other property types that allow for passive real estate investing.
#1 Turnkey Rental Properties
Turnkey rental properties are offered to investors by property investment companies. These properties are fully renovated and already have tenants. Plus, companies that offer turnkey properties are typically also responsible for managing them! The only thing required from you is to research the company to assure it’ll provide you with a steady rental income and good ROI. Thus, turnkey rental properties truly require minimum efforts, making them the best properties for passive real estate investing.
#2 Single-Family Homes
Single-family real estate investment properties can also generate passive rental income. However, there are a few factors that determine how passive your rental income is. First of all, a good tenant is crucial for passive real estate investing in single-family homes. So, the only work you have to do is finding a great tenant who’ll take good care of your rental property. This will make your investment much more passive because all you have to do is collect rent checks every month.
The second factor to take into account for truly passive real estate investing is to find a profitable single-family home in the right location. This can be easily done with an Investment Property Calculator. Using this tool, property investors can analyze both the property and the housing market where it’s located. It also gives you readily estimated data (rental income, cap rate, cash on cash return, cash flow, and more) to assure finding an investment property with a great return on investment from passive rental income.
Some might argue that this requires a lot of time and effort to analyze the data. With Mashvisor’s Investment Property Calculator, however, you can cut down 3 months of work into just 15 minutes! To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
#3 Commercial Real Estate
The last type of investment properties to generate passive rental income is recommended for experienced real estate investors looking to grow and diversify their portfolio. Commercial properties are a good bet for passive rental income because they typically have tenants that stay longer and take better care of the investment property. Moreover, just like multi-family homes, you’ll also benefit from having multiple tenants in one building. Therefore, losing one tenant won’t threaten your cash flow and ROI.
The Bottom Line
As you can see, passive real estate investing with a rental property is not a myth anymore, but a reality. It only depends on the amount of involvement you’re looking for. With the help of professional property management companies, almost any rental property can turn into a passive income-generating property. Of course, successful passive real estate investing starts with finding the right rental property.
Start out your 14-day free trial with Mashvisor now to look for and find properties in any city and neighborhood of your choice in the US housing market!