Real estate has long been a path to monetary success for many entrepreneurs. You won’t be hard pressed to think of people who have made a name for themselves in that space. While there is no doubt that one can make lots of money in real estate, there seems to be a perpetual belief that you just rake in the big bucks by doing absolutely nothing when in fact that mindset is nothing but a passive income myth of real estate. If passive income through real estate is a dream of yours, then you need to be brave and make it happen. Here are a few tips to help.
Passive Real Estate Income Guide For The Brave:
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Passive Real Estate Definition:
Passive income, is defined as net rental income and income from a business in which the primary taxpayer does not materially participate. For the purpose of this post, I am talking about you owning a property and renting it out to tenants and making money without any work on your part. It sounds good on paper, but as a wise man said:
“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin
How to get started in passive real estate investing with little money:
- Start Saving Money:
While it is possible to get started in real estate investment with no money down, you would need a high paying job. After all, the bank wants to know that you will be able to pay them back. You need to save money for a down payment. Start by making a budget and sticking to it. Put aside any extra money in a separate bank account and don’t touch it. When my husband and l decided to get a property to rent out, we skipped going out completely and cooked all meals at home. Watched Netflix rather than go to the cinema. Once you start watching the numbers, you see how much faster you can accomplish the near impossible.
- Work on your credit score.
Before you venture into investing with no or little money down, you need to make sure you have a credit score that would encourage lenders to give you money. Start my getting a free credit report from the credit reporting agencies as detailed on this post. Fix any errors that are on there and work on paying down debt.
I can not stress this enough. You need to do your due diligence and find out hard facts for yourself. Don’t be talked into deals that look too good to be true. There are a lot of shysters claiming they can teach you how to make millions through passive real estate investments. How often do you see those signs saying “we pay cash for house”? All they do is take your money to teach you nothing. They get rich by teaching the “dream” and the only way to make money is to teach others the dream. Our research included looking at places outside of our comfort zone. We lived in Los Angeles at the time and we knew there was no way we could afford a rental property around there. My research included looking at other states. I had a brother who lived in Houston at the time and so we focused there because the real estate prices were more affordable. Our first condo purchase cost us a total of $25,200 for a 2 bedroom 1.5 bath that was in okay condition. We purchased outright with no loan and still have it till today netting us with just over $300 per month profit. We were lucky to have my brother nearby. Point is to think outside the box!
Find book about real estate investing and dive in with gusto. Nothing beats hearing and reading about how people did the same to inspire you. It can be an overwhelming thing and yes, life changing as well. It is ultimately rewarding though, and while you may not make billions, you can make enough to live a comfortable life and maybe even retire early from the work force and do what you really want to do.
Active versus Passive Real Estate:
While everyone pushes the fact that real estate investing is passive, I say once again that it is a fallacy and maintain that it is more active than passive investment. We had to learn quite a few lessons and are still learning. In order to save money and protect your gains, you have to actively keep an eye on the investment because things can go wrong quickly. Is passive real estate really passive? Some of the active actions we have include:
Painting to save money
Cleaning, especially after a move out
Going to court to attend tenant evictions
Surely, you can be passive and hire lawyers to attend court on your behalf or hire overpriced workmen, but what happens is that the profit you make disappears. There have been a couple of times where our year ended with a loss on a property. Being more proactive has corrected our early errors.
Tips for keeping the income you make through passive real estate investment:
Be ruthless when it comes to evicting tenants. This might sound harsh, but as a nice person, l have been burned by tenants who take advantage. One stopped paying rent and we started eviction proceedings. On the court day, she deposited the two months rent owed and begged for forgiveness. My husband said to still kick her out, but l felt bad. Yep! we got screwed again and it took even longer before we could kick her out for good and she damaged the property to boot out of spite.
Hire a property manager if you get overwhelmed. While you can try and do everything yourself, after a while, it starts to feel like a job, an unwanted one at that. A property manager will handle all aspects of running the business for you, saving you precious time. That being said, you need to keep an eye out for them as well. I had to keep a cap on expenses. Anything over $300 needed approval from me. What we found out was that some would just call any workman and price was of no consequence to them. Many times, l have saved hundreds by us calling the fixer and having the property manager meet to supervise. One unit had mold and their specialist was charging us $4800 to deal with it when l ended up finding someone for $1300!!!
Consider rental insurance. We ended up getting a policy with American Home Shield. It works out great for us as the property manage co-ordinates with them to get issues taken care of. If it’s not fixable, they will replace it. We have had a new air conditioner replaced for example.
Add a call out fee to the lease: While most tenants are good, there will always be twats who call the owner for every little thing, costing you money. Our leases now include a $75 call out fee. Since the deductible for the insurance people to come out is $100, it ends up costing us $25 each time. We have had way fewer call outs because people pay more attention.
Make sure you actually make a profit from the deal. Sometimes one can get caught up in the profit alone and forget about the expenses. For example, HOA fees will cut into your profit. Insurance premiums, real estate taxes, wear and tear repairs, unexpected weather damage (we had it with hurricanes Ike and Harvey). You don’t want to be in the red at the end of the month!
Keep good records: This just makes sense come tax time. It make it easier for our accountant to do our taxes so we can deduct the right amounts. They’ll thank you.
Be flexible with the tenants: Be thankful when you get great tenants and work with them. They are hard to come by. We have had times when we did not raise the rent at the end of a lease to get them to stay longer. We have had a tenant pay us 3 weeks late without the late payment fee because they were upfront.
Is real estate a good investment?
Yes is my answer if you approach it with the right mindset. At one point, we had 5 rental condos and 2 single property houses in our portfolio. We stuck with properties costing less than $30,000 that we could do the minimal fixes and lease. Once we made up our minds to retire early and travel, we sold most and currently have just one condo and one single property house which are taken care of by the property agents as my brother no longer lives in Houston either. The proceeds from the sales and passive rental income are funding our lifestyle in a lower cost of living area, something else to consider if you want to make passive income through real estate. Rent your primary house and move to a cheaper place. The IRS allows for the deduction if you live in the place as your primary residence 2 out of 5 consecutive years.
Do you dabble in real estate? If not, is this something that is of interest to you?