Passive income is the holy grail for many investors, offering the allure of earning money while you sleep. Does owning rental properties provide for passive income? Maybe, but just how passive are they? In this blog post, we’ll explore the reality of owning rental properties and evaluate the level of passivity they offer. We’ll cover the process of buying a property, hiring a property manager, managing a property manager, annual costs, tax benefits, and conclude with a discussion on the level of passivity for those close to or in retirement.
What is Passive Income?
Passive income is income that requires little to no effort to earn and maintain. It’s money that comes in regularly with little to no effort on the part of the recipient. Rental properties are often considered a source of passive income because once the property is leased, the owner can sit back and collect rent checks. However, the reality is that owning rental properties involves a fair amount of work, and the level of passivity varies depending on how involved the owner wants to be.
Buying a Rental Property:
The first step in owning a rental property is buying one. This involves determining a good location, finding a good deal, evaluating the cash flow, making an offer, and closing on the deal. Location is key when it comes to rental properties. You want to buy in an area with high demand for rentals and low vacancy rates. Once you find a property that meets your criteria, you’ll need to evaluate the cash flow to ensure it’s a good investment. This involves calculating the potential rental income and subtracting expenses such as mortgage payments, property taxes, insurance, and maintenance costs. If the numbers look good, you can make an offer and, if accepted, close on the deal.
Hiring a Property Manager:
Once you own a rental property, you’ll need to find a property manager to handle day-to-day operations. This involves finding a reputable property management company, interviewing potential managers, and negotiating a contract. A good property manager will handle everything from finding tenants to collecting rent to handling maintenance requests. This can be a time-consuming process, but it’s essential to find the right person or company to manage your property. For more information check out the article: Managing a Property Manager: How to Find the Right Fit for Your Property. It’s from a site about small multifamily investing that I like.
Finding Contractors:
Before you can lease up your property, you may need to make repairs or updates to get it ready for tenants. This involves finding contractors to do the work, getting bids, and overseeing the project. This can be a time-consuming process, but it’s essential to ensure your property is in good condition before leasing it out.
Leasing Up Your Rental Property:
Once your property is ready for tenants, you’ll need to find tenants to lease it up. This involves marketing the property, showing it to potential tenants, screening tenants, and signing leases. This can be a time-consuming process, but it’s essential to find the right tenants to ensure your property is well-maintained and rent is paid on time.
Managing a Property Manager:
Once your property is leased up, you’ll need to manage your property manager. This involves reviewing reports, evaluating performance, and addressing any problems that arise. This can be a time-consuming process, but it’s essential to ensure your property is well-managed and your investment is protected.
Annual Costs:
Owning a rental property comes with annual costs such as property taxes and insurance. These costs can add up, so it’s essential to budget for them and ensure they’re covered by your rental income.
Tax Benefits:
One of the benefits of owning rental property is the tax benefits. You can write off expenses such as mortgage interest, property taxes, insurance, and maintenance costs. You can also depreciate the value of your property over time, which can reduce your taxable income.
Conclusion:
Owning rental property can be a source of passive income, but it’s not entirely passive. It requires work to buy, lease up, and manage a property. However, with the right team in place, it can be a relatively hands-off investment. For those close to or in retirement, owning rental property can be a good source of income, but it’s essential to consider the level of involvement required and whether it’s the right investment for your situation.