There are many ways of earning passive income these days, and one of the most popular is real estate. Before we go there, let’s define this term. Passive income is generally thought of as income where you are not exerting much effort, yet still earning money. Most people would agree, that sounds pretty great! Especially since many other methods of investing can require continuous monitoring.
Real Estate is Great
Investing in real estate can be very rewarding both mentally and financially. Identifying a property that has the potential to earn you a nice cash flow and then getting your offer accepted, is an incredible feeling. This gets even better when owning the property becomes a reality. Seeing a positive income closely aligned to your own estimates is powerful stuff and quite addictive.
To get to this point, however, requires homework. Just like anyone who has mastered a skill such as playing the piano, knitting, or even golf, it requires learning and internalizing the fundamentals. The fundamentals include real estate investing terms, mortgage terminology, and understanding how to research the local market. To figure out the local market, you need to take into consideration: the job market, crime rates, rental rates, and overall real estate performance for the area.
Assessing the Property
Understanding what has happened to the property from a value standpoint and repairs (if possible) is always good. You can learn some of this information by checking out the local assessor site. The disclosure provided by the current owner can also be extremely valuable, if the current owner is the person selling the property. In the event you are considering a property that is a short-sale, foreclosure, or an estate sale, the information about the property is likely limited. It is important to understand the potential repairs, both near-term, and long-term, while running the numbers. Continual costly repairs on a monthly basis that exceed your planned expenses will kill your cash flow. Understand what you are walking into.
Assessing the Market
For the local area rents, you can check out a few resources like Rentometer, Zillow, or a local property manager that you have an established relationship with. Calling or checking on nearby listings that are similar is another great option as well. It is good to have a few data points when you are evaluating your potential rents.
The quality of the school district is a big driver for many investors. To learn more about the quality of the school district, check out Cruvita.
If dealing with flooding is a potential concern for you, check if your property is in a flood zone using the FEMA flood map.
Practice Makes Perfect
The first real estate investment is no doubt the hardest one to make. What makes this first investment easier though, is going out, checking out the neighborhood, and running the numbers on different properties hundreds of times with a tool. Seriously, the more times you go through the process of truly evaluating a property, the more likely you are to spot a good or bad investment. It would be wise to include the costs associated with property management if you decide you do not want to manage the property yourself.
Remember, this research and purchase does not have to be done without help. Ultimately, you will make the final decision, but working with someone who has been around the block a few times and has invested themselves is a great resource.
It’s Yours, Now What?
Once you own the property, you have a decision to make. Do you want to be the person who is responsible for the tenants and toilets? Or do you want to pass this responsibility over to a property manager and make this a more passive type of income? Finding tenants, managing the issues that come up, and collecting rent takes a certain type of person, and not everyone is cut out for it. However, managing your own property, even for a short period of time, will provide you with a good feel for what this work entails. You will have great insight into the type of property manager you want to hire.
Property Managers Can Help!
Owning real estate will never be entirely passive, and anyone that tells you that is not sharing the complete picture. However, selecting a property manager who aligns with your style and goals will help considerably. Once you have a property, you will encounter all kinds of things property managers are skilled at handling. One of the first things your property manager will do for you, is help you find the right tenant. Everyone wants to get their property rented right away, but not every tenant is a good choice.
Your property manager will run a background and credit check on your tenant and is experienced at evaluating applications as well as recognizing red flags quickly. When everything is going well, you will only remember you own real estate when you see the deposited money in your account monthly and at tax time. That is the perfect scenario. For all other times, your property manager will provide you the support you need.
One of the benefits a property manager brings to the table is the ability to recognize rental rate trends and make adjustments accordingly. When you are the person collecting rents from the tenant, it makes it harder to increase the rents. Additionally, it can be harder to make the tenant pay for repairs or terminate their lease when you run into a problematic situation. A good property manager will know how to address these issues and handle them quickly.
Investing in real estate is one of the most profitable options for passive income. Investing the time to find the right property, and a good property manager will go a long way towards making your investment nearly passive for years to come. As Marshall Fields said, “Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”