It’s easy to get caught up in the excitement of owning rental properties and bringing in a little extra income every month. It seems like a simple way to earn passive income without putting in a lot of time on the side.
However, there’s a lot more that goes into being a landlord than you might think. Popular television shows make it look simple to acquire rental properties and handle tenants, but it’s not easy. Before you take the plunge, make sure it’s the right thing for you. Here are a few things to consider.
To fully understand the financial benefits of being a landlord, you need to understand passive income. It’s very different from your hourly or salary job, so it might be unfamiliar to you. Essentially, it’s an enterprise that makes money without you having to be actively involved. In other words, you can make money with very little effort on your part.
Real estate investments are a popular form of passive income. Income from a real estate investment can come in the form of monthly rent payments or dividends from real estate investment trusts (REITs), asset-backed securities, and stocks in real estate.
But just because you’re not involved in the daily operations of an enterprise doesn’t mean there’s no work involved. To make a successful rental property, you must set it up for success. This means researching the market properly, screening tenants thoroughly, and setting up regular maintenance so that you don’t have surprise repairs.
The easiest way to make passive income from your rental property is to hire a property manager to handle your rental for you to minimize your hands-on involvement. It’ll cost you a monthly fee, but this is worth it to most landlords who would rather collect funds than spend hours on their rental.
Assess Your Rental Market
You’ll also need to look at whether or not your real estate market can handle a rental investment. Some markets are primed for rentals because there’s a higher likelihood that the demographic in the area will rent rather than buy. The economy might also be unable to support as many home sales, so you see more renters.
But that’s not the case everywhere. Some markets are filled with people that would rather buy than rent. You’ll want to run market analyses of the areas closest to you to determine the best place to purchase a property.
If you’re not located in a market that can sustain a good rental platform, you might consider a long-distance landlording operation. Many investors purchase homes in vacation spots and rent out their properties during tourist season. You might also rent out a property in a location where you have friends or family who can help keep an eye on your property. In any case, you’ll want a property management company to handle the maintenance and day-to-day needs.
You could also consider other forms of property investment. Rental income isn’t the only way to make passive income on real estate, and if you’re not up for being a landlord, you might give those options a try.
Have the Cash
It’s true that there are ways to invest in real estate without a ton of cash on hand, but it’s not the ideal scenario. The good news is, you don’t need as much cash as you used to. Banks were holding their purse strings very tightly a few years ago, but they’ve recently loosened up in light of a brighter economy. You may be able to purchase a property for as little as 10 percent down, which may be as little as $5,000 for a one bed, one bath in certain areas.
Still, it’s better to have more savings to put down so you qualify for lower interest rates, and you can forego private mortgage insurance. If you can lower the costs of your loan, you can raise your profits on your passive income.
Know the Risks
Real estate investing has a very low barrier of entry, and oftentimes it yields dividends even when the market isn’t in your favor. That being said, it’s not without risk, and you should know what you could face before buying.
Some of the biggest risks include renters that don’t pay, frequent late payments, damaged property, empty rentals, natural disasters, and repeated maintenance requests. All of these can lead to a negative cash flow, and you may have to sell the property to get out of debt.
This isn’t common for landlords who are careful and calculated with their investments, but sometimes circumstances occur beyond your control. If you plan to invest in rentals, have plans in place to mitigate some of these risks.
If you feel that you possess the skills needed to be a good landlord, and you’re excited about the adventure despite the risks, now is as good a time as any to invest and potentially build your fortune!