Whether you’re looking to earn little extra money on the side, want to save more for retirement or want to replace your income entirely with a non-traditional job, passive income may be just what you’re looking for. Passive income refers to the ability to earn money with very little effort on your part. This means no more early mornings, throwing on a suit and joining the other commuters in the sea of traffic. No more pointless meetings, depressing cubicles or pushy bosses. With passive income, you make your own hours, create your own office environment and are your own boss. Sounds too good to be true? It’s not. With a little bit of business savvy, creativity and capital, you can be well on your way to earning your current salary and then some.
While there are several ways that you can earn a passive income—selling eBooks on Amazon, selling wholesale items and investing in the stock market, just to name a few—today we are going to talk about just real estate.
Can You Really Make a Passive Income With Real Estate?
Real estate is, and always has been, the key to wealth. The more you own, the better off you are (have you ever played the game Monopoly?). That said, is real estate investing really a passive income? As mentioned above, passive income is supposed to be income earned with very little effort on your part, but as real estate tycoons like Donald Trump, Donald Bren and Stephen Ross have proven, there is no rest for the wealthy. Building up their real estate empires has proven to be a lengthy journey, one riddled with loss, bankruptcy and yes, success.
But once their found success, they were able to rest, right?
It’s true that they could have taken a breather, but for people like Trump, Bren and Ross, there was always more to be had.
However, assuming that you’re not a real estate tycoon (which you’re not, otherwise you wouldn’t be reading this), you can approach your passive income in one of three ways:
- Purchase the property, rent it out and then forget about it;
- Purchase the property, fix it up, rent it out and maintain it; or
- Purchase the property, fix it up, rent it out and hire someone else to maintain it.
As you can see, option one would be the most passive option of all, but is it really the wisest option? Probably not. Options two and three are the better options, but they require a little more work on your part. However, the more money and work you put into your property, the more you will get out of it, which means more income to either a) save for a rainy day or b) invest in another property. If you chose a, you chose the more passive route. If you opted for b, well, you can see how your passive income can quickly grow into a decidedly impassive career. Option a makes you a landlord, option b makes you a mogul.
In short, passive income is what you make of it. However, invest wisely in even just one property, and you’re bound to make an easy buck or two.
Financing Your Real Estate Venture
Now comes the very non-passive part of your passive income: funding it. When it comes to real estate, the only way you can earn an income from it is if you own some. Unfortunately, most people don’t have a couple hundred thousand lying around to pay for a piece of property in all cash, and nor do they have even $20,000 for a down payment. However, you at least need a down payment of between 10% and 30% for lenders to take you serious. In order to save up that down payment, you’re going to have to work hard and stay frugal. This means no trips to the Bahamas or even to Cleveland; no fancy dinners or Friday night pizzas; and no splurging when you get that tax return. If you have extra money that you could spend remind yourself of what you’re saving for and put it away.
Saving up for a down payment may be a long and difficult road (made extra long by the lack of pizza and fine wine), but it will be well worth it when you can waltz into the bank with a load of cash and walk out with a piece of property. The bigger your down payment is and the better your credit score, the lower your interest rates and monthly payments will be, which means more immediate cash flow.
Some types of mortgage financing such as the Federal Housing Administration (FHA) and the Veterans Administration (VA) typically offer lower interest rates and more lenient credit standards. However, these loans are only available on owner-occupied purchases; however, you can get around these rules by purchasing a duplex or a triplex and renting out the other half (or third). You might find that a duplex or a triplex is better for you, as a first time investor, anyways, as it gives you a chance to “learn the ropes,” so to speak, as a landlord. It will also allow you to get a feel for what type of issues to expect, both maintenance wise and tenant wise, and implement a plan for how to handle them when you’re no longer living next door (or upstairs).
Some other types of financing to consider include:
- 203K Loans
- HomePath Mortgages
- “Money Partner” (or, an investor)
If you already own a property with considerable equity, you may want to consider refinancing or getting a home equity line of credit (HELOC) to finance your rental real estate investment. These are usually easier to obtain than a new loan, as the bank has faith that you won’t walk away from your investment (as your home is now tied to it).
Stay tuned for our next posts in the series, which will detail how to find the right properties, how to choose your tenants and what all goes into maintaining a profitable rental property.