You have come to the right place if you want to start earning passive income from a rental property. There is only one way to do it right. And we are going to show you what that is.
You are going to need a house or apartment or a commercial building to rent out. If you don't already have one, this will be the most challenging part. Once you have the property, you will need to hire a management company to be passive. These are the broad strokes. Let's get into the fine print.
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Do You Want Passive Income From Rental Property?
Well, of course, you do. Who doesn't? So what will it take to make this happen?
Buy a property to rent out
You will need capital for a down payment plus working capital to make the place rental ready. It would be a good idea to work with a Real Estate Agent to find your new property. It would be best to look for something in a good area, near good schools and public transportation. Above all else, you are going to need to find a deal. An agent may be able to find foreclosures. You can also check out the public auctions in your area. Where I live, it is the Circuit Court Commissioners Office that handles the auctions.
I can't stress enough that you can't go into this on a shoestring budget because Murphys Law will rear its ugly head and bankrupt you.
So you have a property and you are ready for passive income
You will need to hire a property management company. Why? Because you want passive income and you don't want to be a landlord. If you are a landlord, you will have to provide maintenance in the middle of the night, or maybe there will be an emergency call just as you sit down for Thanksgiving dinner. Trust me; you don't want that.
How does property management work?
You will meet with them at the property, and they will look it over. You can discuss the rental rates, and they will have a recommendation, sign the contract, and hand over the keys.
During the meeting with the property manager, they will explain what tasks they will do and what they don't do, and the payment arrangements.
Everyday tasks done by the property manager are:
- Screening new tenants and doing background checks
- Cleaning units when tenants leave and preparing them for new renters
- Drawing up lease documents
- Collecting rent, banking, and bookkeeping
- Responding to maintenance and repair requests
- Maintaining grounds and common areas (lawn care, snow removal, sweeping, etc.)
- Advertising and showing apartments to prospective tenants
- Handling late payments, tenant disputes, and evictions if necessary
Just clarify with them that they handle all activities. So all you want is to get a monthly statement explaining the actions for the month.
How does the property manager make money
The property manager will collect the rent and take their fee out of that and send you the balance. My experience has been the fee was 10%, but I'm sure it could vary some. You want to make sure the agreement is that they only get paid from the rent and not from you. If it is vacant, they get nothing. No income provides the incentive for them to get it rented out.
Your monthly statement will show you the rent taken in and expenses for maintenance, lawyer eviction notices, the management expense, and anything else incurred. Advertising the property for rent should be part of the management companies expenses and not yours.
Are property managers worth it?
In my opinion, I would never own rental property without using a property manager. The headaches of being a landlord and being responsible for arranging maintenance, evictions, noise complaints, or whatever else might happen make paying 10% a no-brainer. Plus, this is how you make Passive Income From Rental Property.
Are property management fees tax deductable?
I'm no accountant, but absolutely yes, they are! Just another advantage of using a property manager.
How do I find a property manager?
- Referrals are the best. Ask people you know if they have any recommendations.
- Do a Google search for property managers near me. This will give you plenty of candidates.
Be sure to vet them. Utilize Better Business Bureau, call them, and ask them questions such as:
- What is your fee?
- What does it cover?
- Do you have maintenance on call 24/7?
- How does the eviction process work?
- What interaction will I have? (should be none)
Are property managers required to have a license?
Yes, anyone engaged in property brokerage services, including the receiving of rent, must be a licensed real estate broker or a sales associate licensee.
What are the pros and cons of owning rental property
- There is nothing like receiving the statement showing you made a profit each month
- Not having to deal with renters complaints
- You are building equity
- Your property manager places a bad tenant
- You possibly have months where there is no tenant
- The tenant doesnt pay their rent
My personal experience. The property manager suggested a reasonable rent, and I agreed. A couple of months went by, and no tenant. Because I had a mortgage and insurance to pay, I had him lower the price by $150. He then got it rented, and I had the same tenant for the next five years. During the five years, there were maintenance expenses but nothing too wrong. The tenant didn't pay the rent several times, and the property manager had a lawyer send an eviction notice. The tenant always finally settled, and that included the lawyer fees. My only involvement was a monthly statement emailed to me. During the entire time, I never met the tenant.
Suffice it to say; I am a big fan of rental properties when using a property manager.
Profit is the name of the game for rental property
It will not be a good experience for you if your expenses are more significant than the rental income (after maintenance, management, insurance, and legal fees). The bottom line is that if your mortgage is more than the rent, you lose. However, some guidelines will help you in finding a qualifying rental property.
First is the 1% rule.
What Is The 1% Rule? 1
The 1% rule is a strategy used in real estate investing to determine your cap rate. It states that investors should calculate monthly rent to be at least 1% of the total purchase price when evaluating properties.
Here is the formula for the 1% rule in real estate:
Monthly Rent ≥ 1% of Total Investment
The idea is that if you can meet the 1% rule, you should be able to meet your monthly expenses and generate a positive cash flow on the property.
Next is the 70% rule.
70% Rule 1
The 70% rule states that an investor should only pay 70% of the After Repair Value (ARV) of a property, subtracting the cost of repairs. The 70% rule is a formula used by investors who actively flip houses.
It will help you determine the maximum price you can pay for a property while still earning a profit. However, you may need to adjust your calculations depending on the market.
Passive Income From Rental Property Bottom Line
Passive income from a rental property can be great, providing you bought the property in such a way to allow for a profit. If that is your situation, sit back and relax and enjoy that passive income. If you already own the property, you will have to make some decisions if it is not profitable. What we are saying is it is not making a good cash flow. You are, however, building equity because you are paying down your mortgage with the help of a renter. Your property is probably appreciating as well.
Ultimately, this is a personal decision, and maybe the decision is to sell it and move on to the next investment.
Thank you for taking the time to read this. I appreciate all comments, so please feel free to leave one.