According to the IRS, passive income can come from activities that do not need a person’s active involvement. In other words, it’s when you generate consistent cash flow without having to do a ton of work. In most cases, passive income can be derived from businesses that you put money into, but don’t participate in day-to-day operations. An example would be if you put money into a family member’s business and get a percentage of the earnings.
What Is Passive Real Estate Investing?
One of the most common ways to make passive income is via real estate investments. It’s where you rent out a property to long-term tenants and make money in the form of rental income each month. However, it’s worth noting that not all investment properties can be considered “passive” investments.
- Active Real Estate Investing. The investor not only owns the real estate investment – they run it themselves, too. If you go for active investing, you’ll have a long to-do list, including things such as collecting rent, screening tenants, and signing lease agreements. You’ll also have to be available at all times.
- Passive Real Estate Investing. Passive investors don’t have to deal with their properties at all. All they have to do is partner with third-party companies (such as full-service rental property management firms) and receive their rental income each month.
Active vs Passive Investing: Key Differences
At Luxury Property Care, we want you to have all of the details you need to make an informed choice. Below, we’ve broken down the factors to consider when choosing between the two strategies:
Level of Control
In active real estate investing, an individual (i.e. you) purchases a property and oversees the day-to-day operations. They have complete control over their investment. On the flip side, passive investors only have to provide capital, or purchase a property and pay for a property management firm to run it for them.
In active investments, you’ll have to make time for your investments – this means you may not have time for a 9-to-5 job. In active investments, you don’t have to set aside time for property management as you can get a third-party such as a property management company to do that.
Properly managing a rental property takes a certain level of skill that only real estate professionals have. You’ll have to perform a variety of calculations to make sure you’re investing in the right properties. Plus, you’ll have to be well-versed in the law to stay out of trouble. If you don’t have knowledge of basic property management, it’s best to go for passive real estate investing so a team of professionals can take care of everything for you.
Which Should You Choose?
Ultimately, the choice is yours to make, but it’s best to go for passive investing. Its main advantage is that you won’t have to do anything but buy the property to reap the rewards of being an investor. While you won’t have 100% control and you won’t get to make most property management decisions, you will be able to reduce the risks that come with every investment property.
How to Make Passive Income as a Real Estate Investor
It would be a mistake to believe that every passive investment is immediately a profitable investment. You’ll have to be careful and invest wisely if you want your investment to be a reliable source of income. Here’s what you need to do:
#1 Conduct a Market Analysis
A property management company will conduct a market analysis to make sure running a rental in a particular area is a good idea. They’ll look at property prices to guarantee a good return on investment (ROI), review vacancy rates, calculate the price-to-rent ratio, and most importantly, consider if is an actual demand for rental properties.
#2 Know What Tenants Want
You can’t make passive income if your property doesn’t have what tenants want. As a rule of thumb, you must find out what features your tenants want before you buy rental real estate. If you’re considering purchasing a property in the suburbs, that should tell you that your tenants will probably be families with children. With that in mind, you’ll know that you should look for single-family homes with three or more bedrooms. Or, if you’re renting to young adults, there’s a good chance they want apartments with smart appliances as they’re more eco-conscious than other renters. By understanding what your target tenants want, you’ll be able to attract a wide pool of potential tenants and avoid vacancies in the future.
#3 Consider Maintenance
One of the biggest expenses you’ll have to budget for involves maintenance, but the good news is you can cut your expenses by buying a low-maintenance rental. Old properties cost more to maintain as they tend to come with structural issues, and they may not be up to code. They may be cheaper, but they generally cost more to get “rent-ready”. New homes are more expensive, however, they are more low-maintenance compared to fixer-uppers.
#4 Partner With a Property Manager
Remember, it can only be considered “passive income” if you’re not involved in property management. With that said, be sure to work with a reputable property management company so you won’t have to spend your time chasing after non-paying tenants, performing maintenance, responding to complaints, and more. That’s the only time you can call yourself a passive investor.
As a bonus, property management agents can help you keep your costs as low as possible. They can also suggest improvements that can boost your property’s value.
Earn Passively With the Help of a Rental Management Company
Luxury Property Care is one of South Florida’s leading companies providing full-service property management ideal for passive real estate investing. By implementing property management’s best practices, we’re able to turn your property into a money-making asset and give you a steady source of income for years to come. When you partner with us, you won’t have to work hard to live the investor’s life. We’ll make your property work for you.