How to get into real estate : generate passive income

Passive income rental properties

Passive income investments allow you to generate income without having to trade your time for money. There are several ways to generate passive income. One of the most reliable and effective ways is through rental properties. Other investments such as stocks that are subject to significant market fluctuations. Real estate still offers most investors an opportunity to generate steady cash flow, through ups and downs in the economy. Even when the economy is down, people still need a place to stay; hence there is a higher degree of stability in real estate.

Take advantage of leverage to get into real estate

Why is investing in rental properties one of the best ways to generate money?  Because you can take advantage of leverage to build your wealth. What is the meaning of leverage? Leverage in real estate means using borrowed money to buy a property. When using leverage to buy  property, you borrow funds from lenders such as banks to purchase a property instead of covering the entire purchase price yourself. You can take a huge benefit of leverage.

Let me illustrate this point with an example. Let’s say you buy a $200,000 home with a 5% down payment of $10,000. In one year, if the property appreciates by 5%, the value of the home would be $210,000. Within just a year, It would return back your $10,000 initial investment. As time progresses, you will be able to generate more and more equity. Thus you are able to use leverage to your advantage to build wealth. Moreover, if you are able to rent out your property, your tenants will be the ones paying the mortgage. 

How to make passive income from rental property

Over 90% of the properties in the United States are owned by individual investors. The data shows that over the last 10 years real estate properties have appreciated by over 40% across the United States.

How can you generate rental income using leverage in real estate? Here are 5 important steps with vital tips that effectively help you save money and make passive income from real estate investing.

Step 1: Decide where to buy an investment property

Location, location, location. Yes – when it comes to real estate, location is the most important factor. When the property is in an area where the economy is thriving, plus there is good job growth, it is easier to find renters among the workers who migrate to that area for work. If your property is in the middle of the countryside, it is going to be harder to find renters. Unless it is an area that is popular with tourists.  

Note that sometimes the location would be great in terms of economic growth. However, the house prices may be so high, It is hard to break even and generate positive cash flow from rent.

Step 2 : Do calculation to determine whether you will have positive cash flow.

Some simple calculations will allow you to determine if you will have positive cash flow. 

Add up the mortgage payment for the home, the taxes, insurance, HOA fees and so on to determine the total cost per month. Now add up the rent that you receive from all the tenants at the property. If the total rent is higher than the costs, then you have positive cash flow. Note that you should also set aside some money for maintenance expenses such as lawn mowing, plumbing etc.

The monthly mortgage payment will depend on multiple factors such as the purchase price, your credit score, mortgage interest rate, down payment, and so on. Your monthly mortgage payment can be calculated by using this website https://www.zillow.com/mortgage-calculator/ and look up rent data at  https://www.rentdata.org/lookup. 

Step 3 : Plan ahead how to manage your rental property

You need to plan how you will manage your rental properties. You can manage the property yourself or hire a professional rental property manager. As can be expected, using a property manager will eat into your profits. It is easier that you live close by your rental investment properties to save on travel expenses when you decide to manage the property yourself. If you have the right tenants then you maybe able to get away with managing the property remotely. More on this in the Finding Renters section.

When you decide to purchase a real estate property, you should have a good idea on what types of regulations will apply to your property such as City regulations, Home Owner Association (HOA) rules and so on. These regulations may be complicated depending on specific areas. For instance, are there any restrictions on renting? Can you rent out rooms on AirBNB? Will parking be allowed on the streets? Understanding the regulations before you purchase, will help to reduce major issues down the road.

Step 4: Get ready for real estate mortgage loan

What is a mortgage loan? When you have a limited fund, you usually have to borrow funds from a lender instead of having to pay the whole purchase price yourself. How to obtain a mortgage loan? Lenders usually expect a 20% down payment on real estate investment properties. The interest rates for investment properties are also typically higher than for residential properties.

You need to ready for 5% down payment ( sometimes 0% for new homeowners) for residential property. Also, you need to prepare to live in the property yourself as your primary residence for at least 1 year. After you live at least 1 year in the property, you can rent it. In case, you do not intend to occupy the home as your primary residence, you have to pay 20% down payment and a higher interest rate for rental property.

Note that you could always live at your home and rent out some of the spare rooms to make extra cash. If it is a duplex, then it is even better – you could live in one unit and rent out the other unit. You have a place to live and your renters will help pay for your mortgage! This could also be a way for you to save some funds and get you ready to buy your second property after 1 year or more. 

I would highly recommend shopping around before settling on a lender. It is always to your advantage if multiple lenders compete for your business. Some lenders offer special deals. For instance, when you purchase your property in Utah with Homie as the seller and buyers agent, Homie will give you $2,500 – $5,000 credit toward your closing costs. Lenders such as Homie and Flat Rate Realty, forgo the usual 6% broker commission and take a flat fee and pass on the savings to the buyers and sellers.

Having a good credit score always helps in getting a better interest rate. When you get quotes from lenders, you should be on the lookout for any fees such as points, origination fees, lender fees and so on. These fees are usually negotiable. You should get quotes from multiple lenders, so you can bargain with them to reduce these fees. Some fees such as points, can reduce your mortgage rate, but increase your closing costs dramatically. So you need to analyze information and make a decision based on your individual financial situation.

Step 5: Find tenants without an agent

Now that you have purchased your property and ready to rent it out, it is time to find tenants! 

You have to be very careful about who you rent out your property to because the wrong tenant can damage your property and drive away other renters and bring down the value of your property. 

If you are using a property manager, they usually take care of screening tenants and all the paperwork. The downside is that they will expect anywhere from 8-15% of the rent for their services. If you are willing to manage the property yourself, there are a number of tools available that will help to make your life as a landlord easier.

Sites such as rentler.com, apartments.com, zumper.com are good for advertising your property. 

Depending on your location, there may be other sites that are more effective. If you do a simple Google search for “rooms for rent” for your location, you will find out which sites rise to the top of the search and you can use those same sites for advertising your property.

It is of course easier if you live near your property since you can show the property to prospective tenants yourself. If you live far away from your property, do not despair. There are tools available such as Latch which can help you to show your property remotely to prospective tenants. It is very important that you do a credit check and background check for the prospective tenant before approving their application. Tools such as cozy.co which is now part of apartments.com allow you to do credit and background checks as well as collect monthly rental payments.

Buying and renting property might seem like a lot of work at first, but if you follow these tips, you should be well ahead of the game, and the steady cash flow to your bank account will put a smile on your face!