Isn’t it everyone’s dream to have some kind of Passive Income? If this income comes through one of the hottest markets of all time, it would be even better. In this article I will try to explain everything related with Passive Real Estate Investing. Here you go:
When you hear the term “Passive income” you picture an income that you earn while exerting little effort on your part. You get paid for this income either weekly, monthly quarterly, semi-annually or annually.
If you’re seeking a way to earn some extra money without taking away from your day job, this may well be the route to go for you. You’ll be able to earn on your investment and you’ll be exerting little effort on your part.
This income can be spent however you desire. It’s a way to add to your investment portfolio with minimal effort. You’ll love being able to invest some money and then get a nice return on that money.
What Is Passive Real Estate Investing?
Passive real estate investing is when you’ve invested in some property or housing and you are renting it out without having to deal with the daily hassles of leaking faucets, non-flushing toilets and so on.
You hire a management company to do the dirty (!) work and you sit back and earn some money on the deal. Yes, you will have to pay the management company to do the dirty work, however, you’ll be earning far more than the management company is on your investment.
The best part about this is that the management company will vet the potential renters for you. So you don’t have to worry that you’re getting the wrong renters into the home or apartment that you own.
The management company will check the potential renter’s references, credit and so on so that all you have to do is own the apartment or home. It’s that simple.
Will I Deal With A Bank? Or A Private Investment Firm?
In most cases, when you own a passive real estate investment you’re going to be dealing with a private investment firm. This firm already has a great rapport with the banking industry so you won’t have to worry about being turned down for a loan or finding the right banking industry to deal with.
Of course, you can always go it alone and work directly with a bank. This is preferable if you’ve already got a great rapport with a bank and some investments in that bank.
Some people prefer the anonymity of working with a private investment firm so that they never have to worry about dealing with renters directly. It’s really all up to you and how you view such dealings. If you’re a great real estate agent all on your own, this may not bother you at all, for others, it may be a bit more challenging.
Is It Difficult To Set Up A Passive Real Estate Investment?
Of course, you want to get your new business venture off the ground. However, you’re going to have to take the time to do it right. Your passive income isn’t going to start out passive (everybody’s dream, right?). First, you’ll have to take the right steps to get it all setup.
These steps will include finding the ideal property to purchase and rent out. It may require some work so you may have to hire a contractor or a repair company to ensure that the dwelling is rental ready.
This may be as simple as getting some painting done and cleaning the carpets or it may involve more extensive repairs such as electrical repairs, plumbing repairs or appliance repairs. If you are just starting this business, I would suggest you to go with ‘easier‘ properties. When I say ‘easier’ it means, ‘not much work is required’ properties.
You are new to this business, you don’t have many contacts, you don’t have much experience… So, better to start with easy properties. By the time passes, you will have enough knowledge and contacts, so you will be able to work with any type of properties.
In some cases, you may also have to purchase appliances such as refrigerators, stoves/ovens, washers, and dryers or dishwashers. Each residence will have its own specific needs and requirements to setup prior to being rentable.
Once the property is rentable you can then hand it off to a great management company that will find the right renters for your needs and ensure that you’ll be receiving your rent. You’ll pay a small fee to the management company and the rest of the rent will be yours.
Many owners include the cost of the management company in their rental fee so that they’re not losing any money by this venture. This is a great way to keep your income going without having to worry about how much you’ll owe the management company.
Will It Take Very Long For Me To Get This Going?
In most cases, no. As long as you’ve signed all of the required paperwork and done all of the repair work you’ll be able to earn money virtually while you’re sleeping (or working your other job).
If you find a property to invest in that already has tenants, you’re already ahead of the game. All you have to do is sign the proper paperwork and you’re up and running. But if this is the case for you, please do not forget to check the rent payment records of the existing tenant. You wouldn’t want to be in a position with a trouble makes tenant, I assume?
What Should I Consider Regarding Passive Real Estate Investing?
If you’re considering passive real estate investing you’ll want to consider exactly what you’re looking for. Are you seeking a rental in a great neighborhood that will require minimal effort?
If so, you’re likely going to have to pay more money for this home or apartment. You can also opt for fixer uppers that will take a bit more time to get up and running but may save you some money on the overall cost of the purchase.
It’s really all up to you and what you’re willing to put into your new venture. If you don’t mind using a bit of elbow grease to get your new venture up and running you may do well to buy a fixer upper and put the time and effort into it.
Best property in a bad neighborhood? Or the worst one in the good area?
However, keep in mind that buying the nicest house in a low-income neighborhood may well backfire on you in that people won’t really think they want to live in that area due to the socioeconomics of the location.
If you’re going out on a limb this isn’t likely the right limb to go out on. Instead, you may opt to go for the crummiest house in a nicer neighborhood and make that the one that you opt for. You’ll be able to spruce the house up and when you do, it will net you a lot of benefits.
Many people want to live in a nicer neighborhood, but can’t afford it, by going this route, you’ve just made that dream possible for someone and you can make the outside of the house look very nice as well as the inside and afford to charge a bit less than the rest of the houses in that neighborhood.
Is It Difficult To Finance Such Passive Income?
Many first timers have hesitated on such business ventures because they’re concerned about the level of difficulty to finance their new venture.
Very few investors pay cash for their property. Typically, they will borrow the money and invest it in an effort to create a line of credit and start up their passive income. This also gives them some leverage on taxes and a business write off.
From conventional loans to other forms of loans, the requirement is a downpayment of from ten to thirty percent of the overall cost of the loan. Of course, higher down payments will reduce the monthly payment and increase the amount of cash that is available.
If you have good credit, you shouldn’t have any issues in getting a loan for some property as a rental. However, keep in mind that rental properties will require a bit more on the interest rate than if you’re going to reside in the home yourself.
I have 2 suggestions for you at this point:
1 – If you don’t know your credit score – LEARN NOW! This is critical. When you know your score, you will have better idea about your business and options. You can check your score through Credit Karma – FOR FREE: Get your free credit report from Credit Carma
2 – If your credit score is low, start working on it TODAY. There are some companies that can help you with very easily. They know this business, and they know how to increase the credit score in a very short time. Increasing your credit score even for 30-40 point will make a huge difference on the loans that you will get for your investment. Check CreditRepair for your options: Fix your credit score with Credit Repair
There are specialty mortgages with specialized financing such as the FHA loans and VA loans that might also offer you a lower rate depending on your credit score. Keep in mind, however, that these loans are typically only available if the owner is going to be occupying the dwelling. Unless of course, that dwelling is a multiplex, duplex, tri-plex, or four-plex.
Smaller multi-family dwellings are typically the best route to go for a first tie investor. They offer you the benefit of residing in one of the units and taking advantage of the owner-occupied benefits while still earning you a passive income investment.
Are There Other Options for First Time Real Estate Investors?
Of course, there are other options that first-time investors may consider. If you have equity in the home you’re currently residing in, you may be able to refinance in order to get a downpayment. Or, you could get a home equity line of credit to use to purchase your passive rental investment.
Banks like these as they know you’re not very likely to default on a loan that could cost you the house that you’re already living in. This gives the bank an extra measure of security and it gives you a great line of credit and a huge boost to your credit score once everything is paid for.
If you can’t get a mortgage there are still some other options that you may wish to consider. You can ask the seller if they’re willing to do any owner financing on the deal. Some sellers will entertain this idea and others won’t. If you already know the seller, you may have an edge on this so it’s definitely something to consider.
If you do go this route, ensure that you have everything notarized so that no one can default on the deal. Even if you do know the person well this covers both of you to have the documents regarding the sale notarized.
Also, as another option, you could bring in a partner and finance the deal together as a team. There are many people that do this as a family or as a business venture. It works well as long as both parties are on the same page regarding the deal, who pays what and what they’re doing.
When you go the partner route you may wish to divide the income or you may want to alternate who gets paid on which month. There are a variety of ways to divide this so you can set it up accordingly. Be sure that everything is signed and documented and of course, it’s also wise to have all of this documentation notarized as well.
How Do I Find These Properties?
There are a variety of ways to find your passive real estate investments. Here are a few to get you started.
- Look at your local real estate office. Tell them what you’re looking for and see what they may have to suggest. You can find a real estate company through our comprehensive list here: Real Estate Companies
- As you’re driving around town take a look at vacant properties and check with the city offices to see who owns those properties. Be sure to have a proposal in mind if you call or write the owner of such property. Remember, money talks so if you have an offer in mind you may have the edge on such vacant properties that aren’t being advertised as “For Sale”.
- Go online and check real estate sites. There are many real estate agencies that are online and can help you with this. Just bring the sites up and set out the parameters of what you’re seeking such as 1 bedroom 2 bath vacant homes under $100,000 and see what pops up. Do the research and look into those that interest you.
- Look for bank real estate owned pages and see what you find there. When banks own a property they are usually very anxious to sell. All you have to do is make an offer and negotiate the deal. If you’re a great negotiater this may be an easy route for you to go.
- You can also consider auctions. When a bank owns a housse they often auction them off at the courthouse. This is typically done monthly. Sometimes you can offer a dollar for a home and get it. It all depends on who else may be interested in the home and whether or not you’re at the right place at the right time. You can read more about real estate auctions in this article: How Real Estate Auctions Work?
Now that you understand more about passive real estate investing you’re well on your way to earning a great passive income that can help sustain you and your family. It’s fun and easy to do once you get started.