Without further ado, Johnny will take it away:
What is Passive Income?
Simply put, the ability to generate income on a consistent basis, with minimal and quite often no involvement. This is money that flows in your bank account no matter what you have going on in the world. So why do we need passive income? For some it’s a way to shift your life focus towards your passion, others want to spend more time with family, or take a spur of the moment vacation to Fiji.
Whatever the case, building passive income allows you to stop trading your time for money.
There are different ways to generate passive income, such as blogging, CD’s, annuities, purchasing a preexisting business or renting and holding real estate.
When I accidentally started building passive income, I was new to the rental game. I didn’t know it yet but I would soon grow to love the extra monthly income. Everything I had ever heard about being a landlord in the past was always negative. Stories of the, “tenant from hell,” or the idea that I’d be getting calls to fix a leaky water heater at 2 in the morning were what I thought being a landlord was all about.
The truth is it’s not difficult if done properly. Your first line of defense into creating a passive income stream, is to hone your ability to find a good tenant. Once you have a good tenant in place, the income will flow and the rest is very light maintenance.
When you first start off generating passive income, it’s important set financial goals. Think about how much you need to retire. Think about how much you need to generate to be able to maintain the type of life you want to live. This number will different for everyone, however I believe that this number should not only fund your living expenses, but also allow for savings for other investments.
Know what rentals in the areas that you invest in can fetch per month and calculate how many houses you will need to hit your monthly goal. For example if you need 60k a year to retire comfortably, and the average 2 bedroom in your area rents for $1000 per month, or 12k annually, you would need 5 house fully paid off to achieve this goal.
I find that a lot of new investors set a monthly income goal, then as they turn into seasoned investors and hit this goal, that 60K has turned to a 120K goal. I think that investors should not only look at living expenses, when planning a retirement goal, but also make sure you are generating enough to save. By creating a dedicated savings nest, this allows you to purchase a new property and increase your income stream.
This is why I find it is best to stay employed or have steady income especially in the beginning stages of creating passive income. I’ve found for me it’s worked best to pay houses off sooner rather than later. A lot of investors suggest, that you should treat the difference between your mortgage payments and rents as profit. I prefer to put this extra money back in to paying off the rental, I would also save my work income like a madman to speed up this process. My number one goal is to pay these houses off before I can transition into a full time investor.
The number one thing I tell prospective landlord is that, they should be molding their rental business to be as hands off as possible.
For this type of investment the ability to make this as passive as you like is up to you. In the beginning, I tried to do a lot of the repairs myself. Over time I’ve made relationships with local handymen, whom I can call should I need them, that offer me discount pricing because I’m a consistent customer. It’s always good to build relationships, in different repair related fields.
Once you have built your rental portfolio, many investors find property managers to handle the minor upkeep. Property managers allow you to be as hands off as possible. Some landlords may want to screen their own tenants, while some may not want to be bothered as much. A landlord buddy of mine has given his property management company strict instructions not to concern him for any repairs under $100. That means if something minor like a clogged drain, or the AC needs to be recharged, it’s get handled without any effort from him. It’s important to do your research on the property management company you employ. These are the people making the major decisions about how your house is run. The best way to find a good property manager, is via another investor in your area. Picking a property manager with proven track record, will give you peace of mind.
Do you invest in real estate with the intention of becoming a passive builder of wealth? Are you considering buying a 2nd home as part of a new real estate empire?
For more info about building income streams with real estate. Please visit my blog AffordEverything.com or like us on Facebook.