Passive Income Investments: Is Being a Landlord the Right Decision for You?
If you have spent any time researching passive income, you’ve likely discovered that investing in real estate is one of the best options. Owning rental properties is a great way to create a stream of passive income, but becoming a landlord isn’t right for everyone. While considered “passive” income, it still requires a lot of hard work. You also need to have the means to invest a significant amount of money upfront and have the money to address any problems that pop up along the way.
According to countless financial experts, passive income is the key to financial independence, early retirement, and all sorts of other great things. Owning rental property is touted as one of the best ways to generate this type of revenue, but is the income that you will earn from your tenants really worth the initial investment, your time, and the amount of effort you’ll need to put in? Keep reading to find out!
What Is Passive Income?
Let’s start with the basics. Passive income is, according to Investopedia, “earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.” It also includes things like money earned from high dividend stocks, bonds, and real estate investment trusts (REITs). Less commonly, passive income may include revenue from patents, licenses, copyrights, or royalties.
Passive income is, basically, the opposite of active income, or the money you make working at a regular job or through a side hustle. Ideally, it should make you money while you sleep and continue generating income regardless of the amount of effort you put into it.
Becoming a Landlord to Generate Passive Income
Buying an income-generating rental property and becoming a landlord is one of the most popular methods of generating passive income. In recent years, American households have been increasingly turning to the rental market for their housing needs rather than buying homes, according to a study conducted by the Joint Center of Housing Studies at Harvard University. This is happening for several reasons. Following the record number of foreclosures that took place in 2008 and the lasting economic problems caused by the Great Recession, many people still find themselves unable to obtain financing and purchase homes. Many of today’s young adults also fear doing so as the result of seeing their parents’ and family members’ homes foreclosed on just over a decade ago.
This is, of course, good news for those who are looking for solid passive income investments. With more and more people entering the rental market every day, there is a never-ending stream of potential tenants to rent to. And due to increased demand, rents are skyrocketing in many parts of the country. This means that being a landlord can be quite lucrative.
Is Being a Landlord Right for You?
Being a landlord isn’t quite as easy as purchasing a rental property and collecting rent, unfortunately. You are responsible for upkeep and repairs on the property, and you’ll likely have to spend time chasing down late payments, dealing with feuds between neighbors, and making sure your tenants are abiding by the rules while living in a property you own. If you are thinking about investing in an income-producing property, it’s important to understand what it takes to become a landlord and determine whether you are cut out for this often-demanding role.
For starters, keep in mind that you need a lot of cash upfront. Banks have implemented increasingly strict lending practices over the past several years. It’s harder to qualify for a loan now than it was in the past, and you almost always need to have a down payment of at least 20%. If coming up with 20% down seems insurmountable, you may need to improve your financial situation before you can even think about investing in rental property.
You’ll also need to have plenty of cash on hand after becoming the owner of a property. There is always a chance for something to go wrong. Whether it’s something that occurs accidentally – like a broken water heater or a major appliance that stops working – or damage caused by a bad tenant, landlords need to have the money to make all sorts of expensive repairs. You will also need to have the time to take care of problems on your own or the ability to hire someone to do it for you. Failing to maintain safe properties for your tenants could land you in legal hot water, so it’s crucial that you are prepared to fix any problems that may arise promptly.
Becoming a landlord is always a risk. You could end up with tenants who refuse to pay or find yourself dealing with expensive property damage, prolonged vacancies, etc. You’ve probably heard horror stories about bad tenants, and unfortunately, most of those stories are true. As a landlord, you always run the risk of renting to a nightmare tenant and having to deal with the fallout. With that being said, there are common landlord practices that aid to mitigate that risk to a minimum. One practice experienced landlords use is to always use a reliable tenant screening service before agreeing to the contract. By requiring your tenant to undergo a screening service you effectively get a better understanding of their financial scorecard and whether they pay their debts.
Do Your Homework Before Making Any Passive Income Investment
Before you spend a single penny on a rental property or any passive income investment, do your homework. While owning an income-generating property sounds great on the surface, you also need to be aware of the risk and the potential problems you may face. Life as a landlord is often far from glamorous, and you will likely find yourself needing to invest additional time and money on a semi-regular basis.
If, however, you are up for the challenge and want to build your wealth through passive income, owning rental properties could be the ticket to financial freedom. Being a landlord isn’t always easy, but the rewards can be pretty impressive. Just be sure to research the market in your area and do your due diligence to determine whether or not this type of passive income is right for you.