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Often when people think of investing in real estate, there is often one bad renter’s story that comes to mind. I know of several people who have taken a financial hit from bad renters. This shouldn’t discourage using real estate as an investment. In fact, real estate investing can be one of the most passive investments out there. While I will get into the details of why you should consider investing in real estate in the future, I want to briefly explain why I include real estate as one of my passive income streams in my early retirement plan.
When Real Estate Is NOT Passive
Investing in real estate doesn’t always guarantee that you are getting a passive investment. As I mentioned, it can become quite the chore. One bad renter usually scares people away from staying a real estate investor. It doesn’t take much to imagine the late phone calls from your tenants with an emergency. The simple truth is that houses deteriorate or wear down. Residential properties take work to maintain. While you can purchase newer homes, it still doesn’t guarantee that something won’t go wrong. Because tenants don’t own the property, it can be true that they won’t take care of it like they would if it were their own property. Cleaning up after tenants and getting ready for the next tenant can be a lot of work.
Real Estate as a Passive Investment
Owning AND managing your own rental properties is by no means a passive investment. However, that doesn’t mean that owning real estate can’t be passive or require little work. Ensuring that your real estate investment is a passive investment is as simple as hiring a property manager. Property managers do all of the leg work for you. They handle the day to day chores that would otherwise keep you from sleeping at night.
There is nothing better than owning a rental property that is getting paid off by the tenant and managed by someone else. That’s right – the only thing that is required of you is the financial risk. The risk isn’t large either. The fact of the matter is that if you can find the right property with the right mortgage deal, you can be on your way to securing a passive income. Finding the right property manager isn’ t always easy and it can take some upfront effort, but it can pay off in the long run.
Before you know it, your mortgage will be paid off and the cash will be rolling in big time! If you are wondering why real estate is included in my passive income retirement plan, it is for this reason. There is a little upfront work (finding the right property, selecting a property manager, etc.), but the future payoff is much higher. Once I find the right property with the promise to have a positive cash flow (even after paying a property manager), I will jump right in! If you start investing now, your future will be much easier than starting later.
What’s important to consider is that having this income in the future will allow me the flexibility to do anything I want. If I start investing now, I will be ahead of the game. I would hate to let a little risk keep me from living the life I want to live. I hope to achieve my goal to retire early by using retirement.
I recently went through an exercies and after all taxes, fees, time with no tenants and renovation expenses, you will be lucky to get 2-3% on your expenses.
The only advantage is that your investment is somewhat inflation protect and if selected right will go up in price with the rest of the market. Alternative point is by paying 30% initial down payment and than rent it out to pay off the rest of the mortgage.
Having 2-3 of them sold 20 years later you will have your investments quadrupled….
My goal is not to make a ton of money during the process but to break even over thirty years. Then, when there are minimal expenses and I can use the income for retirement, I will be laughing all the way to the bank.
I think that is a great plan CFM! That’s how many people do it.
Whenever I get out of grad school and start earning an actual salary, I plan to start buying/renting out real estate as side-gig.
Question: how much do property management companies charge to take care of everything for you?
I am planning on starting in the next few years. I have been surveying the markets and talking to management companies. So far, it ranges from 6%-12%.
like everything else, it takes work and time. Some people might strike it rich the first time around but that’s not always the case. Great new site Corey, If you ever need a partner, let me know
Thanks aaron. I will be sure to keep you in mind if I do.
[...] presents Real Estate as Passive Investment posted at Passive Income to Retire, saying, “Real Estate investments can be one of the most [...]
[...] presents Real Estate as Passive Investment posted at Passive Income to Retire, saying, “Real Estate investments can be one of the most [...]
I own a rental property and lose $295 per month on the mortgage/ins/taxes alone. But I do have a decent tentant. Pays late frequently (with late fee of course), but takes care of the place as if it was his own. Can’t complain too much. Only 26 more years until I own it. LOL.
haha. Sounds like it’s not the best rental. I would typically avoid anything where I’m not at least breaking even in the first few years. But, in 26 years, you will be making money!
[...] at Passive Income to Retire presents Real Estate as Passive Income, saying “Real Estate investments can be one of the most passive investments out there. Find [...]
[...] Income to Retire: Real Estate as Passive Income – Real Estate investments can be one of the most passive investments out there. Find out [...]
Of course, you need to deal with the property manager, who is hopefully trustworthy, capable and dependable. Also, passive real estate means less tax benefit in early years, as you are restricted from using rental losses against your personal income.
I think you are narrowing real estate investing down to rental properties, and sounds like single family homes (1-4 units). Real estate investing is expansive ranging from active to passive. From house flippers and wholesalers to landlords and REITs. The passive spectrum encompassing landlording, REITs, private lending, and note buying just to name a few. Being a landlord is definitely at the edge of that spectrum bordering the active side.
I do not understand “investors” who settle on properties that do not cash flow. I would not even be happy with break even deals since today’s market simply favors the rental industry. It may just be that your local market does not support positive cash flow, so you must venture to outside markets for better deals. California does not cash flow, but Texas is superb right now. Do not let the fear of having properties you cannot drive by let you settle for break even or worse cash flow negative properties. No matter where the property is, you MUST do your DUE DILIGENCE.
Good luck. Real estate can be a very rewarding investment. I have been lucky so far and counting my blessings.
How many properties do you think you will need to own before you can absorb a bad tenant without a problem?
I think it would be nice to have anywhere between 3-5 properties. But that varies depending on how many units is in each property. I don’t plan on using this is as my only income so, it shouldn’t be a problem to lose a tenant for even a couple months.