When you think of passive income, your mind might be drawn to things like digital downloads, music and photo licensing, or even affiliate sales. However, it’s possible to earn a handsome passive income from real estate, but only if you invest wisely. Here’s what you need to know about earning passive real estate income in today’s market.
What is Passive Income?
To put it simply, passive income is earnings you generate from someone who is not an employer or contractor. Some examples include the interest you earn on your savings accounts, cashback rewards from credit cards, earning dividends on stock, or collecting rents from tenants. The IRS considers passive income to be “net rental income” or income from any business in which you do not directly participate. While some analysts may consider portfolio income to be passive, the IRS does not always agree.
Passive Real Estate Income
The most common and simplest form of passive real estate income is rental income. You purchase a single-family home, duplex, or apartment complex, then rent it out to tenants. There are different levels to passive rental income, though, so it’s important to think this through before diving in headfirst.
- Truly Passive Income: If you want to generate truly passive income, you would need to hire a superintendent or property manager to handle any requests from your tenants and manage the books. You’ll need to pay for these services, but it frees up your time and puts someone else between you and the tenants. After the rent is collected and your property management team is paid, the rest comes to you – and it’s completely passive because you weren’t directly involved.
- Semi-Passive Income: If you’re just getting started with rentals and you’re only collecting rent from one or two tenants, you may not have the option to hire a property manager. In that case, if a tenant has a water leak at two in the morning, you’ll be the one getting that call. As such, it isn’t completely passive, but it is still considered passive by the IRS.
Building Passive Income with Real Estate
Most investors have the goal of generating a truly passive income that is not only enough to fund their current lifestyles, but also enough to carry them through their retirement years. This sort of real estate portfolio can take some time to develop, so it’s a goal to aim for over the course of many years. The best way to get started is to purchase a single-family home or duplex, then rent it out to tenants. Over time, as you collect rents and pay those properties off, you can buy new properties and repeat the process. When you own several properties and it’s financially feasible to do so, that’s when you can hire a superintendent or property manager – or, in some cases, you can hire an entire team.
Generally speaking, the more properties you own, the more passive income you can generate. It’s up to you to decide how passive you’d like to be in the process, and while there are certainly plenty of investors earning a hefty passive income from their rentals, there are many more who prefer to take an active role.