4 Ways to Create Rental Property Passive Income
- Dec 07, 2023
- 5 min read
Are rental properties a good investment? They certainly can be!
The average passive income from a rental property is around 7-8% after expenses and taxes. However, depending on your location, the rental real estate market, and costs, you could see a positive cash flow of up to 15%.
Additionally, the more properties you own, the more your net worth will rise since real estate is one of the most valuable assets you can have.
So then, how do you go about generating rental property passive income, especially if you’re not a real estate investor? Find out below.
What Is Rental Property Passive Income?
Let’s start with defining passive income. Unlike active income, which you get from working a full-time job, passive income is income that requires minimal effort to obtain. The IRS calls it unearned income.
Notably, sometimes people confuse passive income with a side hustle. While a side hustle can generate passive income, often, a side hustle requires a lot of time and effort. As the saying goes, passive income allows you to “earn money while you sleep.”
There are many sources of passive income, including passive income through rental properties. Rental income is often passive because you get it with little effort.
Yet, some passive real estate investing demands a lot of work, making it feel less passive and more active. Luckily, it’s up to you whether you handle these demands yourself or take a more hands-off approach and pass them off to a property management company.
Don’t worry; you can still make money from real estate if you hire a property manager to oversee your investment properties.
1. Consider Your Property Type
The amount of passive income from rental property you can generate depends on the type of property (or properties) you own. Let’s explore this in more depth.
A single-family home or condo is one of the most manageable properties to own because, with this residential property, you only need to find one tenant.
Of course, though, you won’t have any income if you don’t have a tenant.
You could, however, turn the property into a vacation rental if you live in a place with a lot of tourism. This way, you could still make money from short-term rentals when the property doesn’t have a long-term tenant.
Apartment buildings (those with five or more units) are also a great investment. While they require more capital to obtain (and more work to manage), they see higher returns because you own several units.
For a steady income, you can lease commercial properties to retail tenants on a long-term rental contract.
However, commercial tenants often highly customize the property to fit their needs and are more challenging to replace. Therefore, you must budget remodeling costs and longer vacancies into your finance plan.
If you want to buy a commercial building, a real estate professional can help you find one for sale in your area.
2. Real Estate Investment Trusts (REITs)
If you want to invest in a rental property but don’t have the funds to put a down payment on a property, there are other investment options. While crowdfunding with your friends or family to buy a property is one way to go, there’s something way better.
Purchase publicly traded REITs on the stock market instead. REITs are an excellent investment opportunity to generate real estate income as they are low-cost and pay dividends. Even if you own rental properties, REITs are an amazing passive income stream to add to your long-term investment strategy.
The only downside to REITs is that their value ebbs and flows, similar to how stocks ebb and flow.
Aside from publicly-traded REITs, you can also invest in:
- Non-traded REITs
- REIT exchange-traded funds (ETFs)
- REIT mutual funds
Since there are various investment options, you must do your due diligence before buying REITs to ensure the highest return.
3. Capital Gains
You realize capital gains when you sell a property for more than you paid for it.
For example, you bought a home for $300,000, but now the property value is $550,000. You sell the house for $525,000 and realize $225,000 in capital gains.
That’s a fantastic return! But you likely wouldn’t sell the property to cash out. Instead, you could use the new appraisal to get a loan for another investment property and continue building your wealth.
4. Tax Write-Taxes
Taxes are one of your biggest expenses as a rental property owner. There are two types of taxes you need to know:
- Income tax: tax you pay on earned rental income
- Property tax: tax paid on a property based on its value
Fortunately, the IRS offers numerous tax write-offs to rental property owners. The most crucial write-off is depreciation, which reflects the natural deterioration of a property over time. Even if your property is cash flow positive, you may still be able to declare deprecation.
Interest expenses on your mortgage payments are also tax deductible. So, if you have a high interest rate, it’s not terrible because you can use the expense to lower your taxable income.
Additionally, the fees you pay to use property management services are tax deductible. Hiring a property manager lessens your workload while lowering your taxable income!
Plenty more IRS deductions exist, which you can research. The bottom line is that you must take advantage of these tax benefits to increase your income.
Start Developing Your Rental Property Passive Income Today
Generating rental property passive income may be challenging initially, but it will definitely pay off once you have a steady stream of renters. If you dream of living off rental income, it’s time to start looking for your first investment property.
After you buy a property, find a property manager from All County. With locations in over 20 states, we’re eager to help you maximize your investment. From screening tenants, handling renter evictions, and overseeing property renovations, our managers can do it all for you. So give us a call today!
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