Is It Possible to Live Off Rental Income Alone? Here’s How to Have Passive Income
Yes, it’s possible to live off passive income alone. In fact, many people do just that. While it may not be the most popular career choice, living off of rental income can provide a comfortable life if done correctly.
We often see haphazard and impatient rental investors give up on their properties and tenants just a few years in, thinking that it’s impossible to make a living off of rentals. If you want to be a successful rental investor, however, you need to have a plan and stick to it.
Here are 5 tips on how to have passive income as a property investor:
#1 – Use an experienced and reputable property management company
A good property management company will take care of all the day-to-day tasks associated with being a landlord, freeing up your time to focus on other things. They will also ensure that your tenants are happy and that your property is well-maintained. All of which are essential for long-term success.
Here are 5 key things you’ll want to look for in a property management company to handle your passive income:
- Experience: You’ll want to work with a property management company with a proven success track record. Ask around for recommendations or look for online reviews.
- Reputation: A good property management company will have a great reputation in the industry. This means they’re known for being fair, honest, and reliable.
- Services: Make sure the property management company you’re considering offers all the services you need, from tenant screening to rent collection to maintenance and repairs.
- Pricing: Be sure to get a few quotes from different companies before deciding. Prices can vary depending on the services offered and the size of your property.
- Location: It’s often easier (and cheaper) to work with a property management company near your rental property.
Remember that your property management company should work with you and not for you. That way, a mutual business partnership benefits both parties, and everybody is driven by incentives to put out the best for each other.
#2 – Diversify your rental investment portfolio
Don’t put all your eggs in one basket. For example, what happens if you only have one rental property if it becomes vacant or if the tenant stops paying rent? Having multiple properties will help to mitigate these risks.
Here are 5 ways you can diversify your rental property investment portfolio:
- Location: Invest in properties in different geographic areas. This way, if one market experiences a downturn, you will hopefully have properties in other markets that are doing well.
- Property type: Don’t just invest in just single-family homes. Consider investing in multifamily homes, office buildings, or retail space, so you’re not playing in a single market.
- Tenant type: If you only have one tenant type, consider diversifying by adding other types of tenants, such as families, students, or seniors.
- Length of lease: Offering different lease lengths (such as 6 months, 1 year, or 2 years) will allow you to adjust rent prices more easily based on market conditions. It will also provide more flexibility if a tenant needs to move out unexpectedly.
Doing one or all of these diversification strategies will reduce your risk while achieving your desired return on investment.
Once you have a diversified portfolio and a good property management company, the best thing you can do is take a hands-off approach. This doesn’t mean that you should never check in on your properties or your tenants, but it does mean that you shouldn’t be micromanaging every aspect of the rental process. Instead, trust that your property manager is doing their job.
#3 – Research the market and know your numbers for passive income
It’s important to understand the real estate market in the areas where you’re considering investing. This way, you’ll better predict the following four factors affecting your bottom line. Here are four crucial ones to start with:
- Potential rental income: This is the amount of money you might earn each month from renting out your property. Remember also to consider average vacancy rates, average rent in the neighborhood, and local market shifts.
- Ongoing expenses: These are the costs associated with owning and operating your rental property, such as mortgage payments, property taxes, insurance, and repairs/maintenance. You can’t get away with paying for these, so you’ll have to budget them wisely.
- One-time expenses: These are the costs associated with purchasing and/or rehabbing your rental property, such as closing costs and renovation costs. Not all homes will require significant renovations, so work with a professional inspector to get an accurate estimation.
- Budget for vacancy: You should also budget for the vacancy, as there will likely be months when your property is vacant between tenants. A good rule of thumb is to budget for a 10% vacancy, but this may vary with short-term rentals that also deal with seasonality.
You should also know your numbers in terms of your investment goals. For example, what return on investment are you expecting? What is your exit strategy? Answering these questions will help ensure you’re making sound investment decisions.
#4 – Focus on cash flow, not appreciation
Appreciation is excellent for generating equity gains in the long run, but it’s not always a sure thing. On the other hand, cash flow is money you can count on every month. Therefore, it’s essential to focus on your potential cash flow when choosing investment properties.
A few ways you can ensure that the rental property investment will generate positive cash flow and passive income by using any of the three following calculations:
- The 1% Rule: The monthly rent should be at least 1% of the purchase price. For example, if you buy a property for $100,000, the monthly rent should be at least $1,000.
- The 50% Rule: Half of the rental income should cover estimated monthly expenses (including mortgage payments, vacancy, and repair costs). This leaves the other half as pure profit for you.
Any or all of these calculations will help you zone in on properties that will generate positive cash flow each month, which is the key to success as a rental property investor.
#5 – Invest in areas with high rental demand for your passive income
This one is self-explanatory—the more people want to live in an area, the easier it will be to find tenants for your rental property, and the more you can earn an income from your investments. So you’ll want to invest in rental properties that are located in these kinds of real estate markets:
- Urban areas: People who live in cities tend to rent more often than those who live in suburban or rural areas. This is because many people who live in cities don’t have the space (or desire) to own a home. Additionally, the high cost of purchasing a home in an urban area contributes to the high rental demand.
- Areas with strong job growth: Areas with many job opportunities naturally attract more people into the area. Moreover, those with well-paying, stable jobs can also afford higher rent payments. So, areas with strong job growth will have high rental demand.
- Areas with good schools: Families with children often prefer to rent rather than purchase a home, so they can move easily whenever necessary. That’s why areas with quality schools tend to have high rental demand.
Following these factors will point you towards investment properties with a continuous stream of renters. That way, it’s easier for you to keep occupancy rates up and generate positive cash flow.
Earning a Fortune Investment Returns
Investing in a rental property can generate passive income and build wealth. But it’s not without its risks.
That’s why it’s essential to work with a good property management company, diversify your portfolio, research the market, focus on cash flow, and invest in areas with high rental demand. In other words, you can live off rental properties alone if you approach the challenge strategically—and that’s where we come in.
Logical Property Management is the perfect partner for those looking for experts to help you manage your properties. We have more than two decades of experience in Metro Detroit markets, so we know how to help you get the most out of your investment.
Get in touch with our team today!