This is something I’ve actually been doing for years, and it’s also a strategy that other super successful real estate investors use. What is it?
I think most people know that real estate has long been used to build massive wealth. Even billionaire moguls like Warren Buffet use it as a wealth-building vehicle. So what is the secret behind one of the most effective ways to build a passive income stream? One that can be set to autopilot to generate returns month after month?
Buy and holds. Yep, rental properties are one of the best ways to build your income without having to do a lot of the heavy lifting. If you haven’t thought of becoming a landlord before, the time has never been better.
Why A Passive Rental Income Stream Makes Sense
Passive income is different that an active income stream. Passive income is money that you earn without even paying attention to it. You earn while you sleep. And that’s exactly what rental properties can do for you. There are very few truly, 100% passive income streams. The majority require some initial effort to set everything up, and that’s the case with real estate. BUT, once you put in the work, you really can just let it run while you collect the checks, especially if you hire a property management company to handle the day-to-day issues with tenants.
Rent rates go up with inflation. Right now the percentage of people renting rather than buying is still high, whether it’s because of a bad credit rating, job changes, life changes, or a past foreclosure. The ever-influential Millennials still prefer to rent rather than buy a home, as a whole. Retiring Baby Boomers are even testing out different areas for retirement, choosing to rent before committing to a home purchase. The seven-year foreclosure credit freeze is over for some who went through the housing crisis, but for others, their time is not up yet. Homeownership rates are still near the lowest rates of the past 20 years.
Some markets don’t make as much sense for rentals anymore because rent rates have skyrocketed out of reach for prospective tenants, making home ownership the more affordable option.
RealtyTrac found that the average potential return on residential rentals to be just shy of 9%, which is actually down a bit from a year ago. Rent rates have gone up about 4%, which is good news for passive investors. As of 2013, the average rent rate in the US was just over $950.
Experts agree that rentals remain a smart real estate investing strategy. Daren Blomquist, vice president at RealtyTrac explains, “Buying rentals continues to be a brilliant strategy that allows investors to hedge their bets in a real estate market shifting away from homeownership and toward a sharing economy.”
Demand for rental housing is expected to increase, according to Rent.com.
It’s All About Buying Right
Becoming a successful buy and hold investor will involve some work, particularly up front. But the time and energy you invest will be worth it when you can start building your retirement or investing portfolio towards complete financial independence.
With rental properties, it’s all about how you buy the property. It’s important to buy low so that even after any repairs or rehabbing you do, you’re able to recoup your investment through rent payments. There is also many opportunities to purchase a “Turnkey Rental Property” which means that the property has already been renovated and tenanted by another investor.
Ideally your purchase should be made using bank financing, private money (other people’s money), self-directed IRA money, rather than your own money cash. We have financing sources who will lend up to 80% of the cost of the property, leaving only 20% that you have to come up with. You also want to minimize your risk as much as possible by researching the market you’re looking to own rental property in, researching rent rates, having a solid rental agreement in place, and also having a contingency plan in the event of vacancies.
Once you buy the property, you may need to fix it up to make it move in ready for tenants, manage the rental (yourself or outsourced to a trusted management company), and maintain it. If you purchase a “Turnkey Rental Property” the renovations will already be completed, the tenant will already be in place with a signed lease, and the property will come with a professional property manager to look after it, collect the rents, deal with any maintenance issues, etc. etc.
With buy and hold, you won’t get rich overnight. It will take work, but once you get that tenant in place and can begin to see some returns on your investment, it’s very much worth it, and before long you’ll be looking for the next rental to add to your portfolio.
It’s all about buying the right property, the right way, and knowing the numbers in the deal… all the numbers. And like with so much in the world of real estate investing, it’s about finding the right mentor. And that’s where I come in.