Passive income is the income you get from a particular source for which you don’t have to do any active work. The income, in the form of rent, gets into your bank every month. You put money in the bank and you get interest for the same. This is passive income. Similarly, you buy real estate and rent it out; the money you get as rent is also passive income. Real estate investment is an attractive form of investment and is considered more aggressive when compared to investing in the traditional stocks and bonds.
Not only does a rental property bring you passive income, it is also another way to get tax deductions. In several cases, the owners themselves do not live in these rental properties and they may have to incur expenses that will be way beyond the income amount. In such cases, the investor can avail a tax deduction. The vacancy factor will also be considered. So, one of the best ways to generate an income for your retirement days would be to become a landlord. The percentage of rent has increased from 31% in 2004 to 35% in 2012. According to a study made by Harvard, the number of people renting properties had surpassed 43 million in the year 2013. Most of the people prefer to rent than buy properties because they want to be free from the hassles of maintenance and repair works. This could be the result of economic problems that came in during the Great Recession in 2008.
However, you have to consider four main factors when you buy rental properties:
- The return on investment factor
- The expenses and property costs
- The financial risks you may have to endure
- Understanding the pulse of the area before you invest
Suppose you aim to generate $10,000 a year as passive income, and then you may have to charge at least $3,150 as monthly rent or $37,800 per year because you will have to keep aside a certain amount of money for paying monthly mortgage and additional expense. There might also be repairs that you may have not foreseen. Things may not go as you expect if you get a bad tenant. A tenant who damages your property will always be a liability and you may have to endure a massive dent in your income.
One word of advice:
Earning passive income does not mean that it is entirely passive. You have a lot of work to do, maintenance, upgrades and repairs between tenants. You may never earn much until the mortgage payments are over, but when they do, you will definitely have good money in hand. If you are interested in generating income that is truly passive, you may consider hiring a management company for your rental properties.