How to Build Passive Income with Real Estate in 12 Simple Steps
Passive income is a great way to make money while you sleep, and it’s not as hard to achieve as you might think. All it takes is some upfront planning and effort, and then in time you can sit back and watch the money roll in. Here are 12 simple steps to help you get started!
1. Research the rental market: If you are buying a rental property It’s important to have a good understanding of the local rental market before you purchase a property. This will help you determine how much rent to charge and how often you can expect to have a vacancy. You’ll also want to think about what type of rental property you’re looking for (i.e. long-term versus short-term). Some cities are friendly toward short-term rental options (i.e. Airbnb, VRBO), and others have limitations and restrictions. For example, the city of Langford is very friendly toward short-term rentals, whereas Victoria limits and retricts this option and there are only a handful of downtown condos where this is strictly allowed. The rents you can charge can also vary greatly depending on which city you’re looking at. An easy way to test the market is to look at what other people are charging locally. For long-term rentals I like to look at Facebook marketplace, and for short-term rentals I like to check Airbnb. However, keep in mind that this information won’t be definitive. For a refined estimate I recommend consulting a licensed property manager.
2. Get financing in place: You’ll need to secure financing for your property before you can start generating passive income. This will tell you what you can afford, and it will allow you to make an offer once you find the right property (unless of course, you are buying in cash). There are a number of different lenders out there, so be sure to shop around for the best rates and terms.
3. Find the right property: When it comes to passive income, not all properties are created equal. You’ll want to find a property that is in a good location and ideally priced below market value. This will give you the best chance of success in the long run.
4. Hire a property manager (?): Unless you’re planning on being a hands-on landlord, you’ll need to hire a property manager to take care of the day-to-day operations. This will free up your time so that you can focus on other things. However, the feasibility of affording a property manager will vary depending on your location, property type, and financing situation. In Victoria, a property manager probably doesn’t make sense for most long-term property rentals, unless you own the property outright, or have a substantial down payment. However, a property manager could make sense for a short-term rental property if you are bringing in enough revenue to cover all of your expenses (including property manager), and still come out ahead with positive cashflow every month. While hiring a property manager will make the income from a rental property more passive, it may not be best for you. If you don’t mind managing a rental property yourself, that could be roughly another $850 in your pocket every month.
5. Find the right tenants: For long-term and short-term rentals alike, the right tenants/guests are everything. For long-term rentals, it’s better to attract and screen through as many tenants as possible to ensure you find someone reliable who will pay their rent and take good care of your property. It’s important to get this right since the risk of damage to your property, or a failure to pay rent month after month can be extremely costly. Similarly, hosting the wrong short-term guest can also run the risk of damage to your property, so it’s good to review the ratings of each guest that asks to stay with you.
6. Collect rent: Once your rental property is up and running, you’ll need to start collecting rent from your tenants. Be sure to deposit the rent into a separate account so that you can easily track it for tax purposes.
7. Pay your expenses: You’ll need to set aside some of the rent money to cover your expenses, such as mortgage payments, insurance, repairs, taxes, etc. Any money left over after expenses can be considered profit.
8. Reinvest profits: Once you’re generating a healthy profit from your rental property, you can start reinvesting that money into other properties. This will help you build up your portfolio and create even more passive income.
9. Diversify your portfolio: It’s important to diversify your portfolio so that you’re not putting all your eggs in one basket. This will help reduce risk and ensure that you’re still generating passive income even if one of your properties isn’t performing as well as you’d like.
10. Monitor your progress: Be sure to keep track of your progress so that you can see how well your rental properties are doing. This will help you make adjustments as needed and keep you on track in reaching your goals.
11. Review/set goals annually: At the end of each year, take some time to review your progress and see how far you’ve come. This will help you set new goals for the coming year and keep you motivated.
12. Enjoy your passive income! Once you’ve reached your goals, sit back and enjoy the fruits of your labour. Passive income is a great way to achieve financial freedom and live the life you want.
following these simple steps, you can start building passive income with real estate today! Just remember to stay disciplined and focused, and you’ll be on your way to success.
I am a Victoria based local realtor with eXp Realty. My commitment to honesty, integrity, loyalty and hard work have been important pillars for me because they drive a high standard of excellent service for my clients. Helping you realize your dream is my goal!
I service Vancouver Island, but my focus is on: Victoria, Sooke, Saanich, Malahat, Shawnigan Lake, Cobble Hill, Duncan, and the rest of the Cowichan Valley.
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