29 Apr Generating passive income from a rental property – Part 2
One of the most popular posts that I have put up on my blog recently is about creating passive income using rental property. Because that information really hit home for a lot of my followers, I thought that today I would follow up a little on that post.
So what sorts of things should you keep in mind when deciding to become a landlord? Let’s crunch some of the numbers so that you have a realistic idea.
People liked the idea of creating “passive income” from a rental property – and for good reason. Getting to the point where our financial needs are covered whether or not we go to work is the dream. But before you invest a dime, it’s always good to look at the whole mechanism to understand how it works.
First off, you need to understand your responsibilities as a landlord. While each state varies a little bit in the details, let’s use California as an example:
“Before renting a rental unit to a tenant, a landlord must make the unit fit to live in, or habitable. Additionally, while the unit is being rented, the landlord must repair problems that make the rental unit unfit to live in, or uninhabitable…A rental unit may be considered uninhabitable (unlivable) if it contains a lead hazard that endangers the occupants or the public, or is a substandard building because, for example, a structural hazard, inadequate sanitation, or a nuisance endangers the health, life, safety, property, or welfare of the occupants or the public.”
So a landlord is responsible for making sure his rental property is up to code before a tenant moves in, and needs to be ready to fix certain problems as they arise.
Now, unless you are an experienced contractor, all that may sound a little overwhelming. So many investors have chosen to use something called a “property management company”. What does a property manager do? Other than finding and screening tenants, a property manager also collects rent and takes care of small and large repairs using local contractors. In return, you pay them a percentage of each month’s rent (usually about 10% for a single-family house).
Now, 10% of a rent check that you could otherwise keep yourself might seem like a lot. But unless you have the abilities and time to manage the property yourself, you would be better off handing the reigns over to a third party. In fact, you might even save yourself a certain amount of liability by doing so.
Second, you should evaluate exactly how much money you are realistically expecting to make from this investment. Some of the determine factors will include whether or not the property has a mortgage, how much rent will be, whether or not a property manager is in the equation, and how much you will set aside for major repairs (like roofing, air condition units, and so on).
Carefully examine the laws of the state you are investing in, to see who has the responsibility to provide insurance for the property, what kinds of inspections are required and how often, and what kinds of tenants cannot be housed in your property. For example, if your house is in a school zone, then a convicted sexual offender would be ineligible.
I have found a simple formula that keeps me in the black – make sure the rent is at least twice the mortgage. What I mean is this: if your mortgage on the property will be $400, then make sure that you can realistically get at least $800 per month in rent. Otherwise, with payments to a property manager and the amount you set aside for future repairs (usually at least $100 per month) it really won’t be worth your while.
Generating passive income through a rental property is feasible. I have done it many times, and my rentals continue to make me money today. And you are providing a real need for the members of the community. Just make sure that you crunch your numbers beforehand and make your investment a secure one.