Most people buy rental properties for passive income. Income that flows in while you vacation, while you play with your kids, while you cook or read or relax by the fireplace.
But is rental income passive?
In its purest form, passive income requires no effort after the initial setup. Some investments, like income properties, do require some ongoing work however. Even minimal effort is still effort.
How Rental Properties Vary
The first thing to note is that rental income varies. The details of the property you rent out will shape your experience as a landlord. Is it in a safe area? Does it attract professionals? How complicated is its construction? A basic build is easier to manage. The materials are easier to replace. The public spaces are easier to maintain and decorate.
Imagine renting out a simple apartment in a wealthy real estate market. It’s likely that the tenants would be polite and need minimal attention. Now imagine renting out an old house in an area with a lot of crime. Plan on more repairs, more property damage, more crime, and higher tenant turnover rates.
The more you’re asked to do, the more time you’ll need to commit. Renting out several residential properties increases the challenge. You could hire a property manager to take on some headaches of course. But property management fees eat into your profits, plus hiring and managing the manager all take work too.
In short, rentals differ: each landlord has a unique set of responsibilities. Are rental properties passive income? Some are passive “enough,” while others require frequent attention. Instead consider what challenges you’ll likely face as a landlord. When you’re considering property to invest in, consider these challenges to gauge your real estate investing workload.
Typical Landlord Labor
Some landlords and real estate investors have to put in more labor than others. The following list encompasses their main work-related activities:
Before a property can start earning as a passive income stream, you first have to buy it. Which takes more work than you might think.
First, it takes work to find good real estate deals. You can of course use a real estate agent to find on-market deals, or buy turnkey properties easily on Roofstock. Just don’t expect enormous cash flow returns.
To find stellar deals earning 10% or more cash flow yield, you’ll probably need to find off-market deals. Which could mean driving for dollars, mass mailing campaigns, buying foreclosures, and other more active strategies. Try Propstream for software that helps you find off-market properties.
While you can buy a property with a tenant in it already, most properties don’t come with existing tenants. You have to advertise vacant rentals and sometimes even get proactive on social media. This process takes time and effort, and then you have to process each rental application as they come in. The timing might not work: a prospective tenant may need to move in sooner or later than you’d prefer. Offers may vary: someone may be willing to pay more to secure their place.
Tenant screening takes labor and often patience on your part. A potential tenant may seem nice and friendly, but there’s no guarantee that they’ll stay that way. You need a thorough vetting procedure. The following core tenant screening tasks are particularly worth carrying out:
- Validating financial stability. It’s vital to know that someone can afford to pay their rent each month. You may need payment to be consistent and prompt. Even if you don’t, letting a tenant delay their payment sets a bad precedent. This validation process involves checking bank statements and credit ratings.
- Requesting and checking references. Your impression of a possible tenant is significant, but you need more information. Asking for references and following up on them will give you invaluable insight. What do their previous landlords say about them? You can also carry out a free tenant background check for identity verification.
- Getting sign-off on house rules. You may have certain rules you’d like your tenants to follow. You may live next door and want a low level of noise. You may be unwilling to have pets in your properties. These things are essential to cover before you accept a rental agreement. Leaving them will only result in discontentment.
Finally, you want to avoid tenants who have sued their landlords in the past, or who go around badmouthing their landlords online. Increasingly, landlords have to worry about reputation management in today’s world.
Timely Rent Collection
When tenants default on the rent, landlords still have to make their mortgage payments. And pay for insurance, property taxes, maintenance, repairs, property management fees, and eviction costs.
But some tenants always test your boundaries. They feed you excuses and ask you to cut them some slack. If you give it to them, they’ll ask for more.
In other words, don’t expect to just watch the rents flow in each month like clockwork.
Could you make this task passive? It depends on your tenants. It’s possible to rent out your property to people who pay on time and never cause any problems. With aggressive tenant screening, you can weed out most bad seeds. The more investment properties you rent out, the more likely it is that you’ll run into problems.
Maintaining the Exterior
How a property looks from the outside might not matter to an incumbent tenant, but it always matters to their landlord. Tenants come and go, and never treat your property as well as homeowners treat theirs.
First impressions matter for potential tenants. The more they like the places they see, the more enthusiastic they’ll be when applying to rent them. Something as simple as a fresh coat of paint on an external wall can make a big difference.
It bears noting that it’s not only the building that needs care. The grounds outside also need work to stay presentable. The location of the house will determine what issues arise. Areas with clay soil are challenging for gardeners, for instance, due to poor drainage. Amending clay soils is a possibility, but knowing how to amend clay soil won’t make it easy. Can you put in the necessary work? Can you keep the effort going month after month?
You could refuse to do any of this, but you don’t need to get your property ready if you keep it ready while it’s occupied. There’s a good chance you can tidy the outside without causing much disruption to the tenants. You can also ask them to help you with this, though there’s no guarantee they will. Whatever you do, it’ll cost you time and money.
Maintaining the Interior
Landlords usually end up paying for internal property damage. They can contend that the tenants caused the damage, but the tenants can dispute that. It’s often easiest for them to get things fixed.
Some real estate investors opt to do the repairs themselves to save money. If you’re good with DIY then you can take this approach, but you’ll still need to commit your time. Read: not passive. But hiring the work out isn’t passive either, from negotiating with contractors to checking their work and keeping them on schedule.
Could you make this task passive? You’d need to pay a property manager to handle the tasks for you. You’d also need to give them the budget to hire tradespeople as required. It’s doable, then, but would be expensive. You’d need considerable income from your rentals to cover it.
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Paperwork is the bane of every self-employed worker, regardless of their exact career. Landlords don’t escape it. From lease agreements to renewals, rent change notifications to eviction notices, landlords have to manage plenty of legal paperwork. Which says nothing of documents that must go to regulatory bodies, such as rental registrations and permits. There’s a lot of work involved, regardless of how you mitigate it.
It’s possible to produce many of these documents using online tools. You can use SparkRental’s free lease agreement as a template, for instance. But you still need to review everything to check that it’s ready to go. You also need to keep up with changes to the law and make relevant amends when required. It’s another task to add to your list of steady responsibilities.
And then there’s the paperwork involved in legal issues. When there’s a disagreement between a tenant and their landlord, it can lead to legal action. The latter will have more resources but more responsibilities too. This will limit their ability to fight their case. It’s also an impossible situation when it comes to PR. No matter who wins, the landlord will come across as the villain.
Can they correct that framing? Can they clear their name? It’s possible, yes. They can work hard through social media to explain the situation. They can lean on glowing references from other tenants. Stigma is hard to erase, though, and will linger for a long time. And no matter what happens, there will be documents to complete.
Could you make this task passive? For the most part, yes. If you rent out enough properties to bring in a lot of money, you can hire property managers. If not, you can outsource the world to a property management company. The quality of the results will depend on how much you spend.
How Much Can Landlords Automate?
With landlord software like SparkRental’s, you can manage many tasks from afar. Communicate with tenants, schedule maintenance calls, and submit paperwork. It’s all doable from anywhere in the world.
If you use a service developed for landlords, you can remain in control with a limited schedule. You can travel most of the time. If you want to handle the repairs, you can plan around them. If you want to outsource them, you can arrange that from afar. It’s about helping you cover your basic responsibilities so you don’t need to spend hours and hours each week.
Are there negatives? Of course. You’ll need to decide to trust your chosen system. You’ll need to convince tenants to go along with it. You’ll need to learn your limitations and those of the system. You’ll also need to contend with whatever fees you need to pay. But the positives far outweigh those negatives.
No, rental income isn’t passive in the truest sense. Regardless of how efficient you make your setup, you’ll always have tasks to do. Outsourcing still needs you to oversee the chosen parties. Even the process of finding rental properties takes effort.
But it’s still far more passive than working or running another kind of business.
If you’re eager to make money while doing nothing at all, consider investing in the stock market. For that matter, you can invest in real estate investment trusts (REITs), whether on public stock exchanges or through real estate crowdfunding platforms like Fundrise and Streitwise.
If you want to earn high returns with plenty of tax deductions though, real estate investing can work for you. It all comes down to using available tools to make your responsibilities easier. If you can get comfortable doing that, you can start to expand your rental portfolio. And the more rental income you earn, the easier it gets to systematize or outsource.
Semi-passive income streams are better than active income, any day of the week.♦
Do you consider rental properties passive income? Why do you consider rental income passive — or why don’t you?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.