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Growing Your Passive Income Stream with Rental Properties
Have you been dreaming about achieving financial independence?
Generating passive income is possible when you make wise investments. One of the common approaches is investing in rental properties. But, as Jason McGuire of RE/MAX Infinity, a professional property management company, explains, while the process seems easy and straightforward, successful property investments can pose great challenges.
Market fluctuations, real estate management, and time demands surprise many beginner investors. But the people who are in it for the long run have the potential to generate a sizeable passive income stream.
In this article, we'll go over the main points you should keep in mind when growing your rental property business. Read on for these key takeaways of rental business management.
What generates a passive income stream?
Passive income has many definitions. In most cases, it describes earnings that you aren't actively generating. Having a day job is part of an active income. The profit you generate from working in your small business is active income as well.
Say, for example, you have three vacant rental units and you lease these properties out to tenants. The income derived from this activity is considered to be passive income.
You still have to pay taxes on this income. But it's a smart way to boost your cash flow and save money. It is always possible to further invest the gains into various investment opportunities.
Most definitions state that passive income doesn't include the following:
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Investment income
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Portfolio
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Salaries
This may look confusing at first. Why aren't investments considered as passive income? That's because there is a third category: portfolio income. The portfolio income covers profit from capital gains, dividends, interest, and investments.
Passive income isn't a get-rich-quick scheme. A successful attempt to grow a passive income stream rests on a solid strategy, plenty of research, and an entrepreneurial mindset.
What are the best rental properties for investment?
There is no golden rule for picking the right properties. 'Best' is a relative term. There are considerable differences between regions, states, cities, and even neighborhoods.
You need to conduct a lot of research to understand your investment opportunities better. Here are some potential choices:
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Properties with potential for commercial activity. Compared to residential properties, this type of real estate enables you to charge a higher rent amount. But commercial estate demands higher initial funds to make the purchase.
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Properties for investors with a lower budget. When you are operating within a lower budget, low-income housing can be a good start for investments. The income may be smaller, but the numbers will add up in the long run.
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Turnkey rental properties. These properties are a great choice for investors who are just starting out. Turnkey properties are rental units, such as offices or homes, that are ready for the tenants to move in. You won't have to deal with considerable improvements or repairs before putting the property on the market.
What are the risks of rental property investments?
The biggest risk is taking a gamble on the property. You should always understand the property, its surrounding neighborhood, and the economic climate. Without proper research, the risk of losing your money is significantly higher.
Some beginners are surprised when they see how much their rental property really costs in the long term. For example, it's essential to fully understand the pricing of turnkey properties. There could be hidden charges that aren't communicated to the clients before signing the agreement.
Negative cash flow is a serious financial loss. When you start losing money every month, the investment may start to seem like a bad deal. Professional property managers help you navigate the complicated map of successful real estate management.
There's another aspect that is executed without any issues by great property management companies. Finding the right tenants might positively affect your passive income in surprising ways.
The key here is efficient tenant screening. Experienced property managers have tried and true systems in place. Additionally, these methods avoid any discrimination charges under the Federal Housing Act (FHA).
The bottom line: growing your passive income with rental properties
Rental properties offer a great chance of investing your money. The generated profit creates a stream of passive income. You can use this passive income for further investments, a rainy day fund, or daily expenses.
Successful investing in rental properties calls for research, analysis, and effective decision-making. As with any other investment and business activity, there are risks involved. However, compared to stocks and similar investments, real estate offers a steadier and less risky income.
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Written by Jason McGuire, of ReMax Infinity. He can be reached at remaxinfinitypm@gmail.com
Thanks Jason for your contribution to our blog!
The opinions and views expressed here are solely those of the author and do not represent those of Norco Holdings Inc, it's affiliates or subsidiaries.