“Automate your cash flow!”
“Make money while you sleep!”
“Build your financial future—effortlessly!”
We’ve all heard those over-enthusiastic voices announce the “opportunity of a lifetime” in those midnight infomercials intended to draw in people who are looking to maximize their income potential. It’s like the Holy Grail of financial goals.
Unfortunately, it’s not as easy as it sounds in the commercials. Making passive income can take some initial strategizing and elbow grease, but it is actually possible to earn this income by building a portfolio of rental properties. Let me share how I built my independently owned and operated real estate investing business to create passive revenue streams.
Making Passive Income by Investing in Real Estate
First, let’s talk about the difference between active income and passive income. Active income is money that you earn by working. Passive income, however, is not so straightforward. Colloquially, you may hear people talking about passive income as “free money” or revenue received with little or no effort.
Yet, in order to truly produce passive cash flow, you first have to create something of value. The initial value has to come from somewhere—whether that is a product you create (think of Stephen King’s book royalties!) or initial financial input from a startup source, like a loan. Then, you can earn passive income by maximizing that initial investment to create added value.
You can create passive income by building a portfolio of rental properties. Here’s a step-by-step guide to how my real estate investing business model has worked for me.
- Define your strategy. On one hand, you can target income-producing properties with a high cash flow, like multi-family units, to produce passive income for the short-term. On the other hand, you could take the long view and bank on the property’s valuations rising (as real estate generally does over long time horizons). If you choose the latter, you will want to pay off any loans or liens as quickly as possible in order to start realizing the added value. I have been developing my rental portfolio for years now, so I have a mix of both strategies going on simultaneously for diversification purposes.
- Get financing. Some investors leverage the equity they have gained with their personal home by getting a home equity line of credit, or HELOC, loan. However, the amount that they are allowed to borrow is limited by the difference between the amount still owed (if any) and the appraised value of their home. Others turn to a 203k loan, which is FHA-backed financing that is especially useful for buying distressed homes that need significant repair to achieve full market value. I started investing with this type of financing, but when I became a HomeVestors® franchisee, the preferred vendors gave me access to other financing for qualifying properties.
- Generate leads. This is the hard part for most, especially real estate investors just starting out. Some spend countless hours implementing direct mail campaigns, developing an investor credibility kit, or even outright knocking door-to-door in target neighborhoods. I found those tactics delivered a low yield of investment opportunities for the input required. Nowadays, the nationally-known and trusted “We Buy Ugly Houses®” marketing campaign brings the leads straight to me.
- Estimate your ROI. To get the best return-on-investment, you’ll, of course, need to be able to “buy low, sell high.” But, more than that, you’ll have to determine a pretty accurate estimate of the other costs that are involved, such as any repairs that are needed. There are still those investors out there who use old-fashioned pen and paper, but most use some kind of Excel-based software.
- Negotiate good deals. Of course, you don’t want to pay more than you have to for an investment property, but you still need to be sensitive to the perspective of the home seller— especially when approaching distressed homeowners facing foreclosure. Communication is key to negotiating a deal that feels good to both parties.
- Hire a property manager. If you want the rental income to be strictly passive, a good property manager is essential. The cost will pinch your profit margin a little, but then you won’t have to spend your time fixing faucets and advertising vacancies. If you’ve done your calculations correctly from the start, the property should deliver monthly income even when you hire a property manager.
Once you have your property rented out, you can generally maximize your revenue by taking advantage of the numerous tax deductions for real estate investment property. You should discuss these options available to you with your financial advisor.
Expanding a Solid Rental Portfolio
Following the same steps as above over and over can help you grow your rental portfolio and increase your future passive income potential. While some investment properties provide a frontloaded payoff, others will grow in value over time. With a full portfolio of rentals, I am now positioned to retire well with a respectable monthly revenue stream. Sure, it took some thinking and time to get the whole rental portfolio in place, but now the income it generates is completely passive. If you are interested in expanding your rental portfolio sooner than later, get in touch with HomeVestors to find out more about the tools and resources available.
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HomeVestors of America® is the nation’s only real estate investing franchise, providing wonderful business opportunities to real estate and investment professionals across the nation.