Renting 101: Renting property & Passive Income
How to Earn Passive Income by Renting Out Property?
If you wish to live on passive income, it can be very useful becoming a landlord of a rental property. These days, plenty of investors are trying to enter the rental market to make a passive income and skip the rigors and monotony of a 9 to 5 job life. In the United States, the rental market is still a booming market. The number of rental homes since 2005 has jumped 37%. Although investors have traditionally always tried to make fast returns by flipping their homes following a quick remodeling, many of them are quickly waking up to the benefits of renting their properties. Find out how to earn passive income by renting out property.
Calculate the repair costs
Before investing in this market, you need to estimate the repair costs and the expenses of maintenance on your own rental property. As a thumb rule, you need to keep aside 7 – 14% for sudden repair jobs. The repair costs, of course, depend on how old your rental unit is.
Have your objectives in mind
It is important to keep your objectives in consideration. If you wish to make a passive income from your rental property and live off comfortable, you need to calculate how much you have to earn. Keep in mind that when income turns passive, there are changes in tax rates. You can have 0% tax rate as it is possible to subtract your depreciation from the taxable income. For instance, if you are an investor paying 251,000 USD for a rental unit, you have to divide it by 25.1 (number of years) to take depreciation into account and protect $10,000 every year in income.
Consider your financial situation
When you know your expenses and income, you can be in a better position to look for loans for purchasing a bigger renting property. Take into account taxes, utilities, management, maintenance, insurance and the rest for big repairs, such as a roof renovation or replacement. You should also discuss with mortgage brokers and gather some knowledge of financing to search programs that let you purchase property with the minimal amount of money.
Know about property ratings and vacancy rates
It is important to have knowledge of the property ratings and vacancy rates of your market. You can find areas with A – F ratings, and these rent and sell for varied rates. You should try to reduce your vacancy rate to around 5% or even lower, so that your property does not stay vacant for longer time. Stay away from regions with lesser property ratings. Those rated F witness the most violent activities and you need to keep a hawk’s eye over your rental unit.
Those with an A rating are costlier to buy. However, you can get more money in terms of rent and have more regular flow of tenants. If you keep tenants who are able to afford higher rent, you will have lesser worries.
Check the location
Make sure that you buy rental properties with fantastic potential among tenants. Properties located close to retail stores, shopping malls, schools, hospitals, banks and bus, train or tube stations are better to live in.
Maintenance of your property
Once you buy a property, you have to maintain its exterior as well as interior. This will help reduce your expenses, when it comes to tank-less water heaters, low-flow toilets or landscaping. You should renovate the bathrooms and kitchen to get more rent. High quality granite slabs in your kitchen can be cost-effective for you, when it comes to resurfacing, and get you an additional 50 – 100 USD every month. You have to know about the renovation costs beforehand, in order to understand whether you are entering a fair deal.
Get a Property Inspector
Before buying rental property, you should call an independent, professional home inspector for a thorough inspection. Even if the property has been renovated only recently, you have to check whether the plumbing and wiring satisfies building codes and regulations. It is illegal in most places to own a rental unit that violates codes. An experienced and skilled inspector can determine how longer the roof can hold on, whether the hot water supply and HVAC system are up to the mark and whether the drainage or the building foundation has any defects.
Screen your tenants
After you buy rental property, it is important to keep a fair and transparent application process to screen your tenants, just like in case of a job interview. Look for tenants with credit scores higher than 600, check the latest collection activities, bank statements, criminal and civil lawsuits if any. It could be that you come across tenants who were not financially well off a few years ago, but have bagged a decent job and are making fair savings and paying bills well for the last few years.
Every wanted to know more about how to earn Passive Income? You can read all about it in our article: 10 best ways to earn a Passive Income! Don’t forget to share this article with your friends and comment your opinion on the article.