A lot has been said and written about “making your money work for you,” a colloquial, charming way to refer to passive income (that is, income that does not come from those employment or activities to which you dedicate most of your time in order to generate said income). Still, we think our faithful readers can benefit from being reminded that there are ways of generating passive income in the real estate industry, taking advantage of hard money loans.
One way to think about passive income is that you “previously have invested your time, effort and money in a product or activity that will regularly generate an income for you in the future.” So initially, it might take up a lot of your time to set up the generation of passive income, but eventually, the money “flows almost automatically.”
People in the know will usually tell you that in our current economy, there are several sources of passive income for you to generate money “almost automatically”:
- Bonds. These investments regularly pay interest. Although right now, interest levels are rather low.
- Investing in the stock market (and either receiving dividends or selling the stock for a profit).
- Real estate (for example, from a rental property).
- Royalties for things you have created (songs, novels, photographs, etc.).
- Selling your own digital products (once that product is created, there is very little to do short of watching your product sell.)
- Fractional investing in startups (that is, you don’t have to own the whole company, but you could eventually benefit from their profits as a shareholder, often when the company is sold to a larger company).
In this article, we would like to discuss some fundamental aspects related to generating passive income from real estate.
Passive income from real estate
As stated earlier, owning real estate is one form of generating passive income. But is it really, indeed, “passive” income? Let us discuss that.
- When you own a rental property, you become a landlord; thus, repair and maintenance requirements can demand you invest your time and money to get them fixed. On the other hand, hiring a property manager will diminish the income you derive from the property and save you time. It’s up to you to know how “passive” you want to be when investing in rental property.
- When you purchase a property, and the market is good to you, you can make money from the property appreciating in value, but that usually takes several years to materialize. In any case, market appreciation is almost truly passive income. You just sit and watch it (slowly) happen. For example, that can happen to the house where you live with your family.
- Suppose you really want to spend almost no extra time or money. In that case, you can continually evaluate alternative forms of real estate investing, like real estate investment trusts (REITs) or real estate crowdfunding platforms.
For what follows, as regards to investing in rental properties, we will just call it, instead of passive income, “making your money work for you” through investments in real estate.
Acquiring rental property with a hard money loan
Let’s consider the following scenario: you have enough money saved for the down payment on a rental property, and you’re considering buying one with a mortgage to put your money to work for you. Following are some things to keep in mind when evaluating your opportunities to invest your hard-earned money.
- If this will be your first time renting out a property, you might want to start by taking a “landlord crash course.” There are a lot of aspects that you should know about, including legal, financial, and general all-around administrative.
- Select a property that’s close by to where you live. A rule of thumb is to buy something that is no more than 30 minutes away, so getting to and from your rental property is not a drag on your schedule. Also, make sure you get to know the area and neighborhood very well so you can realistically know what to expect regarding rent levels and turnovers.
- Do the math with a spreadsheet. This will allow you to sophisticate, over time, your analysis with more information and data as you obtain it. It will be helpful because your mortgage lender will surely want to look at your financial projections. Make sure to include items such as mortgage payments, monthly maintenance budget, desired improvements over time, insurance, property taxes, turnover rate, among others.
We are here to help our clients.
We have been in this business for over thirty years now. We have benefited from our solid conviction that it is in our best interest that our clients receive sound, quality advice before making any investment decisions. So, you can approach us with your plans to acquire a rental property through a mortgage with us.
Act now if you have decided to put your money to work for you through a rental property
If you have decided to purchase a rental property through a mortgage, now is the time to act: you need to look for a lender who wants to become your financial ally and help crystallize your plans. Choose AMI Lenders as we have been in this business for over thirty years now and have benefited from our solid conviction that it is in our best interest that our clients receive sound, quality advice before making any investment decisions. So, you can approach us with your plans to acquire a rental property through a mortgage with us.
We are one of Houston’s fastest closers, fund our own loans, and can move as fast as the law allows. Borrowers in Houston will also have a hard time finding lower rates for hard money or private loans than we offer. We want our customers to succeed and take advantage of the financial opportunities offered by homeownership. Visit our website today and fill out an application for a private loan.