A passive income sounds like a dream come true. It’s either a way to supplement your income and potentially build your savings for retirement or other family needs, or it could potentially become a way to essentially retire from an ordinary working life and focus on things you’re more interested in.
Becoming a landlord can hold a lot of promise for people who want a passive income, but is it a viable option? Here are some tips to help you earn money from owning additional properties.
Funding Your Investment
With the vast majority of investments, you should use money you already have in liquid assets and that you can afford to lose. You rarely want to invest on credit, because if the investment falls through, you could be in a lot of debt. Real estate investing is different. It’s common practice to use a mortgage for your investment property.
However, this isn’t to say that you shouldn’t be financially prepared. When you’re buying a second home to rent out, you have to consider a lot of costs in addition to the price of the property itself. This might include renovation costs, costs associated with paperwork, as well as additional taxes.
It’s important to save up for a healthy deposit and to make sure your finances can afford the additional strain, at least until you can get tenants.
Advertising Your Property
Speaking of getting tenants, once you’ve purchased a property, you need to find people to live in it. The longer your property is empty, the more money you lose, so it’s important to find the balance between a rental income you’re happy with and rent that’s low enough to attract tenants.
Check other properties in the area to see what the rent prices are for similar properties, as well as how in demand the area is. You can sometimes charge more in areas where many people are interested in moving in.
People won’t know your property is available if you don’t advertise it, so make sure to use the biggest rental platforms in the area. National platforms work well, but look for local ones as well, so you make sure you reach as many tenants as possible.
Screening Tenants
Once a few people show an interest in your property, you should narrow it down to a few potentials. Bear in mind that most tenants are also looking at a few properties, so don’t assume you’ll be able to get your first choice every time.
You can get a feel for a tenant when they look at the property, but this isn’t the only way to screen them or the most effective way to do so. Ask them questions to make sure they’ll be a good fit for the property and to make sure they’re likely to be reliable. For example, you should ask about why they’re interested in the property or the area, whether they have pets, and what their job security is.
As well as screening tenants via conversation, you should also look into other, more thorough screening methods. You can potentially do a background and credit check. Ask for their rental history or whether they have a guarantor.
Collecting Rent
As a landlord, you’re responsible for collecting rent. In an ideal situation, your tenant will send you the rent at the same time each month, without needing to be prompted. If you can find a tenant like this, try to keep them around because they can make your life a lot easier.
Otherwise, the best way to collect rent as a landlord is to use software or a service that allows you to manage all of your tenants' rental payments. Features like autopay, credit/debit card processing, automatic rent reminders, late fees, and receipts, and other tools can make rent collection considerably easier than having to chase your tenants yourself.
Discuss rent collection with your tenants when you sign the rental agreement, and set a date each week or month for regular payments. This takes a lot of the stress out for you and the tenant.
But what if your tenant can’t pay on time? In this case, it’s best to think about their track record. If your tenant is almost always reliable and pays promptly, and they let you know that they might be slightly late that month, it could be worth being reasonable and flexible. But try not to let late payments become a pattern.
Evicting Your Tenants
Unfortunately, the time might come when you need to evict a tenant. Usually, tenant change-overs occur because the tenant wants to move elsewhere or can no longer afford to rent your property.
But you might need to evict your tenant for a few reasons. If they don’t pay rent or are willfully damaging your property, you should look for legal ways to evict them. Even when they’re at fault, you might need to give them time to find a new place.
You might also want to evict a tenant because you need the property, either to move in yourself or to renovate it. In this case, you should make sure to give them plenty of notice and research how to evict them fairly and legally.
After this, bear in mind that your property will be vacant and may need repairs, especially if the tenant didn’t look after it after being evicted.
Growing Your Portfolio
If you’re just renting one property, you likely won’t be able to support your family. To make a living that you can be comfortable with, you will need to grow your real estate portfolio so you can earn a cumulative rental income from multiple tenants.
The big problem with multiple properties and tenants is that it stops becoming a passive source of income, because you’re so busy managing everything. In this case, using a property management company can be a great way to dial back the work. This service isn’t free, but you can often still earn a healthy income but with less stress.
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