5 Steps to Earning Passive Income with a Rental Property

Passive income is money that you earn without a regular daily time investment. Creating a passive income stream from rental income involves work upfront but allows you to reap financial rewards for years to come.

One common passive income stream is real estate investing and rental management.

Step 1: Research, Research, Research

Before you even think about buying a rental property, you’ll need to do a substantial amount of research in your local area. First, take a look at what rental units are currently available in your area using a real estate database. This will give you a good idea of how much you can reasonably expect to charge in rent. Keep in mind that property amenities, location and size will also influence how much rent you can charge.

You’ll also need to spend time learning about the laws you need to follow as a landlord. Some examples of law classifications you’ll need to study include:

  • Laws governing the landlord-tenant relationship
  • Laws against housing discrimination
  • Laws regarding the eviction process

Step 2: Select A Property and Do the Math

After you’ve done your research on your local real estate market and housing laws, it’s time to choose a property. Select one that’s affordable and in an area where you can charge enough rent to cover the mortgage if you need one. Research the average cost of utilities in the area where you want to buy. If you’re using a mortgage loan to buy the property, you should also research current interest rates.

Once you find the perfect property, sit down and calculate what you’ll need to charge in rent to create a profit so that your purchase will turn into a good investment. Some things you’ll need to account for include:

  • Your monthly mortgage payment
  • Insurance
  • Taxes
  • Maintenance and upkeep

After you calculate your total monthly and annual expected expenses, you’ll need to decide on a final monthly rental price.

Step 3: Secure a Mortgage

If you don’t plan to pay for your rental property in cash, you’ll need to secure a mortgage. You cannot use a government-backed loan to buy a rental property. Instead, you’ll need to meet your lender’s requirements for a conventional investment property loan. These loans can be more difficult to qualify for, especially if you’ve never managed a rental property before.

Investment property loans are considered a bigger risk to lenders than the mortgage on your primary residence. To qualify for one, expect to put more money down and face a higher level of scrutiny.

Step 4: Advertise Your Space and Choose Tenants

Once you’ve secured your home loan and your property is ready to go to market, it’s time to start advertising. You’ll want to use real estate database websites, create your own website, and social media to advertise your space. Be sure to offer interested parties a clear way to contact you or apply for the space.

When you receive applications, you should carefully consider each candidate. It’s best to be picky about your tenants and wait for a few applications to roll in before you decide. Some states have very strong tenants’ rights laws, so you’ll want to be 100% sure about who you rent to.

As a landlord, you have wide discretion about who to rent to, but you must comply with the law against discrimination based on race, ethnicity, gender or other specified characteristics.

Step 5: Be A Great Landlord

Now that your tenants have moved in, the only thing left to do is be a great landlord! It’s your responsibility to provide your tenants with clear expectations regarding rent, and to respond to maintenance requests quickly. If you respect your tenants, they’re more likely to respect your space.

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