Rental Income is an amazing stream of income. It is mostly passive and can be 100% passive which I’ll get to later in the piece. Rental income can seem like an unattainable dream. If it does, it is a strong possibility you haven’t dove deep enough into how you can obtain 100% of what you want for 10 to 20 percent of the cost. Rental income is a way to own an appreciating asset while collecting money monthly on top of it.
In addition to this, you get awesome tax benefits, and if the unit has 5 or more units, you can write off depreciation as if the property is depreciating which as I said, it does not. It’s a dream scenario. So, how can one make this an attainable goal? If this is not a goal but a semi-passive to a passive income stream is, why should this be considered? Can I sell you on this? Well, of course.
Let’s say you are working 40 to 50 hours a week and you are dreading doing it for another 15-30 years before you can even think about retiring. You can use that job you hate to help you get away from it. Now, having a decent job (60k or more) and great credit will make this a lot easier but I’ll give both scenarios. Let’s say you have a decent job and your credit score is 720 or above. You are closer to escaping the rat race than you think. Here is what you do. Most people in this situation will be renting. If you are renting, the game plan should be to buy a duplex where the mortgage is/will be within 10-15% of your current rent. You will need to move into one side of the duplex and rent the other. The rent for the other side will cover the cost of the mortgage.
If you lose a tenant for a month or two, you’ll be able to cover it because it is about what you paid for rent. Qualifying for the mortgage will be based on your income, credit score, and debt to income ratio. The debt to income ratio is the percentage of a person’s monthly gross income that goes toward paying debts. 36% will make things easy and some banks will go up to 43%. Your new mortgage will be included in this so if you do the math now using your rental cost the ratio should be about the same with your new mortgage replacing it. Once in the duplex and securing a tenant, you will be living rent/mortgage-free, own an appreciating asset, have a “decent” job, good credit, and a better debt to income ratio than you had before. This means after a year (to build savings and equity) you can attempt to secure either another duplex or jump up to a commercial unit (5 or more unit building) which will bring you 1 or 2 properties away from leaving that job. Not so unattainable, huh?
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Let’s make it harder. Let say you don’t have a “decent” job and your credit sucks. No worries. This just makes the success story even better. The game plan is similar to the above with a couple of prerequisite steps because of this, you may end up better off than the people with the easier slate. Step one is to embrace the level of difficulty you are approaching and the level patience this will take. What do you have to lose? Step two is to become obsessed with real estate. You don’t need to become an agent, a rehabber, or an investor. This sounds impossible but it is the truth. You do however need to learn the industry.
Think about sports or music. You as a fan(fanatic) of either puts you in the know of things that the athletes or artists themselves may not be aware of. What you will become is a middle person. What you will do to make cash is to be the “plug.” You will find sellers, link them to buyers, and take a “finders fee” from the transaction. You can make $5,000 on even the smallest deals. You’ll use this money to build savings and pay off any debts. This will eventually put you in a position to start the process of buying that duplex and getting on track to buy that commercial building that will easily replace your income.
In closing, rental income is a comforting asset. It is not a “flashy”, get-rich-quick scheme. It is a quiet, semi-passive, stay rich plan that can be done by anyone who puts their time and effort into it. As promised, the way you make this stream 100% passive would be to hire a management company. They will handle the day to day a landlord(you) would normally do. This cuts into profit (about 5-15%/mo) but it takes the job of landlord out of your hands which at times can have you question why you became one.
I’d suggest handling the job yourself until you get that commercial property so you have an idea of why you are paying the management company. You’ll also have an idea of how you’d like your tenants’ issues along with other ownership issues handled. You can then pass that along to the management company you are paying. Remember they are working for and standing in place of you. There should be no lack of anything. Once this is set, you have achieved a stream of income that will take care of you for the rest of your life.
Food for thought…You do the dishes.
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