The dream of many a nascent investor is to get a foothold in the potentially lucrative real estate market. While most average people dream of investing in their dream property to live and raise a family, other more enterprising individuals envision investing in property to develop an income stream able to sustain their lifestyles as passively as possible.
While actual passive income isn’t quite as attainable as the plentiful Tik Tiok Svengali troupe will have you believe, with the right plan in place and enough capital behind you, you can come closer than ever to making money while freeing up your time for more fruitful personal endeavors.
Understand The Fundamentals of Investing In Real Estate
Before you ask your parents or local bank for a frankly enormous amount of money to invest in your first property, it’s wise to consider the fundamentals of the game. However, some factors are more obvious than others, meaning you need to take more time to carefully navigate through what is actually a fiendishly complex web of variables. The most apparent of all is the need to grasp just how vital choosing a home in the perfect location is.
Different zip codes will yield lower or more substantial rental incomes as people with different financial situations inhabit them. You can see this when you compare specific codes in the same area.
For instance, zip code 33186 has a median household income of around $75,699, whereas that of zip code 33135 is $29,800.
Why is this important? Well, those two locations are only approximately 18 miles apart but are separated by a significant income disparity. Even though the purchase price of a home in the former area code might be higher, you will quickly recoup your investment thanks to the significantly higher rental rates you can set there when compared to the latter area code.
Research The Market And Develop An Investment Strategy
As you have probably gathered from the previous point, research is everything if you want to reap more than you sow! As a result, it’s imperative that you study up on your goals and the means by which you hope to realize them. However, the question of what those objectives are and how to achieve them will inevitably arise. If you are looking for passive income over capital gains, you will need to devise a strategy that encompasses several factors:
- How much are you able or willing to invest?
- Will you use an agency to acquire and deal with tenants?
- What does passive income mean to you?
- How much income will suffice (i.e., are you looking for income replacement or additional income on top of other sources?)
Analyze Expenses and Determine Target Rental Rates
A key factor that almost all green real estate investors overlook is the costs associated with rental and dealing with tenants. Even if you are willing to part with a portion of your rental income to a dedicated property management agency, you will still be on the hook for any repairs or refurbishments required to stay up to code.
These costs can and will add up very rapidly and quickly eat into your income unless you have factored them into your budget. Moreover, you should consider ways to reinvest your additional passive income into other opportunities to diversify your investments, keeping you safe from global shocks that could leave you high and dry.
Property is perhaps the best way to build wealth and ensure that you can live the life you want to live without resorting to living paycheck to paycheck. Although passive income isn’t quite the panacea to the cost of living crisis we are all facing, it enables you to own an asset that accrues in value while still earning money from it.