Ever think about being a landlord? Well, you should. Most millionaires agree that real estate is still the best investment today, so you’re on the right track!
You may be worried about a rental property eating up your life. Luckily, we’re here to tell you that it doesn’t have to. Let’s talk about how to make rental income passive to get the most out of your investment!
What Is Passive Income?
Before we jump in, let’s quickly define the terms to avoid confusion.
We use the term “active income” as something you have to work for, like a job. Consequently, “passive income” is income that comes without doing anything. For example, an author earns passive income from the book they already wrote, while a carpenter earns active income through his paychecks.
Of course, passive income is highly sought after among investors, as they want a return on their investments without doing anything. They may earn interest in their savings accounts, dividends in their stock portfolios, or possibly even rental income.
Is Passive Income Taxable?
Yes, any income is taxable. Profits from your rental property (revenue minus expenses) will be regarded as personal income as it would from self-employment. Property income taxes will be taxed at the standard income rate, not as capital gains or anything else.
You will also owe property taxes on the rental property, but you can offset this through rent. Property taxes will also be lower for 2 to 4- unit homes, as they generally are not considered “commercial properties.” While it depends on the state and circumstances, commercial properties usually include 5-units or more.
Is Rental Income Passive or Active?
Essentially, rental income is passive or active depending on the type of landlord you are. Rental properties are one of the best time-tested investments for entrepreneurs, and their level of involvement is entirely up to them.
However, there are many responsibilities associated with property management that need to be addressed one way or another. How involved you want to be is up to you.
It isn’t just collecting rent. When tenants move out, their unit needs to be cleaned up, repainted, and the vacancy needs to be filled. That involves marketing, open houses, reviewing applications, tenant screening, and more.
Not only that, but there will also be a need for maintenance and occasional repairs. If a water pipe breaks at 3 in the morning, it is the responsibility of the landlord to address that.
The property itself also makes a world of difference. A property that was built 10 years ago may earn semi-passive income, while a 100-year old building may require constant involvement.
We’ll put it this way; if you have 3 rental properties and they take up 20 hours of your time every month, then no, your income is active. If you show up once a month to collect the rent, find new tenants once a year, and occasionally call a maintenance team, then your income is semi-passive. Remember, this can vary from month to month.
However, if you hire the right property management company, they can take care of all of your responsibilities for only a small percentage of your rent, which makes your income entirely passive.
How Property Managers Make Rental Income Passive
The benefits of passive income are obvious. Who doesn’t want to make money without doing anything? Well, if you hire a property manager, they turn your income from active or semi-active to passive. Here’s how.
The right property management companies will offer marketing services to help expand the reach of your property and find the right tenants. They will also handle open house showings and all of the details!
Property managers generally have experience with their desired platforms and marketing strategies, so you can rest assured that your vacancies will be filled promptly.
The right tenant screening services can save your entire investment. Any experienced landlord will tell you that one bad tenant is all it takes to set you back financially.
Well, property management companies do extensive background checks on applicants, including their rental history, criminal history, and credit history. This will help ensure you get the right tenants every time.
Maintenance & Repairs
That’s right. You won’t have to wake up at 5 am to shovel the driveway or take your Saturday to mow the lawn. Property management companies handle routine maintenance like snow removal, property upkeep, and maintaining vacated units.
However, they may outsource certain tasks that are outside of their realm of expertise, such as plumbing, HVAC, or electrical work. They will contact you about this as needed.
Although this task is often enjoyable, property management companies will even offer rent collection services. This could be online or in-person, and they will ensure you get your rent on time every month!
Remember, other than special services like repairing a roof, all of these services come for a flat fee that’s proportional to your rental income. Believe it or not, you may see your revenue increase if your property manager sets the right prices and fills your vacancies on time!
Watch It Grow!
Now that you know how to make rental income passive, there’s no time to waste! No investor wants to be tied down for the rest of their lives, so set yourself up to travel, work, or move and let the professionals handle your investment! A small percentage is all it takes to start earning passive income.
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