Is a Rental Property a Passive Income Source?

Is a Rental Property a Passive Income Source?

Truly passive income sources are a kind of Holy Grail for savvy investors. Holding these assets allows you to generate income reliably and consistently without requiring manual effort or intervention.

It sounds like something too good to be true – which is appropriate, considering how hard it is to find truly passive income sources that don’t require enormous sums of initial starting capital or ongoing work.

Some real estate investors insist that rental property is a passive income source, but is this the case?

Property Management Work

There are some problems with the designation of rental properties as a source of passive income. For starters, you usually need to save up a significant down payment before you can buy a rental property, meaning you can’t start entirely from scratch.

More importantly, there’s significant work involved in managing a rental property to keep it active:

  • Property repairs and preparation. First, you need to make repairs to the property and make it presentable for prospective tenants. No one is going to rent your property if it’s in bad condition or if it doesn’t look attractive. This can take many hours of work and cost thousands of dollars.
  • Marketing and advertising. After that, you’ll need to market and advertise the property. You need to get it in front of your target demographics and make sure your offer is attractive enough to encourage tenants to apply.
  • Tenant screening and interviews. It’s tempting to fill your property with a tenant as soon as possible, but it’s much better to practice careful tenant screening. In this process, you’ll review each tenant’s credit score, income, and other financial factors to determine whether they’re a good fit for the property. This process can take many hours across weeks or even months.
  • Maintenance and repairs. When your property is occupied, you’ll be responsible for fielding tenant requests and issuing maintenance and repairs when necessary. It’s your job to keep the property habitable and in good condition, which sometimes means responding to emergency repair requests in the middle of the night.
  • Conflict resolution. Though hopefully rare, you may also have to exercise conflict resolution. You may need to de-escalate situations with angry tenants or help resolve conflicts between neighbors.
  • Eviction management. If your tenants are problematic, you’ll have even more work to do managing evictions.

The Solution: A Property Management Company

Obviously, rental properties are a lot of work by default – but they don’t have to be. That’s why property management companies exist. With the help of a property manager, your property can become almost autonomous. In exchange for a portion of your gross generated rent, your property management company will take care of almost everything on your behalf, including initial repairs, marketing and advertising, tenant screening, maintenance, conflict resolution, and even evictions.

You’ll be sacrificing some of your profitability with this move, but you’ll make the rental property almost completely passive as an income source. If you’re already busy with a full-time job, but you want to keep making money on the side with a rental, this strategy is ideal.

Keys to Success

Of course, managing a rental property with a property management company isn’t guaranteed to succeed. These are some of the most important keys to success:

  • Choose the right properties. Think carefully about the neighborhoods in which you buy – and the properties you buy individually. Spending too much money on a house, buying in the wrong area, or purchasing a house that needs too many repairs could instantly jeopardize the profitability of your rental property management strategy. Even the best property manager in the world can’t save you if you overspend or if you choose a property in a neighborhood that’s in decline.
  • Scrutinize your partners carefully. Different property managers offer different levels of support and different fees. It’s important to scrutinize your prospective partners carefully before choosing one to work with you in your rental property management strategy. How easy is it to communicate with them? How long have they been in this business? What are their terms and conditions? Are there any hidden fees? Can you look at reviews and testimonials to see how other people feel about this brand?
  • Scale when you’re ready. Rental property management becomes more profitable as you add more properties to your portfolio and diversify your holdings. As you grow more comfortable with this property manager, consider scaling up your efforts and reinvesting your profits in new properties.

If you can follow these tips and establish a better working relationship with your property manager, you’ll be in a position to keep your property running smoothly and autonomously while maximizing your income. It may take some time to get established, but once you’re there, you’ll have an efficient, revenue-generating machine.