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3 Reasons I Love Rental Properties For Passive Income

Passive Income Rental Property

There are so many reasons to love real estate rental properties as an investment.  

However, here are three reasons I love it specifically as a passive income investment

#1 – Leverage The Rental Property Mortgage

When we use financing to acquire a property, we are essentially controlling an asset that is worth five times the money invested.

The best part is – five times is achieved when putting twenty percent down, which is considered conservative in real estate compared low money down loans.

Here’s an example:

You want to acquire a property that is worth $100,000.  After getting a mortgage and putting down the $20,000 as the twenty percent down payment, you now control a $100,000 asset with your $20,000.  

Let’s now think about it in terms of percentage return.  If the property increases by 10 percent it is now worth $10,000 more.

However, if you were to invest that $20,000 in say a stock and it went up 10 percent it would be worth $2,000 more.

See the difference?

#2 – Rental Cash Flow

This one is likely the most obvious. If you are looking for passive income, then cash flow from a rental property is essentially that!

Of course, you need to make sure to buy a property that will indeed cash flow.  There are ways to do this and using a property calculator to run the financials of a property is the first step.

On my blog, I talk about “Buying Right.” To buy right, you run the financials of a property and only buy when you see positive cash flow will be produced after deducting all of your operating expenses from the rental income, and yes, allocations for maintenance and vacancy should be included in the expenses.

If you do not have a property calculator feel free to download mine from scaredycatguide.com


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#3 – Rental Mortgage Principal Pay Down

With a rental property, your tenant(s) pay your mortgage for you.

Using the rental mortgage example from above:

If you buy a $100,000 property and put down 20% you will have an $80,000 balance to pay off. Who is actually paying this off? It’s not you, it is your tenants. The rental income goes toward paying the mortgages, taxes, insurance, etc.

We build equity in the property even if it does not appreciate since we are not coming out of pocket to pay off the mortgage.

When the loan is paid off even if the property is still worth the same $100k, you will have the $20,000 invested into it and have $80,000 in equity!

Is Rental Property Income Really Passive Though?

I know what you must be thinking, are rental properties really a passive investment?  Won’t I have to deal with tenants and maintenance issues?  

Well no, not exactly.  If all you want to do is make investment decisions then hire property management to handle all that stuff. Doing that means you just deal with an occasional phone call just like you would from a financial advisor.

Just be sure to factor property management into your calculations when deriving potential cash flow.

Conclusion

Those are the three main reasons I like investing in rental real estate.

Best part, these are not the only ways real estate can make you money.

It’s also one of the more tax-friendly investments as depreciation and your upkeep costs are written off against your gains. Thus a lower tax bill on profits compared to things like stocks.


This post was brought to you by the team over at ScaredyCatGuide. If you have a risk-averse mindset and struggle to pull the trigger on deals, check them out! To learn more about rental property investing visit scaredycatguide.com

(This post contains affiliate links, which means that if you click on one of the product links, I’ll receive a commission – at no additional cost to yourself – if you end up buying the product or service offered.)

6 comments

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  1. Mr Defined Sight

    I can totally understand why people have rental property. A good friend of mine does and he does pretty well from it. However he is also an attorney and has had to settle tenant disputes in court before. He likes that kind of thing because that’s what he does. I’m not sure if it would be for me though. Property management would help that but they chew up a considerable percentage. It can be a great income stream though no doubt about it.
    Mr Defined Sight recently posted…Find Your Balance In LifeMy Profile

  2. Mitch

    Yes, Mr. Defined Sight. That is certainly a risk with rental properties. We prefer to hold rentals in landlord friendly sites to mitigate this risk. For example, FL has a pretty clear and fast eviction process if that unfortunate situation comes up. States, such as NY are a much more involved process and can cost a landlord much more though.

  3. Cato @thedollarbuild.com

    I like the idea of creating multiple income streams from rental properties, but it’s definitely not for everyone. Maintenance, disputes and other issues can make what started as a quasi-passive income source something that is labor intensive and inconvenient. Personally, I can’t wait to be in a position to have another income stream from a rental property. Gotta start by buying my first house though!
    Cato @thedollarbuild.com recently posted…6 Strategies to Stop Your Impulse SpendingMy Profile

    1. Mitch

      Cato, there is always the “house hack” option depending on your living/family needs. Buy a duplex, live in one side and rent the other. Or buy a home with a upstairs or basement apartment to rent out for some income too.

  4. Gabe A. @ The Shiny Dollar

    I have a long term plan to pay off the investment property I own and use that extra money to purchase another one and do it all over again until I own like that. That can easily mean $15,000 a month in income (Gross not net). I use a calculation (That iil talk about soon on The Shiny Dollar) and the returns are just too nice to pass up. I love the stock market, but there is something exciting about property investments.
    Gabe A. @ The Shiny Dollar recently posted…My October 2017 Net WorthMy Profile

    1. Mitch @ scaredycatguide.com

      That is great Gabe. There are some many different avenues to take with Real Estate, which is another reason I love it. I plan to sell the first property I ever bought and use the gains from appreciation to roll that money into two properties in a cheaper market.

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