Earning an income is different from building wealth. Although all wealth is based on earning income, not all revenue translates into wealth-building. Just because a person makes money doesn’t mean they are on their way to achieving financial freedom.
This is because there are only two ways anyone can make legitimate money in life, and only one of those ways can create wealth. A person can earn money by exchanging their time for a salary. But this option will not build the kind of wealth that can secure their future.
Why is this?
Exchanging time for money limits a person’s earning potential because they don’t have an infinite amount of time to give to that job. If your only option for increasing your income is to work longer hours, the time eventually comes when you have no more hours to give.
This is why better strategies exist than depending on earned wages as a doorway to wealth. Yet this is the path taken by most people. Why? The number one reason people choose to work for a salary is that a salary is predictable. Its predictability offers them a sense of security.
But that security comes at the expense of their financial liberation.
But there is a better option where money works for you instead of you working for money (exchanging time for money). With this superior strategy, you earn income from activities that do not require a constant investment of your time. This kind of income is called passive income.
How do you earn passive income?
There are many ways to earn passive income, investing in stocks or bonds and owning intellectual property (a book, music, or online course). But in this post, we talk about one of the oldest and most accessible ways to earn income passively, investing in rental properties.
How to earn passive income from rental properties
California Realty Group in Hemet says there are many ways to invest in rental properties as a source of passive income. But many of those require you to commit a significant amount of time, and that’s not what you want. Here are the strategies you should use as a new rental property investor.
Get your finances in order
Getting lenders to give you money for a rental property is hard because rental properties pose a greater financial risk to lenders, so the qualification criteria are more demanding. Before approaching lenders, ensure you have the required credit score, down payment, debt-to-income ratio, and cash reserves.
Define your niche
Rental properties can be classified as either residential or commercial properties. Residential properties include single-family homes and multifamily properties. Commercial properties are more diverse, hotels, apartment buildings, malls, etc. The type of rental property you invest in depends on your finances and investment goals.
Invest for the long-term
Although you can make money in the short term by flipping properties, this is not a passive investment strategy. If you are serious about making money from rental properties, plan to hold your assets for a long time and have many properties in your portfolio.
Know your numbers
The only way to assess the viability of a rental property before you buy it is to know how to evaluate its future performance using specific numbers. Know how to use the rental’s acquisition cost, rental income, and expenses to calculate its NOI, Cap rate, Cash flow, and cash-on-cash return.
Understand what makes a good location
The location of your property is the most significant factor in its success. It is better to buy an average property in a good location than to buy a great one in the wrong location. Successful rental property investors know how to identify a good location.
Invest for cash flow first
Cash flow and value appreciation are two ways you can make money from rental property. While value appreciation is good, you are better off investing for immediate cash flow. Your goal should be to own a portfolio of cash flow generating rental properties.
Build a support team
Real estate investing is a team sport. Property investors who try to go it solo don’t go very far, or they make costly mistakes that cost them their investment. Populate your team with professionals who have expertise with rental properties. These experts should include an attorney, accountant, mortgage broker, real estate agent, handyman, and financial planner.
Get property management
Overseeing the operations of a rental property is a multi-faceted job that can take up vast swathes of your time. Since your goal is to separate your ability to make money from your time, this is something other than what you want. Your rental property is only becoming a source of passive income when you hire a property manager to oversee it.
How do you learn all the above without making costly mistakes along the way? The best way is to get an experienced mentor who will guide you away from the pitfalls of rental property investing.