What is a Passive Income?

By definition a passive income is anything that contributes to your primary income through various instruments including REITs, stocks, shares, insurance, mutual funds and rental property. Becoming a landlord is a popular way to generate passive income.

Since the housing struggle in 2008, rental properties are on the rise especially the budget ones. Even the middle class households prefer to rent in order to save money. In 2013, the number of households renting crossed 43 million. Why people rent: renting has many advantages such as high mobility, no housing market fluctuations and no maintenance headaches.

Is Being a Landlord your Piece of Cake?

You may be tempted to become a landlord but the reality is not that glamorous. The money management along with the profit margin ratio has to be closely monitored in order for it to be termed as a real passive income. And on the ground: it is a lot of work becoming a landlord!

When vacant, the property has to be maintained which includes painting, repairs, plumbing issues and other concerns. Remodeling projects and renovation can claim a hefty part of the profits if not done right. Feuding neighbors, late rent payments, pesky tenants are all part and parcel of the whole rental property dream. In some cases, the loses at the end of the period can amount to more than profits. So, understand that its not all gold paved road till the end. Here are some takeaways to becoming a landlord.

• Cash Reserves – If you are becoming a landlord, you need to maintain a reserve of cash. With tightening lending standards, going cash is a good choice. Also, you may face emergency repairs any time which can seem heavy if you choose the loan route. Down payments are also increasing and now stand at a minimum 20 percent.

• Risk Appetite – Landlords need to have a relatively high risk appetite. Rental property loans can be overwhelming for some people. Also, the returns can be slow. Some prominent risks include prolonged vacancy, property damage, non payments of rental payments etc.

• Prepare for Bad Things – Rental horror stories are a dime a dozen for those looking to becoming a landlord. Always keep in mind that worst things are going to happen. For example, if you skip background check, you can end up renting to a criminal or illegal entity. Also, constant repairs from tenants who do not care is also a major factor.

• Understand Payments – There are numerous tax obligations for home owners. So, imagine them doubling when you turn landlord. You have to deal with tax obligations, mortgage due payments, rent payments, delay fees, credit statements and a lot more. Brush up your math and be ready for calculations.

• Real Estate Fluctuations – Property market can fluctuate wildly especially since the 2008 crisis. Keep in mind that you will not always command a higher rental price. If the market is down, you should expect a little downside. On the contrary, becoming a landlord also means you ride the increasing rental property wave to cash in on large profits.

Before you jump in head first into the rental arena, take a deep look at all the factors. You have to navigate through a touch terrain in order to turn a profit while on your quest to becoming a landlord.