How Do You Build Passive Income?
Every investor does it a little differently, but there are some best practices to keep in mind when you start down the path to building a passive income.
Be smart about the deal.
This is the most challenging aspect of creating passive income. Finding the right property to buy at the right price point comes down to doing the research. If you're just starting and don't have a lot of capital, you might want to search for properties in less expensive neighborhoods. Understanding the costs is also essential, so run a lot of spreadsheets with different scenarios, especially if you have limited experience. Understand that you'll need a 20-40 percent down payment based on the scenario and budget accordingly. This might mean buying a property in a smaller town with lower prices. Filter your search by price, and look at the rental market in the area to make sure rents cover your mortgage.
Join local real estate clubs and make it known what you’re looking for. Building connections can help you avoid bidding wars because people will bring deals directly to you. Knowing potential tenants and what kind of space they might need also helps in knowing what type of demand is out there. Local professionals also know where the deals are and may be willing to share a few secrets with you.
Tell people what you are actively looking for, including the property type, price range, location, and any other details. The more people know about exactly what you are looking for, the more likely you are to find the right deal for your situation. The best deals often come from friends and family.
You need to act quickly when a deal comes your way. Build relationships with brokers, lenders, contractors, and any other people you might need to help you make quick decisions.
Always be actively looking for properties that fit your criteria. Stay within your price range and limit your location search, so you’re not tempted to go outside your predefined limits. It’s also important not to get too attached to a deal because that could lead to poor decisions.
Be mindful of the location.
The farther you get away from your home base, the more difficult it is to manage a property. If your goal is to generate passive income with a manageable time investment, the location of the property is important. If you can't be near the property, it helps to have friends or family close by. Research and pick a location that you feel comfortable with.
Be aware of market trends.
The real estate market is impossible to accurately predict, but there are some trends that are likely to influence it. For example, with an upcoming surge of baby boomers relocating, you can expect a shift in available housing inventory in the coming years.
Think about how a property can be improved and look beyond the surface-level issues. For example, a family that is selling a property owned by a hoarder might be willing to make a deal because they don’t want to handle cleaning it out. If you’re willing to take on (or pay for) that initial effort, it could mean decades of passive income from the investment.
To find residential properties, look for homes in desirable areas that need cosmetic improvements but don’t have major structural issues. If you’re interested in investing in commercial properties such as retail, office, mixed-use, and smaller apartment buildings, look for distressed properties in locations near key traffic arteries.