Every investor's goal is to build passive income and there is no better way to do so than via rental properties. Financial independence doesn't have to be a dream. In fact, you could realistically collect an extra $2,000 per month via rental real estate. It's not as difficult as you might think.
Innovative Property Solutions presents three approaches to achieving $2,000 per month in rental real estate income:
Assuming that you are purchasing a $100K home and you have secured a 5.5% APR conventional loan with a down payment of 20%, resulting in a total of $80K borrowed money, the math equation is really quite simple and you only need to own ten home to achieve your $2,000/month goal. Here's the breakdown:
$1,000 (rent fee) - $455 (principle/interest) - $115 (taxes/insurance - $80 (property management) - $150 (maintenance, vacancy, etc) = $200 net profit per home owned, equaling $18,000 per year in reserves.
This particular goal requires an investment of $200,000 which is relatively low for a beginning investor.
The cash approach is not a preferred method, however it is still an option. Just remember: when you tie up all your cash in real estate, you cannot easily and quickly liquidate and you are no longer able to leverage the cash of others in order to boost your own finances. If you are entering retirement years, then that is a different story and probably a good decision. Let's take a look at the equation for a cash investor who purchases a property for $100K ALL CASH:
$1,000 in rent - $115 (taxes/insurance) - $80 (property management) - $150 (maintenance/vacancy) = $665/month net profit requiring you to purchase three homes in order to achieve a goal of $2,000 per month in rental income. In addition, you will accumulate $5,4000 per year in reserves. It is important to remember to incorporate annual depreciation and taxes into your annual net profits as it is unlikely the depreciation will cover the taxes 100%.
This particular approach would require an investment of $300K, resulting in higher capital, but fewer tax deductions. However, you will have less financing to contend with and fewer accumulated properties.
While I'm sure this approach sounds like a nightmare, it is actually a preferred strategy for most seasoned real estate investors. Here's why:
Let's assume you purchased a home for $60K and spruced it up for an additional $15K. You've saved $25K right off the bat as opposed to the two aforementioned strategies. You are performing the same way, however the rehab value is now yours. Here's the math:
$100,000 ($75K financed & $25K forced home equity for down payment) - $1,000 (rent) - $425 (principal/interest) - $115 (taxes/insurance) - $80 (property management) - $150 (maintenance/vacancy) = $230/month net income
You would need to own nine homes in order to achieve the goal of $2,000 per month in rental income, resulting in $16,200 in annual reserves. This option is likely tax-free and you will have the added benefit of depreciation. Your total investment in this strategy could quite literally be ZERO with the exception of the capital necessary in order to fund some cosmetic changes.
Still feeling discouraged? Still wondering how you will generate the funds to get started? Here are some things to consider:
Start saving NOW for a down payment.
Leverage personal credit.
Moonlight as a pizza delivery specialist.
In other words, get creative in finding solutions to boosting your savings. There are a myriad of ways to create extra cash flow on the side. Put your mind to it in order to achieve your goal!
Related: "5 Tips for Maximizing 'Passivity'"