If you’re on a mission to generate passive income through investment property, you’re on the right track. Owning property is a lucrative investment, but only becomes passive income over time. You’ll need to pay off the mortgage for each property before any rental income can be considered passive income.
If you’re new to property investing and you’re still weighing your options, consider the following points before you dive in.
1. You’ll do best with a real estate license
Although you don’t need to have a real estate license to buy and sell property, it’s easier than the alternative options.
Be prepared to get your real estate license in the state(s) where you plan to buy and sell the majority of your property. This will give you access to options and tools you can’t get otherwise, like access to the MLS system where you can list properties and view available properties.
2. You’ll have plenty of responsibilities that come with zero room for error
Investing in property requires a keen eye for details, especially where laws and regulations are concerned. Owning investment property is similar to owning your own home in many ways. However, situations you can overlook as a homeowner aren’t acceptable as an investor.
For example, as a homeowner, you may not care if your roof leaks a little water now and again. If you put off making repairs, you’re the only one who will suffer the consequences.
Your tenants won’t see a leaky roof the same way; they’ll expect you to fix the leak immediately, no matter how small. In fact, if you don’t fix the leak in a reasonable period of time, your tenant can sue you and will probably win.
Other responsibilities that have no room for error include:
- Performing all the proper home inspections prior to sealing the deal on a new property
- Providing hot water and potable water for tenants
- Keeping the property habitable, which includes being free from mold and mildew
- Returning tenant deposits on time and in full when no deductions are warranted
- Fixing problems that existed prior to acquiring the property
- Adhering to all advertising regulations set forth by the Fair Housing Act
Being a property investor also means being a landlord. Even when you hire a property management company to take over your landlord duties, you are ultimately responsible for following all landlord-tenant laws and maintaining the condition of your properties. The legal ramifications for failing to adhere to rules and regulations can be steep.
3. You’ll be considered self-employed
Unless you’re working for a company that treats you as a W-2 employee, you’ll be considered self-employed as a property investor. This means you’ll carry all the responsibilities of self-employment, which includes paying self-employment tax in addition to income tax.
If you need health insurance, you’ll need to source a plan on your own and you won’t have access to group rates. You’ll need to purchase all of your own insurance policies and be your own HR department when you hire and pay independent contractors and other businesses.
4. Property upkeep costs money
At some point, your investment properties will start needing repairs and maintenance periodically, which means you’ll need to invest a significant amount of your budget into property maintenance.
You’ll get calls from tenants once in a while to fix small things like broken screens and closet doors. However, be prepared to replace appliances like refrigerators, microwaves, and anything else you provided for your tenants in the lease.
5. Being a landlord is exhausting
If you’re interested in property investments, you probably don’t want anything to do with being a landlord. That’s understandable, as being a landlord is exhausting.
As a landlord you can expect to deal with some difficult tenants. You’ll have to chase down late rent, handle calls from tenants having a dispute with their neighbors, and bug some tenants for late fees. This is all just part of the job. However, if you’re smart you’ll hire a property management company to handle all of your landlord duties for you.
A property management company will have the experience needed to maintain a good relationship with your tenants while ensuring rent is paid on time. They’ll also go through a rigorous screening process to make sure the best tenants get into the unit and nobody with an eviction on their record slips by.
With patience, you’ll reap the rewards
Being a successful property investor requires patience, but with time, you’ll see big financial rewards.