The pursuit of passive income: Is it time to become a landlord?

If you visit personal finance or investing blogs on a regular basis, you’ve probably read countless articles on the virtues of passive income. After all, many personal finance experts believe that passive income is the key to early retirement, financial independence, and permanent wealth. But, what is it exactly?

A Definition:

Investopedia describes passive income as “earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.”

In addition to rental property, typical sources of passive income can include money earned from investments such as mutual funds, dividend-paying stocks, Real Estate Investment Trusts (REITs), and asset-backed securities. Unconventional forms of passive income can include earnings from copyrights, patents, and licenses or even royalties. The birth of the Internet also created a generation of entrepreneurs forging their own path toward passive income via the Internet, including Pat Flynn from Smart Passive Income. Except, according to Flynn, blogging is just part of the game.

“Although a blog isn’t passive in nature, it’s one of the best platforms for launching other passive income opportunities.

-Pat Flynn

Simply put, passive income is the opposite of active income. The money you earn at your 9-to-5 job is not passive income, nor is the money you earn through your side hustle or garage sale. Real passive income is earned in your sleep and regardless of the amount of effort you put into it. And that’s why the idea of passive income has always been so popular. J.D. even wrote about passive income back in 2006, which seems like a lifetime ago.

“Passive Income is money that you earn without having to work for it. When you earn interest on a savings account, you are earning money passively; it accrues whether you’re working or not.”

-J.D. Roth

The pursuit of passive income through rental property: Is it the right time?

One of the most popular ways to generate passive income is to buy (or finance) an income-producing rental property and become a landlord. And, according to a recent study from the Joint Center for Housing Studies at Harvard University, now may be the perfect time.

According to Harvard researchers, the percentage of households that rent is on the rise, up from 31 percent in 2004 to 35 percent in 2012. That may not sound like a giant surge, but it is when you’re dealing with the entire population of the United States. To keep things in perspective, the Harvard study claims that the total number of renting households surpassed 43 million in 2013.

Researchers blame the increase in renters on a convergence of factors, including a record number of foreclosures in 2008 and economic troubles caused by the Great Recession. However, it also points to certain benefits that make renting a popular option. Some of the benefits of renting named in the study: greater mobility, protection from fluctuations in the housing market, and freedom from home maintenance and repairs.

The fact is, renting has simply become the best option for many. In fact, recent reports show that rents have skyrocketed in many parts of the country due to increased demand, so much so that the cost of renting has moved out of reach for many middle-class families. And while that’s bad news for those who simply want an affordable place to call home, it’s a real estate investor’s dream.

My Experience as a Landlord

Becoming a landlord might sound tempting, but — trust me — it’s not as glamorous as it seems. It’s also not nearly as passive as many think it to be, despite what Investopedia or others claim. As someone who has owned and managed two single-family rental properties for almost a decade, I must confess that the income I’ve earned has been anything but effortless. The truth: It’s actually been a lot of work.

For example, we’ve spent far too many weekends painting and cleaning our properties in between tenants. We’ve driven to and arranged countless meetings to discuss remodeling projects and repairs. We’ve had to deal with a whole host of random issues such as late rent payments, feuding neighbors, and secret pets. Once, one of our properties was even left in total shambles — with oil-stained carpet, missing doors, busted windows, and broken everything.

Using Passive Income for Early Retirement and Financial Independence

On the other hand, we do expect all of our hard work to pay off sooner or later. The fact is, both of our properties should be completely paid off in about 12 years. By then, we’ll be 46 years old and (hopefully) on the homestretch of our journey to retirement. Since we’ll have two children nearing college around that time, we plan to use our monthly rental income to help pay for their higher education. After that, we’ll keep it for ourselves and use the earnings to supplement our own income and early retirement plans. Our properties currently rent for around $1,800 total, but that’s only because I’ve promised not to raise rent on either of our long-term tenants. But they’ll move out eventually. And when they do, we hope to pull in at least $2,200 per month or more.

Want to Become a Landlord? Consider This

Since real estate markets are vastly different in different parts of the country, I couldn’t possibly write something that applies to everyone. On the other hand, if you’re considering purchasing an income-producing property to secure your own stream of passive income, there are certain things you should know:

  • You need plenty of cash — Banks have tightened lending standards significantly over the last decade, which means that a down payment of at least 20 percent is almost always required. If you can’t afford to come up with the down payment, then you probably can’t afford to own rental property in the first place.
  • You are taking a risk — Many people think owning rental property is always a money-making endeavor. However, that couldn’t be further from the truth. Investing in rental property has plenty of risks including nonpayment, property damage, prolonged vacancies, and more.
  • Bad things do happen — When you’re a landlord, “no news” is typically good news. However, there’s a reason why so many people are hesitant to get into the game. We’ve all heard rental horror stories and the fact is that many of them are true. You’d be amazed at the kind of damage people can leave behind, and how much of a headache it can cause. You know the saying, “Hope for the best, but prepare for the worst.”

Before you jump in head first, it’s important to understand what you’re getting into. That typically means researching the rental market in your area and gaining an understanding of current and past trends in rents and occupancy.

It’s also important to figure out what you need to earn in order to cover your expenses and turn a profit. And if you don’t like dealing with people or doing repairs, you can also research property managers in your area. For a monthly fee, they’ll do most of the heavy lifting for you — including finding tenants, hiring out repairs, and more.

Becoming a landlord isn’t for everyone, but it is a great way to earn (somewhat) passive income. And if early retirement, money for college, or financial independence are your goals, it’s just another way to make them happen.

Have you ever considered buying rental properties as a source of passive income? If so, why? If not, why not?

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There are 63 comments to "The pursuit of passive income: Is it time to become a landlord?".

  1. NicoleAndmaggie says 21 May 2014 at 04:38

    Land lording is active income, not passive. Unless you really luck out with a property manager.

    • Holly@ClubThrifty says 21 May 2014 at 11:33

      I actually think it falls somewhere in-between. It’s not as active as our full-time jobs. After all, there have been months (and years) when all we’ve done is collect checks and deposit them. On the other hand, it’s certainly not passive.

  2. Curtis@PayOffMyRentals says 21 May 2014 at 04:59

    Unfortunately, too many people don’t factor a property manager into the purchase of a rental property. When you have to manage your own properties, it’s not truly “passive income”.

    However, when you include the costs of a Rental Management Company, Vacancy costs and maintenance fees into the equation (as we always have), then you can consider the rental cash flow as passive income. We lived in Costa Rica for 3 years without ever having to respond to a clogged toilet call due to using a rental management company.

    A hidden reality in most parts of the country: You won’t make any money from your rentals until the mortgages are paid off. Ultimately, most of the free cash flow will go back into the house. It’s not IF but WHEN. That’s why we are on track to pay our rental mortgages off within the next two years. 4 rentals paid off, two to go. That will be the source of our passive early retirement (passive) income. We will continue to pay a rental management company to take care of the headaches.

    Disclaimer: Rentals real estate investing does not make sense in all parts of the country. Your mileage may vary.

  3. Stefanie @ The Broke and Beautiful Life says 21 May 2014 at 05:14

    I can’t afford a downpayment to buy my own house let alone start searching for a rental property :/

    • Carla says 21 May 2014 at 08:58

      Ditto. :-/

    • Elizabeth says 21 May 2014 at 14:44

      Ditto! But I don’t see my not owning property as a financial crisis — especially not with housing prices in my country!

      Years ago, one of my bosses outlined how if I invested the difference between renting and owning I could still come out ahead. The strategy was outlined in a recent Globe and Mail article: http://www.theglobeandmail.com/globe-investor/investment-ideas/the-renters-guide-to-investing/article18732568/

      I like the idea of a “renter’s dividend” — especially if the money is invested in a tax sheltered vehicle.

      • mysticaltyger says 22 May 2014 at 09:15

        I live in an expensive housing market and I have often thought the same thing. I skimp on housing by living in a small apartment and save the difference. The problem most renters have is they blow the difference on other stuff, so they end up broke or worse.

    • Diane C says 22 May 2014 at 00:51

      Stefanie and Carla – I was in the same boat. Housing was not affordable where I lived, so I bought a rental in the less-expensive town where I grew up. I leased it and kept on saving. After eight years, I sold it and bought a tiny condo where I lived. Four years later, it doubled in value and I sold it to buy a larger property, which I lived in for eleven years. I finally got married. Each of us sold our homes to buy one together and we were able to pay cash. It happened because I started small way back when. You can do it. You just have to want it enough to make it happen. Save hard and don’t listen to anyone who tries to discourage you.

    • counting the pennies says 26 May 2014 at 09:27

      Don’t give up, please. At the HEIGHT of the housing bubble in the SF Bay Area, in the 5 counties around my job, there was exactly one POS off the grid home that I qualified for and I wasn’t sure it was structurally safe. I went out of state and bought a four plex in a small town and got a manager. Last year, between savings and the profits from my rental, I bought a duplex in the SF Bay Area. It did take more persistence and disciple than I wanted to do. But it is a tangible accomplishment and I get great satisfaction from it. (And money too!)

  4. Money Bunny says 21 May 2014 at 05:16

    What Curtis is saying is very true.

    It’s difficult but not impossible to make money in rentals in high tax, strong pro-tenant law states but you earn it.

    Also it’s a lot easier to get into a problem property than to get out of it. I was waiting to do an inspection on a 4-family and realized that everyone there other than the inspector was going to get a handout if I did the deal.

  5. William @ Drop Dead Money says 21 May 2014 at 05:50

    You’re right about one thing: landlording is NOT passive income. I think of it more as a side business.

    I know a few people who ended up owning several rental properties, and it’s a full time job. Lucrative, but full-time.

  6. Richelle says 21 May 2014 at 06:05

    I think about doing this all the time. I live in a high COL area and trying to break into the real estate market requires a lot of money and my thought was that an investment property could help us afford a higher mortgage. But I am simply uncomfortable taking the risk. Being a landlord is a lot of work and the nightmare stories are truly terrifying.

  7. phoenix1920 says 21 May 2014 at 06:09

    Love the article. We want to do this when we pay off our house in a few years. Are there good books to help with learn this? Attracting the right tenant is key, but where do you go to do this?

    • Holly@ClubThrifty says 21 May 2014 at 11:35

      We learned almost everything we know from several close friends who own rental property. However, the internet is a treasure trove of information on investing in rental real estate. I’m sure you could find any information you need and then some.

  8. Mick says 21 May 2014 at 07:06

    Since rents are getting so high I have to wonder if people will start buying again.
    I worked as a police dispatcher for years and heard of so many problems I vowed I would never become a landlord.
    It seems like the tenants have way more rights than the landlord.

  9. Kenny says 21 May 2014 at 07:34

    Landlording has 90% pleasure and 10% pain. Some have it more and some have it less. It all depends on what % of the Landlording is being managed under a DIY (do it yourself) model.

    I do ALL of it myself, minus the actual contracting work. And for that I have 90% pleasure and 10% pain. I still take the calls, I still rent the apartments, I still do the paperwork, I still do the background check, and I still get rid of the people (if needed). The rest of it is done by a contractor who is a handyman who charges me a fixed hourly rate for whatever he does. He gets on the roof, does the cement on the driveway, fixes electrical shorts, replaces the plumbing pipe or whatever. I have a appliance guy who selects an appliance and installs it at the apartment when something is broken etc etc.

    Bottom line is that I manage 7 buildings and have an average ROI on my investment of 19.4% (net to pocket, before taxes). Based on my job income, I do not get any depreciation benefits to the buildings, and don’t get taxed on the incomes either!

    So, do Landlording or Not……Make your own decision, since I have friends who love the ROI, but do not want to do the Effort.

    All I have to say is “If it was Easy, Everybody would be Doing It, and then it would be Worthwhile”.

    Kenny

  10. Brian @ Debt Discipline says 21 May 2014 at 07:39

    I would not consider buying a rental property until I had my own home paid off.

    • Robert says 25 April 2015 at 16:47

      It’s actually the other way around…
      You should have an asset before a potential liability…which is what your principal residence actually is

    • Nic says 14 October 2015 at 00:14

      Hi Brian,

      Honestly, I can see how for the average person that is true. However, if one is passionate about real estate investing nothing could be further from the truth. I am 36 and I currently own 34 town homes and 25 apartments. I started out 5 years ago with my first fourplex and grew it to where I quit my full time job in investment banking to be a do it yourself landlord. Currently, I employ a full time handyman. With some market timing luck I am where I am now. I never bought a house and if I would have and waited until it was paid off to start real estate investing I would be waiting around until my mid fifties to get off the bench and get into the game. When I was saving for my first down payment all of my friends were buying homes. In my mind a home was a twenty year death trap because that is how the majority of people in America spend there mid 20’s to 40’s. I can’t tell you how happy I am so far that I did not buy a home and wait for it to be paid off until I started investing. As far as if rentals are a lot of work and risk. You bet they are. You have people that can either take it or you have people that can’t. If you can’t live with paying for a good umbrella insurance party and doing all that you can to make sure your properties are as safe as possible this game is not for you. As far as I see it though the only people that have the chance for the reward are those that go after it. Over the first 5 years I have probably worked harder in this then when I worked in investment banking. What I am saying is you can’t get something for nothing that is just not how it works.

  11. John C @ Action Economics says 21 May 2014 at 07:51

    Being a landlord has been challenging for us. One thing we have experienced on the opposite end of the “no news is good news” as a landlord is that we had a tenant who would call us and say “about 2 months ago the fridge stopped working” I would have much rather known when it happened so I could fix it immediately rather than waiting. When we went to fix the fridge we found other repair issues that hadn’t been brought to our attention too.

    • Holly@ClubThrifty says 21 May 2014 at 11:37

      Ha! I think you may be right about “no news” sometimes being a bad thing. We had one tenant completely destroy our property and were completely caught off guard because we hadn’t heard anything from him for several months before that.

  12. A-L says 21 May 2014 at 08:50

    Being a landlord has helped us to have our own house. My first place was in an low cost-of-living area. But when I needed to move into the city, the only affordable places in a safe area were multi-family properties (I mainly looked at duplexes).

    We now live in a multi-family. We live on the main floor and rent out the ground level apartments (it used to be 1 apartment below, but we added a tiny efficiency a few months back). It brings in about $1600/month. We have a contractor who charges reasonable rates whenever repairs are needed. And since we live right above them, we’ve had really good luck with our tenants.

    I will say, however, that owning multiple rentals is not for the faint of heart. The previous duplex was originally kept, planning to hold on to it as a retirement vehicle. But there are a lot more stresses when the owner doesn’t live on the property. Also, if the owner lives within the building then you can get a mortgage as a homeowner rather than as a corporation, which means lower interest rates. And there are tax advantages… My spouse and I would never be able to live in as nice of an area if we did not live in a multifamily, and there are only occasional inconveniences.

    • Holly@ClubThrifty says 21 May 2014 at 11:39

      I tried to talk my husband into buying a multi-unit and living in it for years but he never caught on to the idea.

      I think that’s awesome. It sounds like you made a great decision, financially and otherwise.

  13. Andy says 21 May 2014 at 09:58

    I was a landlord in portland oregon for a few years. The house behind ours was abandoned after the lady had passed away. She had a reverse mortgage on it and the elderly brother of the deceased said he was threatened by Bank of America not to touch the house. Calls to Bank of America said they didn’t think they own the house.

    So the house was abandoned for about 1.5 years and random squatters moved in. The front flower box was filled with used and unused condoms, there were huge piles of electronics (cell phones) probably leaking chemicals into the ground, massive tarps and tents, horrible horrible smells, and bucket toilets.

    When this started getting really bad, the old tenants moved out (before their lease was up). Being a nice guy, I said you can do that without penalty because that’s how I would want to be treated. Couldn’t rent it out after that.

    Multiple calls to the city by all the neighbors, calls to the cops (who cannot do anything because they cant prove the occupants don’t own the house because no owner is present) yielded no results. Months went by and I couldn’t find someone (who I would trust) to rent the house. I called the news, I was on the news. Some slow response but No effective response from the city.

    The city would come mow, clean it up a little, scare them off, then it would start all over again. I sold the house because I was not in a position to fight what is essentially a social war. I gave up.

    Some things are just way beyond your control. I’m a Dave Ramsey fan and I do believe you should be a landlord with cash, and I think this is a good example. As a landlord I think could weather this storm and ride it out without financial pressure building on you if you owned it outright. But I had the place mortgaged and had that classic feeling of massive debt weighing on my shoulders. I sold at a point where I had to put about $20K of my own money in the house just to get rid of it. The house has since went up in value, and I’d say I regret it but honestly it was worth the $20K to not have the pressure!

  14. El Nerdo says 21 May 2014 at 10:13

    I’ve been having trouble with this notion of “passive” income because it seems that the tax definition and the practical definitions diverge. I don’t understand this clearly and I’m only putting forward my doubts for possible clarification by the GRS hive mind.

    From a practical perspective, seems to me there is nothing “passive” about rental income, unless you get a property management firm that takes your income and turns it into their fees, ha ha ha. Otherwise there’s a lot of sweat & tears (hopefully not blood).

    On the other hand, seems to me that dividend or bond or royalty income is truly passive income. You do nothing but sit and get paid (unless the issuer goes bust). However, reading about it, seems like the IRS doesn’t consider these sources as “passive.” (The IRS drives me nuts).

    http://en.wikipedia.org/wiki/Passive_income

    As of today, that Wikipedia article shows that there’s a bit of difficulty with the definition (US vs. worldwide views are noted.) However I think there’s also a difference between tax definitions of passive income and actual effort put into getting income.

    I think what people want, regardless of how things are categorized for tax purposes, is something that pays you with little or no effort, i.e., the practical definition, if you will. A kind of “set it and forget it.”

    What is the laziest possible way to receive income from one’s investments? How would you rank them in order of returns? Sorry if this is a bit off topic but I believe that the term “passive income” is currently in semantic limbo.

    • Retirmentbuff says 22 May 2014 at 11:29

      I was wondering about this too and think what we are really talking about is income producing activities other than wages. I invest and have several rental properties and one business we co-own with my parents. They take work to run so not entirely passive. Being a silent partner in a business you own a % of could count as fully passive income. Our rentals were managed by family and we have all put in some sweat equity. Eventually we got to the point where having a property manager made sense which cut down on the demands massively.

      I’m a fan of investments that generate positive cash flow like dividends, bonds, rents, or (when interest rates are higher) CD’s. This money is income that is separate from the wages I earn and that is at the core of what people mean when they call a certain income passive. What makes it confusing both legally and linguistically is that there are a variety of vehicles to create income that is not wages and they have different tax advantage/disadvantages and amount of management/oversight needed. The less management/oversight needed the more passive the income becomes. It is a sliding scale in my mind where few things are 100% passive.

  15. BrentABQ says 21 May 2014 at 10:38

    Being a landlord is not passive, and if you try to make it passive its not that great of an active investment. Can you liquidate easily? Is there a lower bound to your losses? What is your expected rate of return and std deviation? If you are in a possition where your tenants stop paying and need to be evicted in a way that involves the courts your property could be incomeless for a long time possibly putting the property into foreclosure. You could lose everything from a single bad tenent.

  16. InvestAsian says 21 May 2014 at 10:42

    I honestly don’t get why more people don’t invest in REITs instead of rental property. Not only do REITs invest in commercial and industrial property, which generally have a higher return than residential property.. but the small fee that the fund takes is definitely worth not having to deal with the hassle of tenants, and getting to focus on other endeavors.

    • Money Bunny says 22 May 2014 at 05:05

      REIT’s do not have some of the tax advantages for high earners in the 25% bracket, and for low income people it’s the hands on component and leverage that really helps them with making the investment a better proposition.

    • Retirmentbuff says 22 May 2014 at 11:52

      Because they are different. REITs and actual property are two different things.

      REIT stocks (they are stocks) have historically behaved differently from the stock market as a whole to work as a diversifier, but it’s not the same as owning property outright. Rather it’s a means of diversifying your stock portfolio but not everyone is looking to buy addition stocks and want to hedge against the market by owning an investment property.

      A huge difference is that outright ownership of investment real estate would inevitably be concentrated in a few properties in one or a small number of locations and operating in a certain narrow market. Outright ownership is also effectively a business with costs and management burden very different from holding a REIT position.

  17. Pete G in SD says 21 May 2014 at 13:16

    I don’t often weigh in, but this is definitely one near (and not so dear) to my heart. We bought a 2 bedroom 1 bath house about a half block from the beach in 2002 which we lived in until it got too small for us. Our first renter was terrific – a USN LT that had just completed medical school and was doing her internship at Balboa (Naval) Hospital. However, she was dating a guy that was crazy enough to intentionally set fire to the house – imagine a call at 11 pm on a Friday saying (seriously) “the fire is out but the police want to talk to you”. Wow, arson is a learning experience. Lesson one – your tenants may be great, but their SO choices may not be! Lesson two – make sure your insurance company knows the property is a rental (we got loss of rents while the rebuild happened). Over the years we have had ok/good tenants, but our last tenant was bad enough that we decided to sell. He decided to stay. This led to eviction. Lesson three – get a real estate agent to give you the most current lease they are aware of – this covers both parties better than any lease you might find on the web. Our eviction process was not the slowest, but the tenant played us, and we ended up in small claims court.

    Bottom line – even though the income was good (2,350 for a 2 bedroom 750 SF house!), we decided our quality of life was more important. We are skilled enough to fix most things, but the constant surprise phone calls and general wear and tear on the property were sufficient for us to sell the property last summer – at a substantial profit. We have NOT looked back, and we will NOT buy another rental property. As an agent, I have agreed to be property manager for one of my clients’ properties (they live in Alaska, and their rentals are in San Diego). Same issue – pets, noise, smoking in the unit, late rent. These are higher end locations, and I always insist on a full application and credit check – and yet…it is stressful! If you are ready to occasionally lay down the law (and be, as one of my tenants called me, “The Man”), then you can do it.

    Be very aware – this wasn’t passive income for us!

    A grateful ex landlord!

  18. Ruckster says 21 May 2014 at 13:46

    It’s all about making the numbers work with rental properties. Always factor the cost of mortgage plus property taxes plus insurance plus maintenance versus the price you can charge in rent. If it’s a high demand rent area your risk of a vacancy goes down.

    Even if the housing market goes down 10% in a yr you will still likely be able to charge the same in rent.

    It’s a great way to diversify your portfolio and keep up with inflation.

  19. Curtis@PayOffMyRentals says 21 May 2014 at 14:22

    Because REITS don’t pay for your equity position like tenants do.

    Remember, the tenants buy the house for you. When you EVENTUALLY own the house and clear the mortgage, you win. You make money.

    Don’t kid yourself, Rental Real estate is a long-term proposition. If you can treat it like a business, get a rental management company to MANAGE your properties, it becomes passive income. Even a properly managed stock portfolio requires time to investigate , purchase, manage and occasionally sell your investments. That requires time and effort, aka: Work.

  20. Elizabeth says 21 May 2014 at 14:38

    Good post! I have a question though: What about income tax on rental income?

    I have a friend whose looking to buy a home and rent her condo. In order to do it, condo fees, property taxes, utilities, etc. would have to equal what she can charge in rent. However, she hasn’t factored income tax into the equation. I’m not sure how that works – I’d be curious to hear from some of you landlords out there!

    • Money Bunny says 22 May 2014 at 05:13

      Take a look at biggerpockets. Many people have asked these questions already. It’s also a bit complicated.

      Many people feel that Real Estate Investing and Do It Yourself Taxes are not compatable. I had an accountant do mine to figure out the depreciation on the first year I put a property into service.

      Take your time, learn how it works, and seek advice from experts who are not making a commission on you “Doing the deal.” An hour with an accountant who does REI to go “Ok so this is what you should be looking for numbers wise.” is well worth the 200 dollars.

  21. Daniel says 21 May 2014 at 17:11

    I’m shocked it took as long as it did for REITS to come up, and the article didn’t even mention them! Why would I take a huge chunk of money, lose the liquidity, buy only one “basket”, whos asset appreciation value I have relatively little control over (market trends, lending rates, sell in 20-30 years one time, etc)… when I could buy an ETF such as a REIT, in which case I can put in as much or as little as I want, take it out or put money in whenever I please, and in the end, receive most of the upside of property without requiring any of the expertise or dealing with the headaches?

    • Curtis@PayOffMyRentals says 22 May 2014 at 03:48

      Because you’re not understanding that REIT vs. rental real estate is an apples to oranges comparison.

      Real estate has the huge advantage of leverage and tenants who pay for the investment. REITS don’t give you those advantages. I’m not against REITS. I’ve owned them, but it’s not the same.

      It’s obvious that rental real estate investing is not advisable for the majority of investors, but it’s misguided to dogmatically state that it’s a bad choice or that it automatically becomes a full-time job. There are right ways and wrong ways to hold and manage investments.

  22. Komrad says 21 May 2014 at 19:52

    I’ve consider it, but there are a few obstacles.

    1) no free time – I’m always swamped at my day job , so that I don’t take more than a 10 minute break and eat lunch at my desk. I tend to get home around 8 pm, and that’s when I have dinner and take care of personal business before heading to bed to start the work day all over again. There is no time to go house-hunting , handle maintenance or other landlord-related tasks.

    2) I’m on-call 24/7/365 , so I might want to work with a tenant on an issue or maintenance , but if works calls for tech support, I’m contractually obligated to respond in a short time frame.

    3) money – I’m saving up for a personal residence, so there are no funds to available to me to purchase a rental.

    It’s can be good idea for those with less demanding jobs than mine, but it will probably remain a dream for me for the next 6-7 years out.

  23. Peter Guest says 21 May 2014 at 20:43

    Great article. I was excited to see a broad view that also outlined the potential downside of being a landlord. I have always thought that owning rental property is far from ‘passive’. Maybe ‘semi-passive’ income would be a better term.

  24. Gabe says 21 May 2014 at 21:00

    Great article. My wife and I have been talking for months about this topic.

    I agree that it can be a real headache. We are still years aways from having the money for a downpayment, but when we do the leap I will definitely take on a property management company. Even if it eats in on our profit, I just do not want the stress from it, since I will want to continue with my regular job too.

  25. Matt says 22 May 2014 at 07:20

    I have 7 rentals and I reckon that I spend less than 1 hour per month on them in total. That’s passive enough for me. Property managers rock!

    • El Nerdo says 22 May 2014 at 08:23

      I’m curious–what’s the return on equity on that?

  26. Laura says 22 May 2014 at 14:39

    For us, no. If you’re raised to be handy or are young and energetic enough to learn it without pain, great. But we’re tired baby boomers who can barely do basic maintenance and find it hard just to handle our own house. It would suck eggs to have to do it on another property too.

    Did anyone happen to see this: http://money.cnn.com/2014/05/22/real_estate/home-buying-salary/index.html?iid=HP_River . We live in Boston and won’t be buying another property any time soon.

  27. Ben says 22 May 2014 at 19:54

    Another good article. However, I think that getting a property manager will make it more passive, as others in the comments have said.

    You don’t need to deal directly with tenants, and for the small fee, the property manager takes care of it all. You just need to keep the property up to date every few years with a paint job and other tasks.

    Also, with Interest Only loans on the properties, you can lower the repayments to make it closer to cash flow positive (obviously depending on a lot of factors). I recently bought my first property using a 5% deposit and it only needs about $100 a week to maintain the interest payments.

  28. No Nonsense Landlord says 24 May 2014 at 00:48

    I have a few rentals, and it is definitely worthwhile. It is going to allow me to retire about 10 years early.

  29. Bruce says 25 May 2014 at 06:39

    Please, keep the landlord horror stories coming! Nothing could be better for those of us who are serious about buying and renting out properties, than newbies being scared to death!

    Now, some comment suggestions:

    1. When rentals are a topic, all comments from those who have never owned one should be screened out. Those “opinions” are not valuable to an honest discussion of the risks and rewards.

    2. If you are worried about coming up with a 20% down payment (more, in many cases for investment homes), an easier way to do it is to rent out your current home then buy a new one for yourself (with a minimum down payment). A few years later, repeat the process.

    3. For every $100 earned from rentals, only about 60%-70% is taxed, due to the early depreciation allowance. (Please, if you are a non-landlord, do not argue this point, see #1.)

    4. ROI of 12-20% on paid for properties and much, much higher rates on leveraged properties are the norm. (Non-landlords, see #1)

    5. Paying more for homes in better neighborhoods and careful screening of tenants will greatly reduce your landlord headaches. Not eliminate. Just reduce.

    DW and I have been landlords since 1986. Early on, we bought the wrong properties, but sold them and traded up. We now have 3 paid for homes, bring in $2900 a month. We average 1 vacant month every 2 years per property. We hire plumbers to unstop toilets and handymen to fix other things we cannot. We own properties in neighborhoods we could live in if needed.

    You can do this too, in 15 years without too much stress, if you really want to. But first you need to buy that first home.

    • Elizabeth says 25 May 2014 at 07:13

      Great comment! I was wondering about the taxes and ROI. I like your point about buying a home first. (I currently rent). I can’t see myself buying a rental property right now, but when I buy I’d like a place where I can rent out a room or two. When I combine households with the love of my life, it could then be a rental property.

      As for #1… I find it helpful to hear from people who aren’t landlords because it’s interesting to hear why people do and don’t do things. If people are going to accept everything they read without applying common sense and critical thinking, then they probably shouldn’t be landlords anyway!

  30. Bruce says 25 May 2014 at 06:40

    BTW, nice article, Holly.

    • Holly@ClubThrifty says 27 May 2014 at 18:57

      Thank you =)

  31. Fabienne Raphaël says 25 May 2014 at 12:20

    Rental property owner does not mean landlord.

    Landlord is active income, not passive. I agree. This article is useful information and I’d certainly look it up before starting a buying process. But I would also take it a step further.

    There are many different ways to create passive income and buying real estate is one of them. But if you become a landlrod, it is not passive at all.

    How to avoid that ?

    Choose the right management company for your building. There are many types of companies in any given market. That is why you need to choose them carefully (by using a specific method). The best place to start is to go to http://www.irem.org (Institute Of Real Estate Management). Then, find a CPM (Certified Property Manager) or an ART (Accredited Residential Manager) in your area.

    You have to know that, property managers specialize in certain properties. Make sure you choose the right one for your property type.

    I experienced that myself. I bought a 8 units in Chicago and had gotten referrals from people in the neighborhood for a management company. I hired them but my building was falling apart. It became worse than when I bought it.

    Why ?

    Because this company was specialized in 40 units and high end properties.

    Once I replaced that company by the right one, my investment turned the corner.

    So now, I am not a landlord, but an asset manager. That is why my investment became passive income for me. I only have to check my report and I am definitely not managing the tenants.

    Hope this will help !

  32. Lucas Hall says 02 June 2014 at 08:42

    I’ve been an independent landlord for about 10 years, with 5 properties.

    For about 2-3 days during Move-in / Move-out, I’m super busy – working 22 hour days to ensure a smooth transition.

    However, for approx 9-10 months of the year, I sit back and automatically collect my rent online. For most of the time its a super passive job, but when it’s crazy, it’s crazy.

    If I average it all together, I think I spend about 6 hours a month on all 5 properties.

    • Bruce says 02 June 2014 at 14:50

      Great comments, Lucas. I agree with all you say. Someday you will be a “millionaire” next door!

      Another landlord

  33. Gerry says 13 July 2014 at 18:56

    It has crossed my mind often, investing in a rental property to supplement my retirement (social security). But for all the negatives mentioned in the story, and then some, I’m not a land lord. I never considered maintaining a rental property (another form of home ownership) to be passive.

  34. Victoria says 02 September 2014 at 09:10

    If you are considering a new means of income by becoming a landlord (like I did when I reached 40) then use an online tool like https://www.ezlandlordforms.com/rental-property-investment-calculator/ to work out just how much money you can make through renting your property.

  35. solinea cebu says 17 January 2015 at 21:26

    I know men and women who have had fantastic accomplishment with flipping houses but as I realize it the significant worry surrounds fluctuations in the industry. Even a fantastic investment property purchased low can then be hazardous if the market place bombs. The final factor anyone desires is to be stuck with a millstone about their neck, in particular if you’ve stretched yourself to make the buy in the 1st spot.

    • George Lambert says 28 December 2015 at 07:12

      Good point on flippers. In today’s market, though, you need to put income first with growth second. Opposite what we had before the 2007 blow up. The plunge in U.S. home prices during the financial crisis should be a continuing reminder that bets on housing can sour in a hurry.

      So buy the cash flow – not what some seller or real estate agent claims you should pocket when selling. This strategy doesn’t depend on home values continually going up, which sets it apart from the house-flipping speculation that cost many home buyers dearly when the market collapsed.

      George Lambert
      Author, What You Must Know BEFORE Becoming a Greedy Landlord. How to build a portfolio of investment properties for an income that lasts a lifetime.

  36. Early Starter says 14 May 2015 at 03:25

    Great article and as is usually the way – better discussion. My wife and I are fortunate enough to land two well paid jobs straight out of university so we decided very early on to invest in property. We now own 3 single family properties (3 x ~$240,000) on 15 year repayment mortgages. Our aim is early retirement so we are not bothered about seeing any returns just yet – Capital growth is key for us. We are now looking for property number 4 🙂 When we build enough capital in each of the properties we will refinance them, release capital and buy more – all with our retirement date as a final date for mortgage repayments.

    In 22 years time (When we are both 50) we aim to have all of our homes (the plan is 15) paid for and producing a solid monthly income of $200,000 a year.

    So far we have been extremely lucky with our tenants and management company (which we most certainly pay for – but thats okay just now as we both work quite hard).

    My advice to anyone thinking about getting on the property ladder is – If you have the means for a deposit, its a complete no-brainer.

  37. Annelise says 31 May 2016 at 14:46

    Interesting read here. The ease of the whole rental/landlord game to me lies in these two things: (1) making your property as foolproof as possible and (2) finding a niche market of responsible tenants.

    Fool-proofing means durable finishes that stand up well to more than the usual wear and tear. Make the finishes in the house cheap, durable and easy/cheap to replace or refinish if necessary. It takes some upfront work, but I look to buy a shell of a house for super cheap on the foreclosure market and then redo the inside with cheap durable finishes (that still look fantastic). Makes renting a bit more worry-free and low-maintenance… a little more passive you could even say.

    Second point, we try to pinpoint niche markets. Students are notorious for being rough on houses and not having time to take care of them (normal cleaning, etc) so we wouldn’t list at times when local college students are looking, if possible. We’ve found professors, young professionals, and travel nurses are great niche markets to tap into. We can reach them through networking with local businesses, etc.

    My two cents. Good article, thanks.

    • Katie Ryan O'Connor says 01 June 2016 at 17:39

      This is really good advice — thank you!!

  38. Investor 1 says 14 June 2016 at 05:38

    Yea, so I’m 57, have (12) properties. If I get bad renters, it is mostly my fault. I’m a sucker, but I enjoy providing solid clean housing for people. I try and rent to dual income couples. Pets are a problem, small children are worse.

    I guess the bottom line is, build up your credit, establish a relationship with a bank, usually a local community bank, find a realtor to hunt down properties in an area within (45) minutes of your house. Typically, an area where your city or town is growing, get (3) or (4) exits beyond that. Buy distressed properties, but for sure you are going to need a solid list of contractors on the front end, carpenters, roofers, plumbers, electricians, and A/c & Heat.
    Bottom line, your tenants but the house for you, then income for life.

  39. No Nonsense Landlord says 29 July 2016 at 16:20

    I finally quit my job and am living 100% on rental income. It is possible, and I am doing it.

    Buy properties right. Fix them up and get quality renters. Pay off mortgages.

  40. KYLEE23TURCO says 30 September 2016 at 12:34

    Practical post – BTW , others have been needing a IRS 2350 , my
    business partner filled out and esigned a template form

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