Passive income is a topic that I continue to learn about every day because in my opinion, passive income is the best type of income.
Passive Income is a term that gets thrown around frequently in self help/wealth blogs, books, seminars, youtube videos. Obviously, it’s important if every financial expert or wealthy person talks about it as critical in attaining wealth.
So what is passive income?
The best definition I could find was:
“Passive income differs from earned income & portfolio income in a variety of ways. Passive income is generally defined as a stream of income earned with little effort, And it is referred to as progressive passive income meaning there is little effort needed from the individual receiving the passive income in order to grow the stream of income. Examples of passive income include rental income and any business activities in which the earner does not materially participate during the year.
Passive income differs from active income which is defined as any earned income including all the taxable income and wages the earner get from working. Linear active income refers to one constantly needed to stay active to maintain the stream of income, and once an individual chooses to stop working the income will also stop, examples of active income include Wages, Self-employment income, martial participation in s corp, partnership. portfolio income is derived from investments and includes capital gains, interest, dividends, and royalties.”
This post will focus on investing in rental properties as a passive income source.
The reason I love passive income so much is because I don’t have to be working, in the traditional sense, to make money. You don’t have to clock in to earn passive income. You can earn while you vacation, sleep, and play with your kids. It’s the lazy person’s way of making money.
My income really took off 6-7 years ago from my career as a sales rep. It has allowed for my wife to be a stay at home and upgrade to a bigger, nicer house in a quiet town with a fantastic school system. We haven’t had to worry about our next paycheck for a while and I realize we’re very fortunate to be in that situation. Since we moved into our “forever” house last year, I’ve been obsessively looking for passive income opportunities.
Our goals changed, we were now going to spend money to invest in assets that would increase in value and bring in positive cash flow instead of spending money on expenses or liabilities.
I started reading blogs, magazines, blogs and listening to business radio stations about the subject. I also began asking people in my network questions about their investments and how they built their wealth. Stay tuned for a future planned post about effective networking.
I look at it as an opportunity to increase our wealth, an opportunity to retire early, and an opportunity to give myself a back up plan in case something happens to my career.
To take the next step in our journey of building wealth, my wife and I decided to try real estate investing. Specifically, buying a property to rent for positive cash flow and hold onto for the medium to long term.
The book that inspired me to take that next step is The Book on Rental Property Investing by Brandon Turner.
I’ve read other books on rental investments but they all made outrageous promises of quitting your job and got into the weeds about the accounting part or were a bore to read.
Something about Brandon Turners writing kept me engaged to keep reading and learning. It was huge accomplishment for me to finish the book because I tend to start reading a ton of books but hardly finish them.
He used a lot of his real life experience and didn’t sugar coat how hard rental property investing can be; i.e, evicting a tenant and how ugly that can get.
He also did get into the numbers part of it but not enough to the point it made me lose interest.
Pro tip: there are apps and programs available for download to help you determine whether your investment will bring in positive cash flow and your long term earning potential in neat graphs. So don’t fret about this part if math or accounting isn’t your thing.
Plus there’s Quickbooks to help you manage the income and costs on neat spreadsheets for your accountant.
His favorite way to purchase properties is finding properties that need some cosmetic tlc. Those then get renovated and updated to create forced equity, meaning the total value of the property increased from the renovations and increased your overall equity stake. He then finds tenants that pay the market rate for rent; should be more than your mortgage and expenses associated with the property. This creates a positive cash flow. He can do this because he bought the original property for a discount because it needed some work.
I chose to skip the step about finding a property needing cosmetic tlc because my wife and I are expecting our second boy to be born in the next 4 weeks and I don’t think I’ll have the time or energy for it. I will be using this strategy in the future and of course document it for you guys.
So my current strategy was to find a garden style condo in a convenient area with easy transportation to Boston and a decent restaurant / bar scene. The difficult part was finding a property with a high enough market rate of rent and low enough purchase price to turn over positive cash flow because the real estate market has been so hot.
We gave our real estate agent (stay tuned for a future blog post about why great real estate agents are so valuable to have in your network) our price range, towns, requirements and waited. I became obsessed with Zillow, MLS, and Trulia. We went through hundreds of potential investment properties and saw about a dozen in person before we found one that made the most sense and best price for us at this time.
The unit we picked is a 2 bed 2 full bath garden style apartment in a town 35 miles north of Boston, located downtown with a commuter rail station and 20 bars and restaurants within walking distance. Perfect for young professionals that want convenience and not have to pay big city rent.
We closed two weeks ago and are currently getting ready to list in the MLS, Craigslist, Facebook.
Will keep you guys posted on the process of screening tenants and leasing it out.
In the interim, below is the link (70 Washington St) to my spreadsheet and chart of how much money we will be earning on it. The numbers speak for themselves. Leave comments about any questions you have or tell us about your story!