A lot of people ask what is passive income really? Is it the money you make without doing any work or is it just a façade created by the so-called get-rich-quick gurus to trap you?
Let me straighten out some of the facts here before we start: It is called passive income, not free income or no work income. It is called passive income because you don’t need to be the one out there swinging a hammer. It doesn’t require you to do the heavy lifting. But if you want to make a profit, it is important that you are involved. Not eight hours a day, 5 days a week. Maybe it is only a few hours one month, and 20 hours the next. It is impossible to figure out how much time is really going to be required but you will need to invest some time with your money too. It is not a get-rich-quick formula.
Is real estate investing truly passive income?
A lot of real estate investment books convince the reader that they need to run out and get passive income. It describes someone sitting back on the beach and the checks rolling in. It isn’t realistic. If you’ve bought into that idea then I’m sorry to break it to you. It isn’t true. Even investing in our turnkey investment properties require some work on the owner’s part. We try to minimize that, but it is still going to take some time.
Passive income is like hiring employees for your normal work. Employees are there to provide you freedom. Freedom from doing tasks that you don’t like, freedom to be able to do other things, freedom to rely on others’ expertise versus learning it all yourself. Not freedom from ever showing up to work again. When you think of your real estate business, you need to think of it as if you are starting a business and you need to find the employees that you need.
Over the years, we have hired many employees and what I have found is that most if not all of the problems stemmed from either improper training or not enough oversight. When you are putting together your real estate investment business, these are the things that you need to keep in mind.
Managing your business needs to be result oriented. So at a minimum, once a month you should go through your financials and understand what’s happening in your business. Understand why the numbers are good/bad this month. Figure out how what happened and how to repeat things when things are good and how to avoid problems when the results are bad.
One thing about working with a company that has already dealt with a lot of these issues is that you are paying them for that experience, so you don’t have to have the same costs of learning what to do. If you are going to do it alone, then be prepared to fall into some of the pitfalls that can come up. Learn what they are and learn how to avoid them in the future.
Treat your property manager like you would any other employee you would have. Following up with them is critical to your success. Getting out ahead of problems can save you time and money. Most of the time there will be no need to be in constant contact with your PM because nothing has happened. Make it known to your property manager that you want a phone call whenever something important comes up. Define what “important” means to you.
Repairs on the property, tenants moving out, rent collection issues. These are the 3 most important things that you need to know about and continuously follow up on. It is your job as a real estate owner to keep on top and ensure that these things are being handled in an economical and timely fashion. It would be a good idea to have an understanding of what repairs may cost, so that you can keep your repairmen honest.
Speaking of keeping your employees honest, it always makes sense to go out and visit the work place (the property). Make unannounced visits to the property to see just how well the property is being cared for. Arrange meeting with the property manager and try to learn from their experience. This will help you to keep growing your passive income cash flow by investing in more and more properties. In order to be a successful real estate investor, you need to ensure that you keep growing. If you are young or nearing your retirement age, these properties can serve as a constant cash flow whereas if you are already retired, they can provide you able support to retire with reverence.
Creating and keeping passive income coming in requires some work. Don’t let the guru’s trick you that it doesn’t. You don’t want to be stuck in a scenario where you have a property 1000 miles away that you’ve abandoned because you were unprepared for what it takes. Some sort of passive income should be everyone’s goal. Just be sure that you understand truly what “passive” means.