If “Property Brothers” and “Selling Sunset” are your go-to TV binges, chances are you're interested in real estate to some degree. Maybe you’ve even thought about dipping your toes in the passive real estate investing pool. But how does it work? And how much do you need to get started? We asked Rachel Richards, aka Money Honey Rachel — a real estate expert who retired at the age of 27 thanks to some smart real estate investing decisions she made. Here’s what Richards says passive real estate investing is like IRL.
How does passive real estate investing work?
To put it into perspective, Richards says we have to start with the meaning of passive income in general. “My definition is that it's money that is earned with little to no ongoing effort,” she tells us. Which, she added, may not be totally passive. But it’s a lot more passive than a nine-to-five.
With passive real estate investing, you make money by buying property, then renting it out to tenants. Your tenants pay enough to cover the property's mortgage payment and any other necessary expenses. Which means what’s left over is your profit for the month.
But how passive can real estate investing really be?
Richards says it depends on whether you’re planning to outsource the day-to-day work when your investments are up and running. But either way, it won’t be totally passive from day one. She told us that once you get your hands on a piece of property, passive real estate investing happens in stages.
Stage One: When you’re building up your passive income stream. “You might be finding the property, doing an inspection, putting tenants in, doing renovations,” Richards says. So in the first stage, she explains, there’s nothing passive about real estate investing.
Stage Two: When things become more hands-off. And Richards tells us this is the stage where you have tenants and all renovations are done. In most cases, but not always. Example: If you have a portfolio of 30 units and you don't have a property manager in place, it's not going to be a passive process. Because you would have to handle property management on your own.
How much money do I need to get started?
The good news is that you don’t need to have millions in your savings account to get started. Richards started in 2017 with $10,000, then added that to $10,000 her ex-husband had saved. But real estate investing can be risky and expensive as you add in renovations and hire a property manager. So you may wanna revisit your budget to make sure you have funds to put toward this project. Even if you don’t have that much spare money at your fingertips, Richards shared a few things you should have in place to build a solid financial foundation before you go looking for property.
Start with an emergency fund
“You should have three to six months of living expenses set aside”, Richards said. The cost of real estate investing can add up quickly. So a financial safety net may come in handy for surprise spending on repairs or non-paying tenants.
Pay off any high-interest debt
The debt-free life is a good starting point. But if you do have debt when you start investing, Richards says it should be low-interest, like a student loan or mortgage. “Have all of your high interest consumer debt, like credit card debt, paid off,” she advises. For example: Richards says it makes more sense to put your money towards a 20% or 25% credit card interest rate than it does to put towards a rental property that might earn you 10% or 15%.
Keep saving for retirement
“[Hopefully] you are regularly contributing to some sort of retirement, 401(k), IRA, something like that,” Richards told us. Not only is retirement savings a great safety net in case your investment doesn’t go as planned, but it can also mean free money if your employer matches contributions.
Any passive real estate investing mistakes I should avoid?
Don’t dive in without a plan. Create a strategy for earning income from your property, including the type of property you want. Are you sticking to residential? Or would you prefer a vacation rental or commercial space? Having a plan will give you clarity on how you’ll generate income.
Rachel’s top tip: “This is not the place to cut corners.” She learned the hard way that skimping on costs in real estate investing can be, well…costly. For instance, Richards hired a couple she knew because they offered her a lower rate, but then they wound up stealing from her. The loss was so devastating that Richards almost lost her motivation. Lesson learned.
What about any success stories?
Richards says the returns have made the ups and downs worth it. She told us her first property became her first major win. And it paid off. In 2021, she sold one of her first properties in Kentucky — and made a $200,000 profit from the sale. Moral of the story: No paralysis from analysis. If you’ve done your research and crunched the numbers, don’t let fear stop you from taking action.
How can I get started with passive real estate investing?
Start saving up for a down payment on your first property. As you save, research the areas where you’d like to start investing. Richards suggests looking outside your state for opportunities, especially if you live somewhere with a high cost of living (like New York, Miami, or Los Angeles). One suggestion: Try areas you’re familiar with, like the city where you went to college, your favorite vacation spot, or a city where you have lots of loved ones.
She also recommends choosing a property you’re comfortable with. Would move-in ready be a better start for you? Or can you handle doing major renovations? Review your budget first to make sure you don’t get overwhelmed.
theSkimm
Whether your goal is to increase your net worth, build generational wealth, or finally live out your HGTV fantasy, real estate investing is a great way to get there — if it’s done the right way. Build up your financial cushion first, then dive in. And remember, mistakes may happen, but the lessons you learn along the way could be worth the cash you’ll bring in later.
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