Passive income. Just uttering the words transports you to a tropical beach, where you sip on Mai Tais while your bank account swells.
Maybe you wrote off passive income long ago as ‘too good to be true.’ Hey, we understand — it’s the phrase that launched a thousand failed business ventures (and a million sketchy ‘get rich quick’ schemes).
But amazingly enough, passive income is possible with the right strategy, partners, and a little luck. And real estate investment is one of the most reliable ways to generate it — if you take advantage of one crucial tool. But we’re getting ahead of ourselves. First, let’s review some basics.
What is passive income?
Passive income is money you make doing nothing at all — i.e. when you’re completely passive. It’s a paycheck that shows up on your doorstep, even if you never get out of bed. For obvious reasons, that’s most people’s dream gig. Why work for money if you can get paid doing nothing?
Imagine, for example, that you start a small business which becomes very successful. You use the proceeds to hire people who manage every aspect of the business, from top to bottom. The business is now effectively running itself, with no involvement from you — and there’s still profit left over. That’s your passive income.
Or imagine that you buy shares in a business when it’s still small. Over time, the company grows. As a shareholder, you’re entitled to a piece of the company’s annual profits. Those are called the “dividends” — and they’ll keep rolling in as long as the company thrives. Again, you’re making money while you sleep. No more of your time or energy is required.
Why real estate is a perfect passive income strategy
For investors trying to create passive income, rental property investment has long been seen as one of the best possible approaches. This is due to some nitty-gritty financial factors — like the way property taxes and depreciation benefit real estate investors over time, dependability of cash flow, and a strong historical trend for real estate to grow in value, creating great returns on your money.
But just as important, there’s a known playbook for achieving financial independence via real estate. You don’t need to come up with a killer business concept, become a stock market wizard, or invest in the next big tech startup. You just need to follow time-tested methods developed by the many real estate investors who came before you and paved the way.
At its heart, generating real estate passive income just means following this basic recipe:
- Invest in a property (e.g. buy a house).
- Lease it out to tenants.
- Collect tenants’ rent payments.
- Use that money to pay the mortgage and maintain the property.
- Keep whatever cash remains.
Are there many financial details you should learn to make the savviest possible investment? Sure. But in a nutshell, real estate investing always works the same way. While you don’t ever need to reinvent the wheel, there are definitely ways to make the wheel spin more efficiently.
Investing in rental properties: What most people get wrong
So now you’re probably wondering: If real estate investing is so easy, why isn’t everyone a millionaire? What’s to stop the average landlord from building a massive passive income stream and riding off into the sunset with a bucket of cash?
First, a reality check: Real estate investment is a form of speculative investment. Anything could happen to your property. Generally, real estate becomes more valuable over time, but investing your hard-earned cash is always a gamble. A fire could wipe you out. The housing could sit vacant for months while you scramble to find new tenants. The whole neighborhood could plummet in value, leaving you with an unpayable mortgage.
But here’s the thing — those sorts of financial catastrophes are not the main problem for most investors. The main problem — the biggest obstacle to financial growth – is a bad management strategy. Far too many property owners try to manage their own real estate investments, and end up losing both time and money.
A tale of two property managers
Zach, the self-manager
Zach is new to the real estate investment game and passionate about building his net passive income. He takes out a mortgage and purchases a few single-family homes, then starts hustling to fill them with tenants. Quickly, Zach realizes that there’s far more work involved than he anticipated.
Evaluating tenants proves incredibly tricky. Zach struggles to find trustworthy residents who pay their rent on time. Rent collection becomes a painful chore, and he sometimes goes months without getting paid. Marketing the properties and filling vacancies is also a huge hassle, which means that units sometimes sit empty, bleeding money while Zach keeps paying the mortgage.
And then there’s the repairs. Who knew that just a few properties would require so many service calls – from leaky pipes and blown heaters to broken fridges, noise complaints, or a request to change a lightbulb, Zach seems to spend every minute of his spare time on a repair and maintenance treadmill. He keeps up, barely, without ever getting ahead.
His passive investment scheme isn’t so passive after all. It requires a lot of labor. And when Zach crunches the numbers, he’s aghast to learn he’s not even being paid well for his time.
Zelda, the outsourcer
As a new investor, Zelda also purchases a few single-family homes. But Zelda realizes upfront that she doesn’t want to be a landlord, and doesn’t know anything about property management. So she decides to call in an expert — a property management company — to handle all of those responsibilities. Zelda knows she’ll have to pay the property manager a percentage of her rental income, but she figures it’s well worth her time.
The company does everything needed to keep the property humming along. They perform deep background checks on prospective new tenants, including criminal record and past landlord evaluations, and find residents who always pay their rent on time. When tenants move in or out, they handle the paperwork and make sure Zelda is protected by a strong legal contract. The property management company also markets the property heavily, keeping the vacancy rate as low as possible.
Best of all, the new managers stay on top of emergency service calls and long-term maintenance for Zelda’s properties. When a toilet starts leaking at 2am, the tenants don’t call Zelda — they call her property manager, who handles the repair logistics and notifies Zelda first thing in the morning. And because they do this work every day, the management company has pre-negotiated below-market rates with a large team of service professionals. Zach is stuck paying retail costs for services like electrical, plumbing, and roofing work, while Zelda gets a deep discount on both parts and labor.
Self-managing vs. Hiring a Property Manager
Comparing these two approaches, you might wonder: Why on Earth would an investor manage their own properties when outsourcing the responsibilities is so much easier? The answer is that they’re trying to keep more of their rental income by dodging the property manager’s fees — but they’re simply not calculating the math on a long-term basis.
As we saw above in the example of Zach, real estate investment income isn’t passive at all if you go the self-management route. It’s just another job where you’re trading time for money. If that’s your goal — to take on a second job — why not take up graphic design or accountant work in your spare time? Those might be better (and higher paying) jobs for you.
The whole point was to build a passive income stream — remember? And property ownership is one of the few paths to that goal, but only if you’re willing to outsource the labor!
The brilliance of Zelda’s approach isn’t just that she starts raking in money for nothing. It’s that she keeps her time free. And time, as the cliche goes, really is money. Rather than chasing down leaky pipes, Zelda can use her off-hours to chase down new investment opportunities — i.e. more real estate to buy — which will in turn generate more passive income.
The Outsource Advantage
So there you have it: If you want to build an additional income stream, real estate investment is an incredible opportunity. But if you want to build truly passive income, and thus leverage your free time into ever-growing additional investments, it’s not enough to be a property owner. You have to take advantage of the extraordinary opportunity offered by property management companies.
Just make sure the management agency you partner with offers fair pricing, a full suite of services, and a company philosophy that values integrity above all. At Great Jones, we’re committed to treating your property like our own, and ensuring you develop a real estate portfolio that powers true financial independence.