The saying goes, "Don't put all of your eggs in one basket." Today, it is tremendously easy to diversify your wealth for passive income: from your traditional financial institution’s financial advisor to your virtual stockbroker, the possibilities are endless. But, where to start? 

Rental income properties have long been a solid investment for people to produce long-term passive income. Many investors like investing in real estate because 1) real estate values appreciate and 2) real estate is tangible. 

The first reason is very important because contrary to what one might initially think, real estate depreciates due to wear and tear and the value of the home or multiplex and land it sits on actually gains in value over time due to the time value of money. The second reason is important because many people are more comfortable with putting something that they can see and touch, compared to the more traditional, intangible investments such as stocks and bonds. 

Anyone can grow their passive income through rentals, you don’t need to be a trust fund manager to do so. We’ve compiled a list of the 5 things you should do to prepare and get started in building your rental real estate empire.

1. Think With Your Brain, And Not Your Heart

Before investing, you must put yourself in the right mindset. It is natural for people to make emotional decisions when purchasing a property because after all, a house is a home. Eliminate the intuitive nature of the decision and remind yourself that this is not a home but a real estate investment (unless of course, you plan on living in it after years of renting it out). Thus, ensure that you look for what the market demands at the time, not what you are seeking for in a home – these are two very different things. 

2. Start Early, Because Time Will Be On Your Side

Start your search early, save for your down payment and mortgage early, and buy early. The sooner you start saving and investing process, the bigger your timeline to invest and the higher the earnings potential. Thus the premise of time value of money where a dollar today is worth more than a dollar tomorrow due to interest over time.

3. Agents Are Professionals For a Reason

Many are skeptical of real estate agents and mortgage brokers because of the potential for them to not have a client’s best interest in mind. This may be true, but more often than not, they actually have more knowledge than you from understanding the ebbs and flows of the market over a time period, to unique deals done that may peak your interest, to being first in the know of new listings from their deep network. An agent’s commission can always be negotiated, too. 

4. But Still Do Your Own Homework

You should be knowledgeable in the real estate market in your city and understand major macro-economic trends (interest rate hikes, major federal policies) that will impact real estate prices. A few things you can do today: 

  • Read the real estate section of your local newspaper;
  • Subscribe to your local real estate listings website and follow/tag the areas that pique your interest;
  • Reach out to real estate brokers and ask them about their views on the market so far (you could ask if they think that now is a buyer’s or seller’s market)

When you have a community in mind, go visit the area and note:

  • Is it close to public transit?
  • Where is the nearest grocery store, shopping mall, or retail outlet?

5. Do the Math

Investing in real estate is pretty black and white; if the numbers make sense, go for it - if not, go find another property or don’t invest at all. 

First, your monthly operating income should not exceed your expenses: 

  • Income is the sum of rent minus vacancies. Vacancies are more important if you have multiple units or are managing a rental building as it hedges for the potential that you will not have your unit occupied at any given time during the year. You can usually average 1-2% for vacancies.
  • Expense is the sum of repairs and maintenance, real estate taxes, rental property insurance (if you pay on behalf of your tenant), homeowner association fees, utilities, and legal fees.

A general rule of thumb is that your expenses should be approximately 30-40% of your income. The monthly net operating income (NOI) will be your income minus your expenses. Multiplying this by 12 will get you your annual figure. 

So go start now! Whether it be starting a conversation with a fellow landlord to see how they started or building on your existing portfolio, start today and be grateful tomorrow for the passive income stream that you've created.

Once you have invested in your first property, next step will be to find the right tenants! Use Naborly Tenant Screening