A Guide to Creating Passive Income with Long-Term Rental Properties

Have you been considering investing in rental property as a way to build wealth, or even passive income? Rental properties are one of the few assets that can provide truly passive income, and this is thanks to the consistent revenue generated each month from rental units. This revenue can cover the costs of owning and operating the property and is what eventually nets owners profit. However, there are many aspects to setting up a reliable passive income generating portfolio, and you will want to get up to speed before you go out and make such a large investment. To help better position you for success, we’ve compiled a guide to creating passive income through a portfolio of long-term rental properties.

The Power of Long-Term Rental PortfoliosCoin stack increasing on table next to a house model

Being able to generate passive income through real estate will most likely require an investment in multiple properties, or at least a multifamily home. That’s because it’s difficult to keep your investments profitable with only one source of rental income. In most cases, investors have a diverse portfolio of investment properties along with a property management company that takes good care of them. This strategy ensures you have enough income to cover all expenses and still take in money each month, and by diversifying your investments across multiple different property types and locations, your portfolio is more resistant to economic downturns.

Setting Investment Goals

Now that you have a better understanding of your end game, you should start formulating a plan that can help get you there. But before you begin, you should have a clear understanding of what your desired income is, and a good idea of your risk tolerance level. This can help you avoid making bad decisions that might slow your progress or even cost you money. You should also break your strategy down into smaller, more achievable goals that you can accomplish over time. Building a solid real estate portfolio doesn’t happen overnight, and you will need to have some degree of patience as you wait for the right properties to appear that will strengthen your financial position instead of hurting it.

Diversification Strategies

So, what are the different properties you will want to invest in if you want to diversify your portfolio? Well first, you can start by spreading your investments across different physical locations. This can help protect you if a particular market starts experiencing depreciation or rent decreases, ensuring you stay profitable. You will also want to diversify the types of properties you invest in, which can depend on the area you are investing in. For example, a multifamily home might be more profitable to operate in one location than another. You should also watch out for opportunities in fixer upper properties, which can be acquired for a low cost and turned into very profitable rentals with a little investment.

Tips for Researching and Selecting Properties

There are a few key attributes you may be able to identify when you’re searching for properties to add to your investment portfolio. For instance, markets that are experiencing high population growth or a rapidly expanding job market will most likely be great places to invest in. People will also want to live in neighborhoods that are safe, with access to amenities like good schools, shopping centers, or other attractions. Before you make any purchases, be sure to hire a property inspector for a professional inspection. They can identify any underlying issues that could be a huge financial burden, which can save you from making a bad investment.

Financing Your Portfolio

There are a few options you have when it comes to financing your real estate investments. A traditional mortgage from a bank is always an option, but they’re not a one-size-fits-all solution since they often come with stringent property criteria and a lengthy approval process. Alternatively, you may be able to secure financing from a private lender that operates in the real estate space. These loans are easier to qualify for since they are asset-based, and they have much faster application processes which allows you to secure time sensitive deals. For financing a portfolio of homes, many of these lenders offer investment portfolio financing programs which allow you to merge all your long-term rental loans into one simplified payment.

Effectively Managing a Portfolio

We cannot stress enough how important effectively managing your portfolio is to your success. A well-managed property leads to less tenant turnover and ultimately more peace of mind for you as the owner. If you want to turn your investment into truly passive income you should be looking to hire a property management company (or even multiple) but you will also need to make sure they’re going to do a good job. This typically means regular maintenance of the property but also dealing with tenants’ requests in a timely and professional manner. Be sure to vet potential management companies by doing your due diligence on them: taking a look at their reviews, or speaking with past clients if possible.

Mitigating Risks and Maximizing Passive Income

There are a few risks you should fully understand that are commonly associated with investing in long-term rental properties, however many of them can be avoided by performing enough due diligence at the start of a project. Some examples include buying a property in a low-demand neighborhood, buying a property with structural or flood damage that hurts your ROI, and investing in a market that experiences a sudden downturn which lowers property values.

The other risks you need to know about are those associated with managing the property. This includes things like property maintenance, tenant turnover, and ensuring legal compliance within your local and state jurisdictions. By staying on top of your investments and being involved in the tenant management process, you can help ensure things are running as they should be. You should be in contact with tenants regularly, or property managers, and you should also ensure your property follows all codes and regulations by getting regular inspections. You can maximize the profit of a rental property investment by putting in the effort to ensure there is less to worry about in the long run.

RCN Capital

The easiest way to save on rental property financing is to find a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Are you looking to purchase or refinance a long-term rental property? Connect with us today to discuss your next real estate investment.