Before generating any passive income through physical real estate you plan on maintaining and treating as your appreciating child for the next few years, it is recommended to first understand what the property you plan on earning a considerable amount of income from involves.
As a shareholder, no matter how many shares of Tesla you purchase, it wonât generate nearly the same level of comfort and ease than with a residence. And what better way to justify the sticker price for monthly rent than living in it first!
Something to check off before getting into the neighborâs business is that you must understand more about what you are selling in your property which boils down to lifestyle appeal and maintaining trust between you, the landlord and tenant.
Letâs say you received a lump sum payment from your cashed cow FAAMG company in the banner year of 2021 and decide to invest it all in a property. Congrats! Rental yields are at record highs in coastal cities (NYC avg. $4k) and you are finally ready to get into the action!
This property isnât for yourself but for your portfolio to be exposed to non-correlated income to hopefully one day turn that 5â9 job into a 9â5 using 9â5âs salary! Not a bad choice given 1H has been dicey with the S&P down -21%., itâs worst start to the year in more than 50 yrs.
The listing price on your dream home happened to match what you can afford and you pay 100% in cash for the property. To the seller, this entails you are a serious and ideal buyer and the transaction closes the next day.
Given real estate has lower cap rates and takes a longer time to break even unless you pay fully in cash, expenses such as maintenance, HOA fees, utilities, possible vacancies, property taxes, secure tenants, ammenities, etc. are all factors you must account for that will normally delay young owners from earning an appreciable return as soon as possible.
Once youâve closed the deal and everything is settled, you get all thrilled and fantasize about passive income until you realize thereâs really nothing passive about it. Youâve set yourself in a trap too soon, never realizing renting out a property entails knowing the ins and outs of it by the back of your bed.
Passive To Active To All Eventually Compound
Given lower cap rates (3â6% in coastal cities, higher in Sunbelt and Heartland of America where the overall cost of living is lower), it is more advantageous as an owner to explore and experience your rental first. This will give you a competitve edge when it comes time to negotiating higher rent later on. This is another bonus I love about real estate. The more sweat and tears you put into taking care of it, the higher you earn.
Nothing beats the return from effort. Very few investments besides with an individual venture or venture debt/capital/angel investing gig does one have that much skin in the game!
So letâs say you didnât recieve a seven figure windfall from your Silicon Valley employer in the peak of 2021 and take out a mortgage with only 20% down instead on your future rental. Even as a non-cash buyer with an average loan size of ~$300k these days, in order to have your future tenant pay off your mortgage ASAP, it is still recommended to understand the basics of the property before going ahead and posting on Zillow.
The worst thing to happen to a listing is to have it vacant and sit on the market forever.
If this happens, it either means:
A) Something is structurally wrong with the property
B) Pricing makes no sense and you donât know what it entails
C) Your agent and their brokerage donât know what theyâre doing
D) Staging is poor
Once you get a feel for what you are dealing with, it is more lucrative and there is a higher ROI on the table to rent it out afterwards so you will not only have less FOMO for never getting the chance to live in a property your future renters will adore, but feel more certain in knowing you are generating what you truly deserve each month.
Once youâve gone through the tried and true method of living in it, you will be able to expand your cash flow by renovating your property and have full control over it, and as result, there is higher-income potential on the table!
Expecting to immediately reach your break-even point within a few months to a year is not realistic, especially in this rate hike cycle we are experiencing. Cheap credit isnât readily available anymore and net rental yields (cap rates) are taking longer to pay off so make sure you know what you are getting, it never hurts especially with liabilities such as vehicles. Over $1k, I would suggest trying it out first not take a bet the online version is a replica of the real deal.
If thereâs one thing for sure in any market, itâs to never rush with any investment. If you feel pressurized or frightened, it is usually an indication the investment isnât right for you so stay humble, realistic, and patient. Donât bite off more than you can chew. As they say, when others are greedy, be fearful. The gains will work for themselves if you let time and your level of familiarity pass.
The more you expect to gain, the more you should spend time living in it. This time for real.
As they say, if youâre betting your money on it, or in this case, expecting lower cap rates sooner than later to generate real rental income, it must be actively lived in and charted just like with almost any other investment.