Ah, passive income…

The words bring to mind dollar bills drifting gently in through the windows and doors. After all, it’s passive, so that means you don’t have to work for it, right?

Not quite.

There are ways to earn passive income that takes very little effort on your part, but that is reserved for investors who back deals, putting their money in to get their returns. The returns come in the form of interest payments.

You might wonder why people would let you use their money in your deals. I’ll get to that in a minute. Then I’ll talk about other ways to earn “passive” income and what it really means. I promise it’s not really passive if you’re the one finding properties, making offers, doing the due diligence, making repairs on the properties and then running them.

Sure, it’s a heck of a lot easier when you have a team that helps you do all those things, but the passive income you will earn in rents doesn’t mean you will be free of work, especially if your goal is like mine… to create a place to live for 300 families!! I’m a little shy of that goal right now, but I’m working on it. The date by which I’d like to hit this goal is by December 31, 2019.

“If you want to learn more about how you earn passive income in real estate, that’s excellent. In fact, that’s what I go over with you in this short video…”

So, why would investors back your deals anyway?

I hear it a lot.

“Billy, why would anyone invest in my deals? Why would they let me use their cash or credit that would allow me to purchase a property? That’s crazy.

No, it’s not. It happens all the time. (How do you think I get to my goal of providing housing for 300 families?)

People… and that is what investors are… who don’t want to get their hands dirty finding, rehabbing and running properties but who still want to participate in real estate and earn good returns will indeed be open to letting you use their money to back your deals. They get to charge you interest for the privilege.

The beauty is that you and your investor can agree on the percentages that work for both of you. That means the investor will receive checks from me for several years to come. At the end of the terms (let’s say it may be five years), he/she get the original loan amount back.

Now you can see why people would be so willing to lend you their money. Plus, their position is protected, because the promissory note will typically be attached to the property. That simply means that if you default, the investor has a lien against the property. They should be able to get their original investment back, no matter what.

For me as a long-distance investor who buys properties in the U.S. while living and working in Barcelona, the rules can be a little trickier for me than it will be for those who reside in and do deals in the U.S. That’s why I have two legal teams. One is here in Barcelona; the other is in the U.S.

Either way, I pay my investors their interest payments first before my other bills. These investors are earning truly passive income. All they have to do is let me use their money, which can come from a retirement account, personal savings or even the equity in their own homes. There are all sorts of ways to come up with a big chunk of change to put into a good deal if you know you’re going to earn more than you can in your retirement account or savings account. It can make sense to borrow against your home if the interest rate on that HELOC (home equity line of credit) or personal line of credit is far lower than what you can charge the real estate entrepreneur who needs a private loan from you.

Before you lend money, speak with other investors. Speak with your tax advisor. Speak to the custodian of your retirement account. If you have a self-directed IRA, you are in excellent shape to become a private lender who earns passive income. There are other types of retirement accounts that allow such transactions, but you need to educate yourself first. (Reading other articles on this blog helps.)

Passive income on the side of the entrepreneur…

Now that you understand why people would want to invest in your properties, let’s talk about the “passive” income you can earn and what that looks like.

The reason you hear the earnings you can make from owning rental properties as “passive” is because once you have the property up and running, once all your units are rented out and once you have a team to handle the day-to-day operations, including rent collection, you earn an amount above and beyond your expenses.

Expenses include your debt service (the mortgage payment you make each month on the property), utilities, staffing (a.k.a., the helpful property manager or management company who collects rents and handles everything in your absence), maintenance and repairs. You’ll also have the payments you make to your investor(s).

Your income is what is left over at the end of each month.  – Tweet  

It is important to note that it is wise to put some of that income away in reserves for surprise expenses that may happen down the road. For example, if a storm damages your property in any way or there’s a slab leak. These things are costly and you best be prepared. Putting money aside in a special account helps. Be consistent in the percentage of your income that you put away month after month.

If you are a hands-on type who invests in properties in his/her own back yard, you may want to start off without a property management company or manager. Until you get tired of collecting rents, running the operations, going through inevitable eviction proceedings and keeping the property up to snuff.

In fact, I think it’s a good thing to get to know all the jobs that happen on a property to keep it running right. Then you will know why you want to pay your property management team well. For me, because my interest lies in owning multifamily properties, I have no interest in running the day-to-day affairs. That’s not to say I get away with not working as it relates to owning the property. On the contrary. I am the overseer and decision-maker.

If a problem comes up, I’m the one at the helm directing the ship. Let me tell you that it can be very stressful when your property manager calls to tell you something big just happened at the property that now requires big money to fix. Or if you are informed that the city representative stopped by and wants a list of things fixed to bring the property up to a new code. Yes, that’s stressful indeed.

Also, if you are hands-on, you might try fixing and flipping, or even wholesaling where you simply put buyer and seller together, earning income from the transaction as the go-between. While I’m not interested in either of those strategies, you might be. I’m a buy-and-hold kind of person. I want buy properties using investor backing and hold onto them for a good, long time. I’ll pay others to rehab the properties if needed, but I don’t swing a hammer. I’m just not interested in doing that kind of work. Maybe one day, but not now.

In the end, you can see why calling it “passive” income is somewhat of a misnomer.

What are the ways to earn passive income in real estate deals?

I’ve covered this topic before a few times, so I won’t devote much time to it here. But there are four ways to earn passive income. As a real estate entrepreneur buying rental properties, you will primarily be interested in the first two:

Appreciation

This is how much a property goes up in value over time. You can force the value up by improving the property. You can buy and hold the property, doing very little to improve it, too. The market will dictate how much the property will go up in value. The market will dictate how much the property will go up in value.  – Tweet   But you’ll be holding onto it for a good, long time to see it go up a lot on its own. One thing to look for is a property in an area where you learn that a new school or park or other public work is going to be built. Grab that property and hold onto it. Earn money in rents and eventually sell it at a good profit. That’s called phased appreciation, because as the neighborhood goes through upward phases, so does your appreciation!

Cashflow

This is the one you’re really after when buying rental properties. It’s the income you earn after your expenses as I shared with you in the last section. This is also something your investor-backers may be interested in, because they have the choice of being a private lender OR being an equity partner. What that means is that they agree to let you use their money in return for being a part of your deal. They can have a portion of the cashflow month after month, as well as part of the appreciation. They can even gain tax advantages by taking part of the depreciation in your property, because every part of the property depreciates (loses value) over time. For example, countertops have a lifespan as do door knobs and other hardware. This is a topic unto itself, so I’ll stop here.

Depreciation

Again, everything has a depreciable value. Your tax professional will understand these values and this is a discussion best left for you and your tax person. I am not talking about deductions. You will take deductions as a real estate investor, entrepreneur and business owner, but that’s not the same as depreciation. That has more to do with the things with which your property has been built.

Amortization

Simply, this is the interest an investor-backer can earn when he/she lets you use his/her money in your deals. In the banking world, it has a greater meaning. For example, your loan amortizes over a period of time. This is a big topic and I’m not a banker, so I’ll leave it to you to talk to your banker if you intend to fund your deals yourself. In that case, you want great terms from the bank in a loan that amortizes in your favor.

In these four ways to earn returns, while they are considered “passive” income, you can now see what that terminology really means. As the real estate entrepreneur, you will put in a lot of sweat and brain space. You will be tending your properties whether you have a property management team or not. They are your properties, so you need to know what’s going on with them at all times.

You just have to decide what type of investor you want to be… active (like me) or passive (like my investor-backers whom I appreciate beyond words).

passiveincomewords

My question to you today is what are your goals in real estate investing?

To help you with the answer, I invite you to browse all my helpful videos on my YouTube channel. All you have to do is click these words:

Take me to Billy’s YouTube channel!

If I can be of assistance to you in any way, for example, answering questions and giving you guidance in this realm, please contact me!

I’d love to hear from you. In fact, I’ll make it easy. Here is a quick link:

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You can also check out my latest podcasts and collaborations here keeponcashflow.com/podcasts/