How To Create Passive Income From Property
When we consider the benefits of property investment, passive income is often near the top and a major reason that investors choose it as an investment asset. Whether you’re looking to build security in your later years, provide for your family or supplement a pension, the returns from property could be an excellent way to achieve these goals. It’s no surprise then that one of the most common questions we’re asked is: How do I create passive income from a property?
What is Passive Income?
So what is passive income? It’s money you earn without doing any work. Income delivered by secondary streams and created ‘passively’. These second streams are usually delivered by investments such as property, stocks, bonds or pensions. If you have the option of utilising passive income during your retirement years, there’s no reason you can’t have the lifestyle you did during your working years but without the work.
Some basic examples of passive income investing include rent from property investment, profits from a business where you have no daily responsibility or role, dividends from stocks, the interest from owning bonds or your pension.
Obviously this allows you to simply enjoy your time, especially once you’re retired. If you find yourself unable to work or you retire, normal employment income will most likely cease to exist. For people in high-paying roles, this is vital to consider, especially with the ‘death’ of final salary pensions brought about by economic upheaval.
How to Make Passive Income From Property
The most common way of building passive income is to utilise your own money to buy assets that will generate passive income over time. It’s most common in property investment for investors to either buy outright or utilise a mortgage to purchase a property, which can then start generating rental income.
Step 1: Find a Location to Invest
It might be a cliche but property lives and dies based on its location. From the demand for the location to the amenities that are in the surrounding area, it’s vital that you find the right development in the right place. At the same time, you’ll want to find a property type that fits your chosen investment strategy.
Investors typically have two initial options when identifying a location – the choice between an emerging market and an established market. Emerging markets tend to be more affordable and will experience growth over time while established markets will generally be more secure and consistent, offering immediately delivery on returns.
At the same time, you’ll also want to identify some key investor signposts around your chosen location. Any development that is near transport links; nightlife spots; retail spaces; good schools or career opportunities will be much more competitive in the market, delivering higher yields and experiencing better growth.
These types of amenities are ensuring that places such as Birmingham, Manchester and the London Commuter Belt are trending above-average growth, providing investors with a solid foundation for generating yields and taking advantage of natural market growth.
Another clear signpost for a good location is regeneration. Any area that is focusing money and time on building new spaces, iconic landmarks and other key redevelopment should be a major target for investors – transformation tends to attract demand and demand is an investors best measure of success.
The above is just a few examples of the supply and demand cycle that can affect property prices.
Step 2: Do the Numbers
The most common way of building passive income is to utilise the money earned from your main employment and use that to buy assets that will generate passive income over time. Investors often consider investing in a start-up, app or buying shares. For property investment, buyers may either buy outright or utilise a mortgage to purchase the property which can then start generating rental income.
Investors will then aim to pay the mortgage, taxes, insurance, maintenance and property management services using the rental income. This leaves a small margin from day-to-day and a source of passive income once the property is fully paid off.
With this in mind, it’s no surprise that you need to do the maths behind the investment. Having your finances in order is vital to avoid any unwanted issues down the line, especially when it comes to a long-term investment.
Financing will generally form part of your due diligence process, where you establish a positive cash-flow, the budget you have available and typically, a ‘rainy-day’ fund in the event of any unforeseen issues. Most seasoned investors will recommend the latter, as it can guard against you having to pay out of your own pocket during any void periods.
Step 3: Set Up Hands-Off Management
Property management is a full-time endeavour and despite the efforts that go into managing a property, even the most prepared of landlords will generally underestimate how time-consuming owning a property can be.
A unique benefit of property investment is its flexibility compared to other investment assets. You can be as involved or as ‘hands-off’ as you like, particularly if you’re working with partners in the industry.
Many investors go into property investment with the intention of it being a singular source of passive income that requires very little micromanaging. This typically requires working with a letting agent or someone similar, allowing you to utilise the benefits without property management becoming a full-time job.
Letting agents are an investor’s best friend in a competitive market. Working with an agent that knows the market and having a quality product can mean you’ll never struggle to let – ensuring you’re maximising the returns of your investment.
This approach also suits international investors because it doesn’t involve needing to be in the area. Although you should always visit your potential investment site or seek professional advice, the day-to-day can be run by other people, leaving you to enjoy the benefits. By having several tangible investments spread out around various locations, you can build a diverse portfolio that can deliver significant returns.
Building passive income streams can be made easier by investing in a Pre-Let development (sometimes known as Ready-to-Rent). Although these opportunities are typically rarer than standard Buy-to-Let investments, they generally come pre-tenanted and furnished – giving you an immediate source of rental income and thus, passive income.
Step 4: Invest and Wait
If the aim of the property investment is to build consistent returns over the long-term, there’s no doubt that the earlier you invest, the better. ‘Invest and Wait’ is a common strategy that can result in compound return and long-term passive income, freeing up capital to re-invest.
One of the most valuable resources an investor has is time. Time can offer much more to an investment than money – not least because of compounding. Compounding is the reinvestment of earnings to generate additional wealth and over a longer period can result in much higher earnings.
Once the groundwork is in place, you can sit back and watch your passive income roll in. If you’ve chosen a quality product, this is the time when you’ll see the effect of yield security and how that can help build long-term returns – these developments will generally attract better quality tenants that will have longer leases.
It’s also important to ensure you ride out your investment. Property growth experiences the same market cycles as most investments – in ‘bull markets’ most investors win but in ‘bear markets’ you need to be prepared to ride out the storms and in some cases, fill gaps and voids where they arrive.
Whilst all of the above are viable for creating a passive income, it’s important to remember that none of these will make you an overnight success. There is no such thing as 100% passive income and some legwork will be necessary throughout – smart passive income compounds and must be re-invested to maximise returns.
What you will have from following the above is an excellent foundation for a property portfolio, allowing you to reach your long-term financial goals.
Passive Income Property Opportunities
Looking to start a property portfolio of your own? We have plenty of passive income property opportunities available in a range of locations that are forecasting incredible growth. From Birmingham to the London Commuter Belt, these properties have been chosen to maximise potential from both established and emerging markets.