The UGLY Truth About Owning Rental Properties and “Passive Income”

Owning real estate and holding for the long term is a great way to build wealth and create some “passive income”. But, I would not be doing you justice if I didn’t talk about the ugly side of owning rentals and the truth about passive income.

The truth about "passive income"

So, to get this out the way first, we all know by now that passive income isn’t completely passive. And this set it and forget it, relaxing on a beach and never putting in any work, is a picture that gurus try to paint that is misleading.

And on the topic of passive income, I’m actually a huge believer in active income to start, especially if you haven’t found a way to make six figures a year. The reason is the best ‘passive income’ vehicles, again I put that in quotes, are going to be asset classes like real estate. This is usually a pay to play game.

These assets can be purchased and accumulated over time and if you already have active income, you can funnel that into acquiring more rentals. You get them by using the BRRRR Method, purchasing them outright, developing from the ground up or some form of creative strategy.

But if you’re broke, and I hate to say it that way, I’ve been there done that, then you need to first find a way to make at least 6 figures a year before playing monopoly and try to add houses on boardwalk and Park Place.

I’ve made videos on how to get rentals if you don’t have that much money to start, so make sure to check that video after this one.

And yes, when it comes to owning rentals you can hire a property manager to do a lot of what we will discuss but even then it’s still not fully passive. And you would need to oversee the work of the property manager as well.

So, when it comes to rental properties, you will still play some sort of an active role, and well go over what those are, and what to look out for before going down that path of owning rentals!

I personally believe real estate is a great way to build wealth. But there are things to look out for and ironically the first thing to be mindful about is how much of an active role you must play to find a rental property that will make you passive income in this first place.

So first Ugly TRUTH Is having to…

Find a Rental

I can make entire videos on different ways of how to find a rental property. This also depends on what strategy you use to take down a rental.

This is probably the most difficult step, especially if you want to find off-market properties and use the BRRRR method so that you can refi your money out and have some built in equity from the start. The BRRRR method would mean taking a distressed property, renovating it and refi your money out after you have a tenant in place. All very active items.

The 2 ways I prefer to get rentals are by using the BRRRR method and developing multifamily from ground up.

But if you are looking for your very first rental then I believe that the best way is to house hack. That is essentially buying a duplex, living in one of the units and renting out the other side. You can use the income from the tenant to cover most or all of the mortgage payment. This would also allow you to take advantage of loan products that serve first-time home buyers and owner occupants.

Other strategies is you can buy them out write, put 20% down or use a creative strategy like sub to. Regardless there is nothing passive about this process.

So, prepare and think of a game plan on how to get to your goal.

Next ugly truth to be aware of is…

Getting Tenants

Finding tenants for your property may not be too difficult, but finding good tenants that will respect your investment and pay on time will be important.

When you have to screen tenants yourself, you will need to do credit and background checks, which can be time consuming, especially if you have to go through a lot of tenants until you find the right one.

This is very important because you don’t want to have to go through an eviction process which can be costly, stressful at times and a time-consuming process.

Now that you have the rental and the tenants in place, the rental will still require upkeep and management.

So the next ugly truth is..

Maintenance

This is more of what you hear when real estate investors mention a dislike about owning real estate. Owning rentals requires ongoing maintenance.

Maintaining the property is a huge responsibility and something to consider when owning rentals. It keeps the tenants happy and protects your assssssset, lol. You can hire a property manager, but that usually comes after you own quite a bit more rentals.

Here are some maintenance examples:

Exterior: roof, gutters, drains, gates and fences, landscaping, siding and bricks and power washing it to keep it clean.
Interior maintenance: plumbing, electrical, AC and HVAC systems, any faucets and sinks, lights and just all the unknowns of what can go wrong.
Then you may need to pay for quarterly or yearly for pest control.

So just a lot there that can need attention and can be costly depending on what repairs are needed.

The next ugly truth is around…

Vacancy and Eviction

It’s like a vicious cycle, once ethe existing tenants move out, hopefully willingly, you need to do all the steps over again, screen tenants, get the property rent ready, so that means repairs and maintenance, and pretty much do it all over again.

There are ways to reduce the likelihood of having bad tenants, which will lower the possibility of having to evict anyone or dealing with high turnover and vacancies.

The most important preventive measure would be:

Buying in a decent neighborhood – do some research about the area and make sure its not in a bad area, certain areas attract certain types of people who can make your life a nightmare.
You can do it through tenant screenings.
Make repairs on time.
Reward tenants for staying longer and paying on time.
Send gifts or offer incentives.

Doing these things can help reduce late payments and evictions all together. Just get to know your tenants and make them feel appreciated.

Also, on the topic of tenants, if you’re self-managing these yourself, you can get calls at any time having to deal with something urgent that comes up with your property.

It could be holidays, late nights, weekends, anytime – so imagine it’s the day before Christmas and the fridge goes out or the bathrooms get flooded from a plumbing issue.

This can suck when you are busy and weren’t expecting to have to drop everything to handle this issue that came up with one of your rentals.

Also there have been times that tenants will trash your rental before they leave, which is expensive to fix. Or even getting into legal issues.

There’s just some much that can go wrong. BUT… I didn’t want to do this video without mentioning that despite all of these ugly truths, the good can outweigh the bad depending on your ability to look past these, accept them as a part of the process and look at your long-term goals.

Despite all the ugly truths that I know we just covered, the good is definitely worth mentioning. The goal here isn’t to turn anyone away from owning rentals but to offer a balanced perspective on what to expect before getting into this.

Here’s the good! And all of it translates to a financial benefit.

There’s the obvious like cash flow and rental income. At the beginning it may not seem like much but overtime the rental income will add up.

Then you have appreciation. Real estate has historically goes up over time. So holding on to these rentals will pay off huge in the long run.

Appreciation with debt paydown from your tenants paying down your mortgage will increase your equity.

Imagine if you continue to add properties, then funnel all the cash flow to a property until its paid off then take the cashflow from the paid off rental and point it towards the next rental you own. It’s an amazing snowball effect that can make you very wealthy overtime.

Owning rentals will provide diversification and it’s a tangible investment that will always be in demand.

And then there are the tax benefits that come with owning real estate.

With depreciation, you can defer the tax that you would have owed until a later date when the property is sold – then the tax deductions mean more money in your pocket and less that’s paid out in taxes.

Its really how the rich play this game and something to think about.

If you are willing to work through the ugly, then there is a lot of good with owning rentals – I think that everyone should consider owning rentals. As long as you know that passive income is not all that passive, be aware of the active role you will play and hire a property manager when you have enough rentals and justify one.

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