A passive income in any type of income that doesn’t require you to constantly work for it. It usually involves investing some time, money and effort upfront – however in the long run, the money should be able to keep coming in without having to do much work.
It can benefit everyone to have a main source of income that you constantly work for and a secondary passive income. If disaster strikes and you can’t work your main job, this passive income can ensure that money is still coming in. It’s also an easy way to supplement your main income without taking on a second job or working overtime.
A popular form of passive income is buy-to-let property. By charging rent to tenants, you can cover the cost of the mortgage payments and make a small monthly profit on top. Compared to other forms of passive income like investing in stocks or relying on ad revenue, you can guarantee a certain amount of income each month.
That said, there are numerous risk factors to investing in property. As a landlord, you’re responsible for repairing wear and tear – if things keep breaking, you could end up spending a lot of money getting them fixed and could end up making a loss. Similarly, you could take on bad tenants who continuously fall behind on rent or end up severely damaging your property. The following guide explains how you may be able to avoid these situations.
Finding the right property
If you want to be making a return each month, it’s important that you’re not forking out huge amounts of money on repairs. This involves making sure that a property is in good condition and not damage prone.
You also need to make sure that a property is attractive to tenants – you don’t want your property sitting empty for months. On top of making sure that condition is good, you should make sure that the property is in an accessible location.
When searching for the right property, don’t rush the search process. Take the time to look through properties on real estate websites and organize viewings. If you find a property that looks right, take time to then research into the area. What local facilities are there? Are there good public transport links? Is the crime rate high? You should look into the history of the property.
It’s possible that you may have inherited a property or that you already own a property that you want to rent. Try to assess the suitability of this property and compare other properties in the area to decide whether you’re better off renting another property.
To get the best idea as to whether a property is in good condition, it’s worth hiring a surveyor. A home inspection will be able to determine if there are any hidden problems that could result in major repairs in the future. If there are a lot of problems, it could be worth looking for another property.
Before renting out a property to tenants, it must meet certain living conditions. Factor in the cost of any improvements that you may have to make upfront.
Finding the right tenants
It’s also essential to find tenants who are going to pay rent on time and keep the property in good condition. This involves screening tenants and putting in place certain protective legal measures.
You should start by establishing property rules. Popular rules include no smoking, no pets or no kids. These rules could protect your property from damage, but they may narrow your scope of potential tenants (if you’re renting out a house, you should think carefully about not permitting pets or kids, as families and pet-owners are the most likely ones to be looking for a house).
When it comes to setting up a screening process, it could be worth conducting a credit check on all prospective tenants and getting references from previous landlords. A good credit score and a good reference from a previous landlord are good signs that a tenant will pay rent on time.
Almost all landlords charge a deposit. This can be anything from a month’s rent to three month’s rent in advance. A deposit is given back to a tenant at the end of the tenancy. If the tenant still owes you rent or causes damage to the property that you need to pay to fix, you can deduct this money from the deposit.
It’s also important that you write up a legally-binding contract that sets out the rules and conditions of the tenancy. It could be worth working with a legal writer to create a solid contract. Tenants will have to agree to the terms on the contact before taking them on.
How you market your property can have an impact on your ability to find the right tenants. Many landlords use a tenancy agency – just be prepared to pay extra fees.
Should you hire a property manager?
Having to regularly make repairs or chase up rent can result in a buy-to-let property being less of a passive income and more of a second job. This is why many landlords hire a property manager to take care of things like organising repairs and chasing up rent.
Taking on a property manager does mean paying extra fees each month. You need to be sure that this is worth it – the profit you get from rent needs to be enough to cover their fees.
Tenancy agencies can also provide this role on top of helping you to find new tenants. You’ll similarly need to pay these agencies a fee for using their service.
Should you take out landlord insurance?
Landlord insurance can also cover you against losses incurred from renting out your property. This can ensure that your passive income remains a source of profit.
Of course, you do need to pay insurance payment each month, so factor this into your monthly expenses. It’s worth spending time shopping around for the best landlord insurance rates.
Some other things to consider when thinking about buy-to-let
- First thing to consider when thinking about Buy-to-let: Do you want to be a ‘hands on’ landlord, or would you rather hire an estate agency to manage the property, find tenants, and collect rent?
- Another thing to consider when thinking about Buy-to-let: Choose a property that will appeal to renters – remember, you are not selecting a property for yourself.
- When considering Buy-to-let: Are you willing to stay current on tenancy law changes? Some changes can have a significant impact on the profit you make from the property, as well as how you handle evictions.
Read also: Difference Between Lease and Rent
