Real estate is an interesting stream of “Passive Income”. I say passive with a word of caution, this truly is not passive in the sense that it is hands-off, but, it is a potentially low time investment with a potentially high return. It really does depend on where you buy, and how lucky you get.
Let’s consider the a sample set of numbers:
Property Cost: $250,000
Taxes: $4,000 / year
Insurance: $1,200 / year
Down Payment: 25% (62,500)
Total Mortgaged: $187,500
Total Mortgage with Insurance and Taxes: ~$1,450 / month
Now, if this property has 2 units, and each pays $1,000 a month in rent, that is a net gain of $550, just for having people live in your property. Not a bad amount of cash for holding this property. That said, this number is a lie. While you are profiting $550 per month, there are other considerations. Water, sewer, and fire taxes, improvements, and replacements for appliances, landscaping fees, and the list goes on.
However, if you had 3 units in the same building, that profit goes up to $1550 per month (!) for the same cost. That is about 7% a year in profit on the mortgaged value. Also, something to consider, assuming the house does not increase in value over the years (which it should and potentially at a considerable amount) the mortgage payments are bringing down the principal amount owed as well. When you sell this property, you get to reclaim that principle, it is like making money twice.
Also, if you have a few properties and no longer want to manage them yourself, you can hand them off to a property management company. They take a percentage of the collected rent (between 5 and 10%) but handle it all for you. You just collect the excess. This makes it much more passive, but potentially less profitable.
The biggest problem with real estate is you really need to save your profits. When things happen - they can happen big. For example, if someone stops paying rent, it can take MONTHS to have them properly evicted, which depending on your current holdings may flip your property to a monthly loss. Also, things like hot water heaters, roofs, pipe bursts and similar can cost huge dollars to fix. If you are not in a highly trafficked area, you may not be able to fill rentals in a timely manner. You need to be sure you are saving for these inevitable issues.
Disclosure: I own a few properties they treat me pretty well, however, I do not use a management company, so my time investment is considerably higher than someone who does.
Time investment: 1-8/10
Potential income: 5-10/10
I am just a regular guy who does far to much research on financial independence and early retirement (FI/RE). I look forward to sharing my journey with you all.