Skip to main content

How to start a passive income business with a rental property

Imagine a situation where you invest in rental property, then sit back and watch the earnings stream in while someone else worries about fixing the plumbing. Is it that easy?

Well, it depends. It’s possible to earn steady money from rental property after investing some up-front money and time. After that, you can let someone else manage the daily headaches while you earn income and reap some tax benefits. Or, you can maintain an interest in a limited partnership capacity, keep your distance on the day-to-day tasks, and also call it passive income for tax purposes.

Image used with permission by copyright holder

Passive but earning

Passive income is generated when you are involved in a business and earn income but not as an active participant. The most common passive income comes from rental properties, limited partnerships, or ventures with a silent investor.

Passive income businesses such as rental property investment generate certain benefits that make them attractive. For one, the earner doesn’t need to be physically present and directly involved to generate income.

As a result, they may have more flexibility to earn from multiple properties or profit from a different business altogether. But to succeed, the investor may prefer to be more involved in the property.

Passive versus active

In tax terms, the level of material participation in a business defines it as passive or active. Some businesses are still considered passive even if the owner is partially involved. It’s important to consult a tax professional to determine if your rental business will generate active or passive income, and what tax breaks and deductions can be taken for your business.

Generally speaking, rental property investment is considered passive except for these scenarios defined by the Internal Revenue Service. For example, exceptions include if the rental property owner is a real estate professional, if the rental is leased out on a very short-term basis, or if the property is mainly used for other purposes.

Person at desk filling out paperwork
Image used with permission by copyright holder

Property types

Typical rental properties that are used for passive income generation are single-family units such as condos, as well as duplexes and other properties with multiple units. These can be secured with a residential loan, whereas apartment buildings, also popular for passive income, can be gotten with a commercial loan.

Mixed-use developments and industrial complexes are additional examples of rental properties to invest in and generate passive income.

Up-front work

For your rental business to succeed and generate predictable income over time, it’s important to invest your time at the beginning to ensure a sound business plan and viable rental property. You may want to take an active role in choosing the property and investigating the local market before making a purchase or investment.

This process will take considerable research and assessing of real estate trends, rents paid for similar properties, and typical tenants who will seek out such a property, as well as the property’s long-term viability and its likelihood to attract a steady stream of appealing tenants over time.

You, or a trusted third party, should also develop a well-informed business plan to sustain oversight of the property. This will address expenses for property management, marketing, tenant contract management, materials and equipment, furnishing of the units and lobby, regulatory and safety compliance requirements, necessary utilities, vendors such as cleaning service and building maintenance, and any regular repairs.

If you are only involved as a limited partner, possibly alongside other investors, then your interest in the property is distanced from the daily operations, but you will benefits from the state, local, or federal tax breaks, and receive proceeds from rents once they start rolling in.

Mistakes to avoid

To ensure a steady stream of passive income in the future from your rental property, it’s important to head off any potential hiccups at the start. Here are a few common mistakes to keep in mind.

Since the real estate market can fluctuate and affect your property’s appreciation, make sure you will have enough cash flow at all times to cover your expenses and still generate income.

Even though your goal will be to become less involved over time and benefit from “passive” income, you should still treat the property as a small business and pay close attention to details, especially at the beginning.

One example of this is tenant screening. It may be tempting to go easy on potential tenants in a rush to fill the building, but good tenants with steady jobs and credit profiles are key to your property’s longevity. Excellent screening measures are key when vetting those applicants.

Rent collection and strictly enforcing other contractual obligations is another way to ensure you are earning a steady, predictable cash stream. Flexibility in these areas can only lead to problems and inconsistent income.

You might prefer to hire employees or a management company to handle such day-to-day operations, particularly if you can afford it. How much time you willing to put in will determine how passive your income really is in the end.

Jennifer Lindahl
Former Digital Trends Contributor
Jennifer Lindahl is an experienced writer and editor with two decades of experience in journalism, public policy, and B2B…
Start teaching art with these supplies
the best art pencils

You enjoy art all your life, and you want to share it with others. You officially starting your art studio, and you want to teach others to express themselves through art. Art is therapeutic, and it destresses people from their troubles and worries of work or school. You have a lot of ideas on how to share your knowledge of art, which is to teach your art class. You can even do events that involve painting and listening to calming music. You believe that everyone is an artist, and you want to guide people to reach their creative potential in art.

You want to give the overall best experience for your students when it comes to art. You believe art should be expressed freely, and you want to guide your students to explore art in many versions. You want to believe that everyone can be an artist, and you want to help guide them to which artistic styles fit them. You have the knowledge that was collected through your journey in education and experiences, and you are ready to share that in your class sessions. You want to pass down your artistic knowledge to others that want to take a journey of exploring their inner artist.

Read more
5 tools to start your beauty salon
get product packaging beauty box set  bottles of natural cosmetics blogger skincare face

When starting a beauty salon, having the right tools is important. Before you open, making sure that your beauty salon is well-stocked will set you up for success. More importantly, it’s vital to invest in high-quality tools that take manicures, pedicures, and beauty treatments to the next level. Combined with great skills, tools elevate a client’s experience and make it likelier for them to return. Give your salon the tools it deserves and start your business on the right foot. It can be easy, effortless, and simple. 

From nail clippers to nail files, take the time to look for high-quality tools that take manicures, pedicures, and beauty treatments to the next level. Your clients will feel the difference, and you’ll enjoy using quality tools when you’re on the job.

Read more
Supplies you need to start your local Restuarant
Freshly baked loaves of bread

All your life you have enjoyed the taste and the smell of bread. You started to make your bread from home during your spare time. Making bread has started to become a hobby that you enjoy. You enjoyed making bread so much, you decided to make a career from it. You decided to buy a building, and you want to create your recipes for pastry dishes. You want to share your homemade pastry recipes with your hometown and sell your homemade bread that comes in different flavors. You can also have a small section where your customers can buy your homemade bread loaves.

When it comes to starting your business, you need a lot of creative ideas to start your business. You want your place to be perfect, and you want to gain the attention of people passing by your pastry restaurant. You cannot just sell bread, but sell different varieties of pastries such as pies, desserts, sandwiches, and biscuits. When comes to selling your bread, you have to be creative with your recipes and create a menu that your customers get to choose from what recipes they will enjoy. You want to promote your business, and it depends on how your start your business and how you influence your customers.

Read more