Updated: Mar 20
As the term suggests, passive income is any form of payment you are able to generate that does not require your time or presence. In other words, your money (or assets) work for you, as opposed to you working for money.
Ways to earn money passively can include receiving rent from properties, dividends from stocks and bonds, revenue from advertising and affiliation of your digital assets, royalties of owned intellectual assets and interest from peer-to-peer lending. There’s no shortage of books and courses advocating passive income streams through real estate investment, as well as various other methods, but there is a growing number of people claiming it’s a myth or a lie to suggest you can actually make money with little or no effort involved.
Passive income is a key theme from one of my most life changing reads, Rich Dad Poor Dad, in which Robert Kiyosaki defines wealth not by bank balance, but by financial survivability; i.e. How long could you survive if you stopped working? For many, that’s a question that has never been more relevant than it is today, and it can be frightening realisation just how reliant we are on employers and our health to be able to pay the bills and put food on the table. To hedge against this, many people strive to make passive income from a side-hustle while also working full-time, and even diversify into multiple streams of passive income at the same time. It doesn’t have to be about financial independence of course – many people would just like to top up their earnings for beer money, to put a bit extra into savings, reinvest, or pay for a nice holiday.
By Kiyosaki’s definition, passive income differs from ‘portfolio income’ whereby your assets go up in value, so the capital growth that can be gained from holding property assets over the long-term does not qualify as passive income. Other property investment strategies like flipping (buying and selling for profit) or holiday lets, are clearly not passive as they require your continued involvement, however buying and renting out property surely qualifies doesn’t it? Well, sort of.
First of all, there are a number of things that anyone looking to create an income from real estate needs to consider, particularly if you are new to property investment and you want to avoid making costly mistakes. All of these things take up-front time and effort in the beginning. You will need a lot of time to plan and execute: hours, days, months dedicated upfront before you are ready to invest:
Your strategy - You have to start with a plan and a set of goals that work for you, for your individual situation, your capital on hand, your desired future and the amount of time you have to invest.
Your investment area - Careful consideration of not only an area of a country, but a particular street in a particular town is required to ensure there is demand as well as attractive returns on paper. You will need to build a full picture of the type of tenant that wants to live in what type of house/flat, where in particular, why, and for how long to ensure you will be purchasing a true property asset rather than a potential liability.
Finding a deal - Once you find your area, the time will come to find the perfect deal, so knowing what that looks like and where to look is key. Knowing also what your perfect deals don’t look like, will help you to keep focused and not let daily Zoopla updates distract you from your goals. If your strategy is to find a bargain below market value, be prepared to spend a lot of time viewing a lot of properties, and having a lot of offers rejected before getting one accepted.
Building your team - Finding a property and agreeing a purchase is only part of the journey. You will need to find a good conveyancing solicitor, mortgage broker, surveyor, builder and letting agent to help you purchase that house, refurbish it and carry out all necessary checks, inspections and certifications to turn it into a real, legally lettable asset.
But now you’ve done all the work and you can just sit back and earn a steady passive income from home, right? Well, not exactly.
Now you are a landlord, you have a responsibility to look after your tenant and your property. Neglecting either is not only morally questionable, it will also add to your workload and expense further down the line. You can of course have an agency manage your property for you, but you will need to factor in the cost into your investment numbers, and remember that you still need to check in with your lettings agent regularly to ensure maintenance is kept up, inspections are carried out, safety certificates are renewed, the tenants are happy, and rent and bills are paid timely and accurately. Furthermore, as recent experiences have made all too apparent, you will also need to track and take actions to adapt to ever changing market conditions; whether that comes from a global pandemic, a recession, a change in legislation, or from increased competition that reduces demand for your property.
Although it's possible to outsource certain elements to reduce your workload, buying and renting out a property isn’t strictly passive income. That’s not to say it isn’t a good investment, but, it is by no means completely hands-off. If you are tempted by the increased yield of an HMO (House in Multiple Occupancy) you can multiply the amount of checking required to ensure full occupancy of all your rooms, and add on all of the legal checks, paperwork and licensing requirements to your workload.
However, there are other ways to make passive income from property, albeit indirectly; through loaning money to a property investment business as an angel investor. This type of investment works a little bit like a corporate bond, where you loan a business money in return for consistent passive cash flow in the form of healthy interest payments for the length of the term. They then invest that money into property to grow their portfolio and return the loan to you within a pre-agreed timeframe.
As with any investment you make, there are risks so be sure to do your own research and seek financial advice from a qualified source. Make sure you are confident in the people and the business you are investing in, how your money will be used, what the risks are, and what securities are offered. Although you would not own any assets, this route offers passive income in the truest sense, as your money would be working for you without the time and hassle spent in finding, buying, renting and maintaining a property of your own.
If you would like to know more about how you can achieve passive income through angel investment, please get in touch to find out how we can help.