3 Easy Steps to Start Building Your Passive Income Stream Today!
You know what? It’s my birthday week. And I am feeling a little gushy, a little wound up, a little fired up, and overall, it’s been a pretty decent week. We’ve been through some tough stretches on several deals, but overall, by the end of May, we will have closed several awesome flip deals, bought several new rentals houses, and added another $1,000 or so to our monthly passive income.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
Let me backtrack for a minute and give a little more clarity on this past week and the lens I am looking through as I write this.
As some of you may know, I am also a professional musician and worship leader at an amazing church, and I have played music since I was a grade schooler. This week I had the honor of playing at the funeral of a man not much older than myself. He left a wife and a family. He died young. I have played at numerous funerals over the years, but there was something very hard but also very special about this one. Everything about this person spoke to me, from his passion for the KC Royals to the driving nature of his personality to my desire to take care of his family.
My world revolves around my beautiful wife and two children, whom I adore. And working many, many hours keeps me from seeing them more than I would like. Moments like these, seeing the pain and sadness of a family missing their loved one, really puts things into perspective. It makes us look within ourselves how we otherwise wouldn’t.
Here is what I am getting at: Are you living the rat race? Living by the month-to-month paycheck? The no savings. The heartache of having to barely scrape by to buy groceries, let alone take the family on that amazing Disney family vacation. Have you thought about what you are working so hard for? For your spouse? For your family? For your legacy?
What is your “WHY?” What is it that drives you to work so hard? I can hear my daughter’s laughter as I write this now… nothing like a little reminder and a little more motivation (and a little Lego playtime too).
The Power of Passive Income
We are all in different places with our income, our budgets, and our portfolios. Our real estate investments, our knowledge, and our experience. All these things drive what we can do, what we do do, and what we want to do.
How would you feel if you knew that no matter what happened today, your family was taken care of?
To me, passive income trumps everything when it comes to your family’s stability and opportunity. It is what takes you from working to earning. From tied down by a job to flexibility, higher earning potential, exponential growth, and freedom.
Looking back at that family again, I don’t know any details about this man’s financial picture, but at his funeral, they talked about how he had planned everything, down to the last details. And his family was taken care of. What that means exactly, I don’t know. But he made the effort to make sure they were taken care of, and whatever he did was enough for them to mention it at his funeral.
I know for me — God forbid — if something terrible happened, my wife and children would be too. We have life insurance, and we have all the things in place to make sure they’re taken care of. But I am NOT talking about the worst case scenario stuff. I am talking about LIVING.
I am talking about not missing out on the small stuff: my children walking, learning to ride their bikes, playing in the sandbox, going for ice cream, taking family vacations, going to the Royals game. (Probably another World Series this year, if we are being unbiased and honest too.)
Passive income in my life has allowed my wife to stay home. It’s allowed us to pay for a nice vehicle for my wife and lots of room for the kids. And it’s given us flexibility and freedom to have things when we want them, but also income to then turn back into more rental properties, which translates to — you guessed it, more passive income. Ultimately, the goal is to have far more passive income than what your monthly expenses are and therefore be able to do more within other investments.
But depending on where you are, you might be having a hard time seeing where to start. Let me help. Let’s look at 3 simple steps to start your passive income stream.
3 Steps to Create a Passive Income Stream Using Real Estate
1. Assess your goal. What amount of passive income do you want?
Is it literally a few hundred dollars a month? Is it $1,000 to cover your own mortgage? Is it $4-5k monthly to cover all your expenses? Or is it $20-30k monthly?
Set a goal, and then break it down to what each house brings in after all expenses. Also have a solid number of what you want to make and why. What is that paying for? You can help yourself visualize the income, your goal and what it looks like when you get there.
Keep your “why” (wife, home, put kids through school, buy a vacation home, no debt, etc.) in mind to help drive your thinking. This will also help you put into perspective how much income you really need. It might actually be less than you think.
2. Figure out: What will it take to get the house rent-ready, and then what will each house make?
As you look at the houses, consider if you will be putting a mortgage on the house or if you will be financing it. Also, if you are going to have to do significant rehab on the property before you rent it, make sure you know how you are going to get the funds for that house, and if you are planning to use bank funds. The bank understands what you are going to do. If you have a clear plan in place, you know how much the house is to buy, how much it will rent for, and how much total expenses it takes to hold it. You will be prepared for that conversation with your banker or private funder.
Go through and make sure the house looks great, and that people will want to live in the area and in that home. Buy in areas that are desirable to live in and where homes will rent quickly. Not sure? Ask other realtors, investors, and local real estate professionals in the area.
In my market, and with the houses we buy, we are able to get about $300-$400 per door. So for example, if our goal was $4k a month, it is 10-12 houses or so. These are C+ class rental houses. If you were going to just go buy one totally done, you would be in the $60-$70k range. These are all just ballpark numbers, but at least you have an idea.
3. Buy a house.
Seriously! Buy one! To live in, if necessary. If you don’t own one yet, buy one. House hack. Get 2-3 roommates to pay your mortgage. Don’t over-buy something because it’s beautiful or in the perfect neighborhood. Buy it because it will rent well, and it’s a solid investment. We added significant dollars to our net worth just with buying the house we live in. Not because it’s perfect, but because it was a great deal. It was a flip kind of house, and that we did for ourselves.
If you already own your house, look seriously at what it would rent for. Would it meet the criteria for what you want your rental houses to make each month? If so, consider turning that house into your rental, buying a fixer upper house, and rehabbing (actual practice for future flip deals) and living in it — look at the instant equity you just created.
Sometimes the hardest part is the last step, the action part. Making a decision. No more analysis. You just have to take the leap and do it.
Above all, find people along the way — real estate agents, investors, insurance agents, and contractors that you enjoy working with and that you trust. Business isn’t built on a one man show; it’s built on a foundation of professionals who make possible all the facets that are required to make a real estate investment deal come together.
What are you working hard for? What will passive income do for you? And what’s YOUR goal in houses?
Leave me your comments below!