The Part-Time Investor’s Guide to Truly Passive Rental Income

by | BiggerPockets.com

Working 9 to 5 but trying to build some extra income streams?

Rental properties are a classic income-producing investment and can help you reach your goals of financial independence. With enough investment income, you can quit your job and spend more time with your family, travel the world, volunteer, or go work a not-so-high-paying job you just like more.

But do rental properties create truly passive income?

Not every month. When you have a vacancy, it will probably take 10 to 20 hours of work to find a responsible new tenant. Then there are the maintenance problems, property emergencies, and repairs. Occasionally, you’ll have a nightmare tenant who takes you to court or decides they aren’t going to pay the rent anymore. It can leave you scrambling to create more time for your real estate investments while trying to balance all the other demands on your time.

Still, few investments can rival rental properties for predictable cash flow and return on investment. As a working professional with a full-time job, a family, a social life, and (hopefully) some hobbies, how can you earn some extra money from income properties without draining time from the rest of your life?

In other words, how do you maximize the “passivity” of your rental portfolio?

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Related: Passive Investing: How to Have a True “4-Hour” Real Estate Workweek

More Cash Flow Means More Options

Your march toward passive income starts before you ever buy a property. You must, must only invest in properties with truly strong cash flow.

Why? Because with good cash flow comes the option of hiring a property manager to handle all the headaches for you.

Advertising vacant units for rent? Done. Screening tenants? Done. Signing leases, collecting rents, handling repairs? All handled by someone else—but only if you can afford to pay them.

A $2,000/month rental with $200 cash flow is not going to cut it. Your entire cash flow would go to the property manager, leaving you with nothing to cover repair costs, accounting costs, vacancies, etc.

It will mean much more work invested up front, a more difficult hunt to find only properties with outstanding cash flow. Be sure to calculate estimated annual repair costs and capital expenses, vacancy rates, property management fees, accounting fees, and other oft-overlooked costs. If the property still has good cash flow, then full steam ahead!

Avoid the Slums

Low-end housing means low-end tenants, and low-end tenants are more likely to be difficult and time-sucking. They are less likely to pay the rent on time (if at all), making you chase them in court for it. And the way they’ll treat your property? Don’t count on kid gloves.

You may think that the cheap house that more than satisfies the 2% rule is a good find. But how about when it’s vacant four months out of the year? And what about the carpet replacement and new paint job required every single year, as tenant after apathetic tenant abuses your property and eventually has to be evicted?

Speaking of bad renters, just wait until you’re hoodwinked by your first professional tenants, who just game the system.

Oh, and if you think anyone will laud your efforts to invest in affordable housing, think again. You’ll be vilified as a “slumlord.”

These are hard lessons I learned the hard way, after some starry-eyed mistakes in rough neighborhoods. Skip the slums and invest in middle-class housing if you want your rental income passive instead of passive-aggressive.

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Related: The Truth About Passive Income: Is it Ever REALLY “Passive”?

Screen the Living Daylights Out of Tenants

How does passive income happen? It’s a by-product of leasing to good tenants who pay their rent on time every month, rather than calling you every month to whine and moan.

Finding those tenants means getting extreme with your tenant screening. Credit reports and criminal background checks are just the start. You should also run eviction history reports, that include nationwide data. You should call up their employer, chat up their direct supervisor about what kind of employee they are, then transfer over to the HR department to confirm their exact income.

Did they exaggerate their income? Don’t lease to them. If they lie about little things, you can’t trust them about the big things.

Walk through their home! You can be sure that how they treat their current home is how they’ll treat your investment property.

Good tenants will leave you free to work your 9 to 5 job in peace—no muss, no fuss, just truly passive income.

Lease Long-Term

Turnovers are where most of the work—and expenses—lie in managing rental properties. If you want more passive income, shoot for long-term leases.

Lease for two, even three years if you can. Sell the idea by telling new tenants that you typically raise rents by $25 to $75/month every year, but tell them you’re willing to lock in the current rent price for them.

And all the Airbnb buzz in the burgeoning vacation rental industry? Sure, you can theoretically earn more money in a given month—but at what cost to your time? From coordinating with vacationers to deep cleaning the unit between each tourist that comes through, it’s a lot more work. If you must go this route, hire a vacation rental manager to do the work for you. Just know that they will charge more than typical property managers because they do more work.

Retention Is the Name of the Game

Remember a few paragraphs ago when we talked about turnovers creating massive work for you? Let’s talk a little more about that.

Keeping good tenants needs to be a priority if you want to keep your income passive. You can postpone the heavy work and expense of turnovers indefinitely by renewing leases with your best tenants.

Beyond avoiding the work of turnovers, new tenants mean new risk. No matter how well you screen your applicants, there’s always a risk they’ll turn out to be no good. But you already know that your current good tenants pay the rent on time and treat your property well.

Birthday and/or holiday cards are a good start and cost almost nothing. Keeping a note in your file about their children’s names, their job, or their hobbies costs you about 30 seconds, but asking your tenant about them sends the message that you care and you think of them as people, not just check-writers.

Occasionally make property improvements—it will encourage your renters to stay, and when they eventually leave, it will continue paying for itself in attracting good tenants and higher rents. The cost of upgrades is even tax deductible, either immediately as a repair or depreciated as a capital improvement.

Passive income doesn’t happen on its own; it’s designed. It starts with which properties you buy and continues with how well you attract, secure, and retain excellent tenants. With a little strategy and a proactive approach, you can build an empire of income properties—all from the comfort of your full-time job.

[Editor’s Note: We’re republishing this article to help out our newer readers.]

Where have you found yourself tangled up spending time on your rentals? Have any tips to share for streamlining properties and maximizing passivity?

Share your stories, so someone else can learn from them!

About Author

G. Brian Davis

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their living expenses. Through his company at SparkRental.com, he offers free rental tools such as a rental income calculator, free landlord software (including a free online rental application and tenant screening), and free masterclasses on rental investing and passive income. He’s been obsessed with early retirement since the early 2000s (before it was “a thing”). Besides owning dozens of properties over nearly two decades, Brian has written as a real estate and personal finance expert for publishers including Money Crashers, RETipster, Think Save Retire, 1500 Days, Lending Home, Coach Carson, and countless others.

31 Comments

    • Katie Rogers

      Okay, but how do they get out if they want to buy a house? Or get a better job somewhere? And also, if the landlords is exemplary, even on a month to month, you will have long-term tenancy. There is no need to trap tenants with leases.

      • James Barnhart

        I agree with Katie. I have long term tenants, screen then carefully, and want to keep them as long as they want to be there. But, I only rent on a month to month basis. I don’t trap tenants, and if there is an issue, such as the woman moving her boyfriend in, unscreened, I just give them a 30 day notice to leave. Now, that is passive income.

      • Curtis Mears

        In my state, a tenant can break the lease and the landlord is responsible for finding another tenant. But it is not all bad as the current tenant is required to pay rent until a new lease is signed. For the landlord, this means you have zero vacancy and you should still have a good tenant if you are screening properly. I have had several properties that have not had any vacancy for several years even though 2 or 3 tenants have come and gone. Would I rather have a good tenant stay forever, sure. But having zero vacancy is nice if the current tenant is leaving.

      • rob Aliberti

        I agree with you. We always do a 12 month lease and require 90 days notice if they are not renewing. In addition I have an early termination clause that that requires them to pay three months rent and utilities or until I can replace them whichever comes first.

        I also don’t see any need to “chat up” a supervisor our tenants bring us six months pay stubs.

        • Katie Rogers

          90-day notice? You better check your state laws. It is more likely 30-day notice. 90 days is excessive. 6 months of pay stubs is also excessive. A lot of tenants are looking for a place because they are starting a new job. If tenants are paying you for utilities then utilities are simply part of the rent. If the gas and electric bill goes to the tenant, they are under no obligation to pay you to keep the utilities on after they leave. Three months? Well, that relieves you of the responsibility to make an effort to replace them. Besides, how will they ever know you replaced them. sounds like a way to double-dip. When I was a tenant, if I read these kinds of provisions in the lease, you would not pass my landlord screening. But i can see why you favor trapping tenants with a 12-month lease.

  1. Chris Billington

    Great info! Love the hint to chat up the tenant’s supervisor – never thought of that! Also the leasing longer term focus. What do you think about pricing slightly under market to increase the applicant pool. I’m always shooting to rent as soon as possible to a stellar candidate (easier now in the hot Denver market).

    • G. Brian Davis

      Thanks Chris! I personally don’t like positioning my rentals as the “cheap” option in the neighborhood, I think you can attract better renters by positioning a rental as a higher-end option in the neighborhood. But ultimately it depends on some of the unchangeable aspects of your rental – if it genuinely is a lower-end layout or location in the neighborhood, then by all means compete on price.

    • G. Brian Davis

      As someone who owns some affordable housing in Baltimore City, I can say from firsthand experience that I’m always the “bad guy” in court, held to a much higher standard for evidence than my tenants. My rentals are much, much nicer than most in the area, but that doesn’t matter when you’re arguing in front of a judge and the tenant is trying to thread a loophole or game the system. Of course, not every market is as tenant-friendly as Baltimore, and not every tenant population is as antagonistic. I would urge rental investors to invest in those sorts of markets, not aggressively anti-landlord markets like where I cut my teeth.

  2. Mark Douglas

    Great advice Brian! One question, you mentioned walking through the prospective tenant’s current residence..? Do you ask them if you can look at the place they’re living in..? If so, is that for every applicant or just the ones you feel have a good shot on paper, before going to their home..?

    • G. Brian Davis

      Thanks Mark!
      I only physically walk through the homes of applicants who otherwise check out. It’s the last thing I do, when screening tenants. In fact, I usually drop by on the pretext of dropping off a copy of the lease to go over with them.

  3. Matthew Ward

    Great article! I’m new to researching being a landlord and plan to be purchasing my first property within two years. I’ve heard so many horror stories from friends and family that have rental properties, but most of them have them by default. I always thought proper screening is one of the keys to not having most of the headaches they have. These little tips you speak of will surely help me in the future. Thank you

    • G. Brian Davis

      Thanks Matthew, and you’re right on the money when you draw the distinction between accidental landlords vs. intentional, strategic rental investors. Good things don’t usually happen by accident, they happen based on intentionally creating a specific outcome.
      Talk to as many grizzled veterans in your area as you can, find a mentor or a senior partner for your first couple deals, and don’t be afraid to jump in and start earning some rental income!

  4. Matt Schuberg

    Great article Brian. I agree that everyone should work on making their income as passive as possible. This gives them more freedom and potential for scale.

    I think investors should also consider other passive real estate investments, such as turnkey properties, syndication, or crowdfunding. These all have their unique advantages, depending on what the investor is looking for. Thanks for the post!

  5. It’s incredible how few people think about renting. We all have something to rent, from some equipment to real estates. We can make these work for us and generate money without us moving a single finger. It’s that simple. I couldn’t say it any better: More Cash Flow Means More Options.

  6. Jorge Ydlibi

    Hello Brian and thanks for the insightful article! In regards to lease terms longer than a year.Would it not be better to always first sign a tenant to 1-year lease. This way you can see how they perform for you during the first year and see if you want to give them the option of a longer term lease after you have actual knowledge of how they behaved for you.
    Thanks in advance for your input!

  7. John Teachout

    We never sign less than a 1 year lease. Most people renting a single family home expect a longer lease and since turnovers are costly, we want to keep those to a minimum. While a 30 day notice gets a tenant out of your house, it works both ways and makes for an uncertain income stream. I can see where if I was renting an apartment I would consider something less but not for a house. The lease also provides some protection for the tenant too as their stay is guaranteed for a known period of time.

    • Katie Rogers

      A year-lease is for the landlord’s benefit, not the tenant’s. If the landlord is a good landlord, the tenant will stay, often for many years. If the landlord is not a good landlord, the tenant has a recourse—they can just give notice and leave. A good landlord will not have an uncertain income stream. A lease benefits both bad tenants and bad landlords.

      • John Teachout

        I’m just not going to be interested in renting to someone that won’t sign a lease for at least a year. And for single family homes, I don’t think it would be easy to find one for rent that doesn’t require that. A lease is an indicator of stability for both parties. For those people that think landlords are always out to get them, cheat them, financially abuse them, etc, they can buy their own home and be committed for the next 20 or 30 years. A year isn’t a long time to live in one place. (and of course we hope our tenants stay for a decade).

        • Katie Rogers

          That is just landlord justifying to themself a power differential and a tenant trap. Asa landlord, I prefer a good faith relationship and the ability to give a 30-day notice if the tenant turns out to be as bad tenant.

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