Is Rental Income Considered Passive Income?
The Wealth Gang team writes about financial information, passive income ideas, apps, programs, cash management tools and other wealth gadgets that we think you might want to use or learn more about. Sometimes, we write about products, services or items that might be associated with affiliate partnerships. In these instances, we will earn a small percentage of the revenue from sales. There is, of course, no cost to you.
Thank you for all your support! Without you, we could not keep this site running. Gang Gang!
For many people, the search is on for a source of passive income. This is a way of making money that allows you to bring in cash regularly without any need to work for it on an ongoing basis. It is no surprise that it is such a sought-after way of earning cash.
However, not everyone is clear on whether certain types of income are classified as passive or not. A good example of this comes with rental income. Should this be viewed as a source of passive income or it is something different?
There are a few different points to take into account when looking at this matter. Let’s take a look at what sort of investment it could be for you.
How Much Work Do You Need to Do?
We can begin by seeing what passive income really is. This is money that comes into your account regularly, and one of the key defining factors with passive income is that you don’t have to work hard for it.
This compares favorably to active income, which is what you earn by working for it day after day. On the other hand, passive income just keeps rolling in no matter what you do with your time. This is why it is so popular with people who want to retire early or live a more relaxed lifestyle.
The truth is that this income source isn’t always as simple as it might appear to be. When thinking about buying a property to let out, you may think that you will just need to count the rental income as it rolls in from then on in.
Yet, there can be a lot more work involved in this sort of project. What if you need to deal with repairs to the property? A troublesome tenant can also give you lots of work if they are always complaining or you need to chase them up for payment every month.
Then there is the situation when you lose a tenant and need to look for a new one. How much time will this take you to sort out? Will you pay an agency to do it for you? If you have several properties then running them can easily turn into a time-consuming job.
So, is rental income passive income in terms of the ongoing work that it involves? In the best cases, you may have a trouble-free tenant who stays with you for years, and a property that never needs work done on it.
However, it is more realistic to expect that this involves a bit more work than other passive income streams. Hopefully, it will be a lot less than you would need to do in a full-time job. Yet, we can’t just class it as a source of income to set up and forget about.
Is the Income Stream Reliable and Consistent?
The next major point is around how reliable and consistent the earnings are. Can you feel sure that you are going to get a handsome amount of cash paid to you every single month for the rest of your life? This is one of the overall goals of passive income, after all.
When letting out a property, you will feel that your income is virtually guaranteed for the length of the current tenant’s contract. While things can go wrong during the period of a contract, this is as close to a guarantee as you can hope for.
After that contract runs out, it is a question of lining up the next contract. How easy this is will largely depend upon supply and demand in the local market. Is your property still desirable? Have rental prices risen or fallen since the last contract was signed?
It would be fair to call this a reasonably reliable and consistent income stream. However, it may vary over time, as you need to look for new tenants who will pay the same level of rent that you are currently receiving or more.
What About Costs?
Is rental income passive income in terms of not having ongoing costs? The perfect type of on-going income is when you receive pure profit every month with no outgoings.
When letting out a property, this is unlikely to be the case. You may need to pay a mortgage, taxes, repairs bills, and a range of other fees. All of this can mean that some months you end up losing money rather than earning it.
It is worth remembering that some people choose to rent out a property for the growth in the capital invested, rather than for the income stream that it may provide.
For example, it may be that the monthly mortgage payment is similar to the amount that a tenant pays in rent. In this case, you don’t earn any stream of income from it. The benefit in this case is that you get value from any increase in the property’s value.
As long as the value rises or its rental price goes up, you should end up a winner in the long run. Yet, you certainly shouldn’t be counting on rental income giving you a cost-free income month after month.
There are some clear benefits to buying a property and letting it out. This can turn out to be a very smart financial decision for your future.
Is rental income passive income in the truest sense of the word, though? It does give you some of the benefits that you would expect but there are other elements that might not be quite as good as you had expected.