How to turn $10,000 into a passive income empire
Eight years ago, I bought my first condo with just under $5,000 down. We only lived there for a few years and when we moved we decided not to sell and rent the condo.
We made good money out of it for the first few years, but you sure can’t call it passive income. Between tenants, we spent hours cleaning, painting, fixing, listing, showing and screening tenants. And when we had tenants, we spent hours and tons of money fixing things and listening to complaints.
Since then, we have moved several times and now have three rentals that generate totally passive income. I’ve spoken to the property manager maybe once a quarter, but I have to cash checks every month.
Here are five steps to turning $10,000 (my inflation-adjusted down payment) into a passive income empire.
1. Start small
The first step is to buy your first property. I would recommend buying it as a residence. Because we lived in the condo for over a year, I only had to put down 5% to buy the condo. If you’re buying an investment property for the sole purpose of renting it out, you’ll probably have to put 20% or 25% down – more likely 25%, if you’ve never owned a rental before.
With a $10,000 down payment, living in the property versus buying it as a rental is the difference between being able to buy a $200,000 property and a $40,000 property. So, the advantage of living in rental first is clear.
Living in the rental will also give you time to learn the locality, solve easy problems, and generally learn more skills for the unit. You can also use the time to save for your next property and have cash reserves.
2. Create an automatic savings plan
Each month, one of our brokerage accounts automatically withdraws money from the bank account. Currently, he draws about 15% of our take-home pay each month. It was higher in the past, especially before we had to pay for daycare, but the key point is that the amount is automatically taken each month.
Once it enters the brokerage account, I invest it in ETFs of low-risk municipal bonds and low-volatility stocks paying dividends. For our “deposit account” we don’t want the risk to be so low that the returns are at the level of a savings account, but we also want to be able to take real estate opportunities when they arise. present. any stock that can drop 30% or more in six months is out.
Over time, we accumulate enough cash in this account to buy another property. So far we have moved each time and lived in the neighboring property. Eventually, we’ll stay in a long-term residence and start using that money to buy rentals directly.
3. Put the properties in an LLC
Once you’ve accumulated a bunch of properties, it’s time to incorporate them into a Limited Liability Company (LLC). This will protect you from personal liability and help centralize the accounting and finances of your properties.
We did this by refinancing all three properties into one commercial loan and forfeiting the deeds in the new LLC. The LLC now owns the properties and therefore has liability. Not only does this reduce our risk, but our credit reports are much better, so it will be easier to buy another house in the future.
4. Hire a property manager
Property managers are the key to turning your rental income into true passive income. Being a landlord is a ton of work. The property manager will find and select new tenants, take care of the small issues and hire someone to take care of the big issues, keep the direct accounting of the property online and sometimes even help you sell the property when you are ready.
5. Build your empire
Once you have your process in place, keep going. Set aside reserves, invest some of your savings in the stock market, then place the rest in your deposit account. The faster you can buy new properties, the more cash flow they will free up that can go into the deposit account.
Soon you will have the savings to buy a new property every few years using only the cash flow generated by your existing properties. And then, eventually, you will have enough cash flow from your properties that you can stop buying and stop working, living on that income alone.