How to Build Residual Income with Property

What Is Residual Income?

What is residual income? Residual income means the money left over from an investment, in this case, property, after expenses have been deducted. These expenses include mortgage payments, property maintenance, insurance, taxes, and other costs. Residual income, sometimes called passive income, gives a clear idea of exactly how profitable an investment is.

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To work out residual income, use this formula:

Gross income – total expenses = residual income

If the total is positive, it indicates that the property is making more money than it costs to maintain it. This is a sign of a profitable investment.

Property investment can be a great way of earning more residual income – this guide shows you different ways that you can generate residual income from properties.

How To Make Residual Income From Property Investment

There are a few different ways that you can start generating residual income from property investment.

Renting Out Properties

This is the most common way of earning residual income from property – you purchase a property and then rent it out. Pretty simple, right? Once the mortgage, if you have one, has been paid, and other expenses taken care of, the remainder is all yours. This strategy is not without its problems – after all, you have to consider maintenance costs as well as mortgage payments. You can cut down on these costs by managing the property yourself and taking on any maintenance tasks if you are handy with a drill. These activities will all cut into your time, so consider the money saved vs the time saved to make sure it’s worth it.

Renting Rooms in Houses in Multiple Occupation

Some rental properties are a wiser investment than others – HMOs, or Houses in Multiple Occupation, can be an even better way of making more rental income. HMOs let you rent out individual rooms to multiple tenants who share facilities like kitchens and bathrooms. HMOs usually enable you to make more money on a property than by renting it out to one individual or a family. This helps diversify your income stream, but be aware – you do need a licence to rent out an HMO. Consult your local authority for more details on this.

Flipping Houses

House flipping is a popular way of making money through property investment. The idea is simple – you buy a property, invest some money and time in renovating it, and then sell it for more than you paid and invested. Consider the market value of other properties in the area, how much it would cost to get the property ready to sell again, and any selling fees to get a realistic idea of how much residual income you could make. It’s essential to manage your finances effectively for house flipping to be worth it. Take into account factors like acquisition costs, mortgage payments, taxes, fees, and selling costs. Taking the time for proper financial planning and budgeting will make sure you get a positive residual income from house flipping.

Investing In Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust is a company that makes money for investors through property. REITS can be a good way of generating some residual income. They allow you to invest in a number of different types of property, such as residential, commercial, industrial, or retail properties, with just one initial payment. Some REITs even allow you to invest with as little as £50.

To invest in REITs, you can put money into the REIT itself, or buy shares of publicly traded REITs on stock exchanges. If you have invested in the REIT itself, you can get regular payouts in the form of dividends, which are not subject to income tax.

Investing in REITs is a pretty safe option, but as with any investment they are not without risk – the shares can fluctuate, and dividends are not always guaranteed. You won’t make quite as much money through a REIT as you would investing your money directly and buying a property yourself, but REITS can be good for first-time property investors. They are managed by experienced professionals who handle things like property acquisition, management and leasing.

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Things To Look Out For When Building Residual Income With Property

It might sound like an easy way to generate residual income, but there are some things to look out for – consider these things first before taking the leap into property investment.

Researching The Property Market

People will always need places to live and work, so it seems like a pretty safe bet to invest in property. However, some locations are better than others for property rentals. Analyse local property prices, demand, and market trends in the specific area where you plan to invest. Take a look at rental prices in the area, plus other factors like local economic growth, local zoning and regulations, and general economic trends.

Assessing Potential Risk Factors

There are a few risks that you must be aware of when investing in property for residual income. Property values can fluctuate due to things like market conditions, local supply and demand, and economic factors. If your plan is selling your property, e.g. when flipping houses, you could actually lose money.

Be aware of the economic downturn affecting property prices and rental income – the whole economy took a big hit from COVID which it is still recovering from. COVID-19 lockdowns drove the price of office properties down, as a lot of companies switched to remote working and stayed that way even after lockdowns were lifted.

Legal requirements for landlords may change, resulting in more expenses for you and impacting your residual income. Keep up to date with changes in legislation, taxes, or regulations, and ensure your rental properties stay up to date with regular maintenance.

Renting out properties to tenants can have many pitfalls – non-payment of rent, legal disputes, unexpected repair costs and property damage can all cut into your bottom line. Consider screening tenants first before entering into a rental agreement with them to reduce these risks. There is also the possibility of your property sitting empty between tenants, during which time you will still have to shell out for the mortgage and other costs.

Even with the above risks, investing in property is still a great way to generate residual income. Just make sure you do your research and due diligence, weigh up the risks and benefits of each type of property investment, and seek expert advice before investing your cash.

Before you go …

We hope this article has helped you find the answer to the questions; what is residual income and how can property help you acquire it? If you are interested in building residual income through property then you’ve come to the right place. Join our upcoming free property training here.