Examining Whether Rental Properties Count as Passive Income

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Real estate investment is prevalent because the property should appreciate over time while building equity. The result is a steady passive income source that helps you build wealth throughout your working years and create a nest egg for retirement. 

Your investment might not count as passive income, though, as it depends on a few factors, like how much time you put into managing your properties. Passive income also depends on making monthly profits, which some investors struggle to do in their early years. This guide will explore some questions you might have about rental property passive income in the Washington, D.C., area.

What Is Passive Income?

Passive income is any money you make from your investments without materially participating in their operations. Investing in a retail store or residential real estate complex typically counts as passive earning.

You can also accumulate passive earnings from dividend stocks that generate monthly income. The goal is to have money coming in without actively working for it when developing a passive income stream for your family. 

Situations Where Rental Income Isn’t Passive

When is rental income not passive? It depends on how much work you put into managing the property. Some situations could turn your investments into active income and hurt your passive income rental property tax status. Here are some scenarios where your income might not be passive for tax purposes:

You Work in Real Estate

Real estate professionals must be careful about passive rental property income because your tax status changes when 50% of the services you provide in a year are in the real estate industry. This scenario could limit your ability to make passive income, but you’ll want to speak with a tax expert before making a decision. 

You Rent the Property to Your Business

You can’t rent a property to a business you own and count the income as passive. Your rental income in this scenario is active because you have an interest in the company that stands to earn income from the property. 

You Invest Too Much Time

Spending too much time working on your rental properties could turn them into active income. These properties have to take more than 750 hours of your time each year for this to be an issue, though, which would likely mean you own multiple properties. 

You can own as many rental properties as you can afford and retain your passive income tax status as long as managing them doesn’t become your full-time business. Learning the ins and outs will show you how small investors are making passive income in real estate.

Seven Tips For Making Passive Income in Real Estate

The goal is to turn your rental properties into a steady monthly income stream, but it’s unlikely to happen overnight. You’ll need to develop goals and create a plan to accomplish them before you begin achieving the results you want. Some tips that could point you in the right direction include:

1. Use Leverage

Leverage is when you borrow capital to increase your potential return on investment. This idea is relatively straightforward in real estate because you’ll take out a mortgage to pay for a property you otherwise couldn’t afford since the ultimate payout is typically far greater than a home you could afford with cash. You can also leverage the equity you gain in one home to pay for another investment property in the future.

2. Research the Market

Buying a rental property in the right area is essential. You could find a perfect-looking house at a reasonable price, but things will quickly go south if the neighborhood is dangerous or doesn’t have the amenities renters are seeking. Carefully research the local market and its quirks before diving into an investment to ensure passive income is possible in the area.

3. Consider Your Additional Expenses 

It’s easy to overlook other expenses a rental property requires. These costs include maintenance, repairs, utilities, and landscaping, which will take time, money, or both. You’re also responsible for replacing appliances, so there’s more than the mortgage to consider when it comes to your property costs. 

4. Make a Large Down Payment 

Putting down as much money as possible reduces the amount you’ll have to borrow and creates a more significant passive income stream earlier in the process. This scenario means your monthly mortgage payments could be lower, so more of the money you charge for rent goes into your pocket at the end of the month.

5. Pay It Down Quickly  

A shorter-term mortgage that you pay off quickly helps create a more significant passive income stream earlier in the investment process. Some mortgages allow you to make double or lump sum payments to pay it down more rapidly.

6. Screen Your Tenants 

Your rental property’s ability to generate passive income relies on the tenants renting it. Problem tenants could make late rent payments, damage the home, or take more of your time, which are issues for landlords. Taking the time to adequately screen every renter is worth the hassle because it’ll make your life easier in the long run.

7. Hire a Property Manager 

A property manager can remove significant work from your plate and turn real estate into a genuinely passive income stream. You’ll be responsible for at least some work without a property manager, but making this hire ensures you can be as hands-off as you wish regarding your investment. 

Following these tips can help you reach your passive income goals. The result is a rental property that makes you money every month without much effort on your end whatsoever. 

Get Help Meeting Your Passive Income Goals

Passive income is all about having additional money coming in without doing extra work. You’ll have to invest your money to earn passive income, and real estate is a popular avenue because it builds equity and provides income while your renters pay your mortgage. 

Nomadic Real Estate offers property management services in the Washington, D.C., area. We’ll help ensure you have responsible tenants in your units while taking care of maintenance and the rest of the time-consuming, day-to-day tasks that could make real estate unappealing. Contact Nomadic Real Estate for more information about your Greater D.C. property management needs. 

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Enhanced Reporting

Your portal includes a selection of extremely useful reports. Reports are available in the “Reports” section, and are distinct from the financial statements. Unlike financial statements which are static records, Reports are dynamic real-time records that will update with current data every time you view them. 

Scroll down to learn more about Reports:

Navigate to the "Reports" module in your portal:

  • Keep in mind, these reports are dynamic records. They will refresh to display current information every time you view them. 

Enhanced Rent Roll Report:

  • The Enhanced Rent Roll Report will show the rent amount, last payment date, move-in date, lease expiration date, and security deposit amount for each of your tenants. 
  • It will also show a portfolio summary with occupancy percentage, vacancy loss, and more!

Unit Comparison Report:

  • If you own multiple units (or buildings) with Nomadic, you’ll get access to the Unit Comparison Report. 
  • This report enables you to quickly compare financial performance between your units at a glance without toggling between individual reports. 

Income Statement Month-Over-Month:

  • The Income Statement Detail – Monthly Report serves as a month-over-month record of portfolio performance. You’ll see itemized income and expense categories and can track monthly. This report will update with fresh data every time you view it. 

Financial Statements

Financial statements will be published to your portal on a monthly basis. The statements are found in your Documents library, and provide a historical record of all financial performance. The statements serve as a snapshot of financial performance over a given period, and are static documents (unlike Reports, the statements do not update/change in real-time). 

Scroll down for more info about the Financial Statements in your Documents library:

The Documents area contains monthly financial statements:

  • The statements in the Documents are are static documents. They are posted to the portal once a month to serve as a historical record of financial performance. 

Download a statement to see month and YTD financials:

You'll also find a month-over-month operating statement:

Portal Communication Tool

You can use your owner portal to communicate with our team. Any messages you send through the portal will go straight to your Account Manager. When we reply, you’ll get an email notification and you’ll also see the message in your portal next time you log in. 

Here’s an overview of using the communication platform:

Click "Communications" and navigate to "Conversations":

  • The communications module will contain a record of all messages that you create through the portal. 

Click the "New Message" button and send your message:

Responses will show up in the conversation ticket:

  • You’ll get an email notification whenever you get a response, and you’ll also see the message in your portal next time you log in. 

You can reply in-line using the comment box:

Each conversation will be logged in its entirety:

Understanding the Ledger

Your portal includes a ledger with all transactions. The ledger is populated with data in real-time as transactions flow through our accounting software. Much of this information is also available in the Reports area, as well as the Statements in your Documents library, but the ledger is the most comprehensive resource for diving into the details. 

Please scroll through the sections below to get a better understanding of how to interpret the ledger. 

By default, transactions are sorted chronologically:

  • The date reflected in the lefthand column is the actual transaction date, not the “bill date”. This is the date the transaction was actually processed. 

If you have multiple properties with Nomadic, you'll see the address for each transaction in the "Location" column:

  • You can filter the ledger to look at just one property, all properties, or specific sets of properties. 
  • If you only have one property with us, you’ll just see the ledger for that property. 

The Description column displays the transaction type:

  • BILL: this is an expense transaction, such as for repair costs or management fees.
  • CHARGE: this is a transaction  billed to the tenant, most typically a rent payment. 
  • NACHA EXPORT: this is a credit we processed to your distribution account. This type of transaction is how you get paid! 

The Amount column shows the dollar value of each transaction:

  • Positive Amounts: if an amount is positive, it reflects a transaction that is payable to you. Typically, this will be a rent payment that we collected from your tenants. On occasion, a positive number could also signify a journal entry or credit adjustment. 
  • Negative Amounts:  if an amount is negative, this is a transaction that is either payable to Nomadic or is an amount that has already been paid to you. Typically this will be for repair costs or management/leasing fees. Owner draws (net distributions into your checking/savings account) also reflect as negative amounts, since they have already been paid to you. 

The Account Balance column shows a sum of positive/negative transactions at a given point in time:

  • Account Balance should always equal zero after a net distribution has been processed. When the balance is zero, this means that all expenses have been paid and you’ve received the remainder as net operating income, leaving a balance of zero (meaning: no one is due any money, as all funds have been distributed appropriately). 

Navigating the Propertyware Owner Portal

Your portal includes some extremely useful features that help you understand your property’s financial performance at a new level, with real-time transparency into every transaction.

Scroll through the snapshots below for an overview of portal navigation! If you need more help or have specific questions about using the portal, you can reach out to your Account Manager any time for a screen share. 

You can filter all info by date range or property:

View a snapshot of income and expenses on your dashboard:

See every transaction in real-time on your ledger:

Statements and forms will be posted to your documents library:

View a suite of real-time financial reports:

See a running list of all bills, and drill down for more detail:

Under Bill Details, you'll find dates/descriptions/amounts and more:

You can also communicate with your Account Manager through the portal:

How do net distributions work?

Net distributions keep your accounting clean and simple. Each month we’ll collect rent from the tenants, deduct any repair expenses for the previous month and any management/leasing fees for the current month, and credit the remaining net operating income to your account. 

You’ll receive a statement via email each time a net distribution is processed, and can view all transaction details in your Propertyware owner portal.