Step 39: Income stream 7: Rental Income

Step 39 of the 100 steps mission to financial independence: Income stream 7: rental income
Step 39: Income stream 7: rental income

We’ve got to the last income stream of the 7 different income streams: rental income. This type of income can come from any asset that you own and rent out. The most obvious and well-known form of rental income is the renting out of a building, such as a house or apartment for private use (having tenants living in your property) but it can also be for commercial use, such as the renting out of an office space or shop.

Rental income isn’t limited to the rent of a building however,  you can also rent out other assets that you have, as the recent increase in local initiatives such as rent-my-lawn-mower or rent-my-toolbox-for-a-day prove. So as always: don’t limit yourself by thinking that rental income isn’t something you could ever make any money with as you might well have something that somebody would like to borrow from you and they might happily pay for it if they can’t or don’t want to buy their own version of it, due to financial reasons, or a sense of minimalism (living with less) and is there really a point in buying a drill if you know you’ll only ever use it two or three times a year? 

For the sake of simplification, for the rest of this step we’ll look at the renting out of a property, partially because it provides more money (making it slightly more sexy to talk about than renting out your lawnmower) , secondly because it is the most well-known option of rental income, and lastly it is slightly more complicated than renting out a tool. That said, whatever we cover here can also be applied to smaller assets as well.

When you have a property, however big or small, from a storage area or garage to a flat or house, you have an extra income that is relatively passive and that can supply you with a good amount of extra cash. Having a rental property to rent out is not without risks and costs however. First of all, acquiring a property means that you most likely have to take a mortgage (maybe in addition to one you already have for your own house), meaning there are the monthly extra costs of paying off this second mortgage. Having a mortgage isn’t necessarily a big problem, as long as you are able to rent it out during (most of ) the year. If you are, you might pretty much have your renter paying off your mortgage almost with the rent that you are cashing. If you don’t manage to get a renter in for most part of the year, or if they are not always the best at paying their rent, it can become more problematic as it means that you have the cost every month of paying your mortgage, but not the income to cover for this.

Another potential risk is that you might buy the second property in order to sell it for a much higher price in the long-term as well as to generate a monthly side income in the short-term. But as we have seen in the capital gains post, in relatively recent years the property market has fluctuated heavily and your house-for-let-that-you’re-hoping-to-sell-at-a-profit-at-some-point can suddenly decrease significantly in value.

A third aspect, apart from the risk getting a monthly rent to cover costs and the risk of your property losing value, there is also the time you need to invest, look for, buy and administrate the house, decorate it, find renters, keep up with maintenance tasks, collect rent, find new renters etc. so it is definitely not always easy money. You might not find renters easily, or only for short amounts of time, there might be a lot of maintenance tasks that creep up, meaning you have to spend a lot of time on this income source.

That said, if you do have a place that is easily rentable, find good, long-term renters who never trash your place and if you can keep up with the maintenance of the facility well, a flat-for-rent can be a highly profitable way of making money, without having to invest so much time in it after the initial purchasing time you invested.

It is a long-term commitment, and not something that you should decide on over just a day, but this step is to make you aware of the possibilities that exist when it comes to making money renting out.

Step 39 – Income stream 7: Rental Income – in detail:

  • Brainstorm a list of possible things you could rent out: from tools and objects to a house, your garage, a storage area, kids’ supllies etc.
  • Have a look online to find out more about local initiatives for rental services, and see what other people are renting out, what prices they ask and how they organize and advertise.
  • If long-term you might consider buying a property-to-let, talk to people who you know (think beyond your family and friends, consider colleagues, friends of friends etc.) who rent out a flat. Ask them about the different aspects involved:
    • How easy / difficult it was to get a (second) mortgage?
    • How often do they have to find new renters?
    • How much work is involved (maintenance, replacement, finding new renters)?
    • Is it worth it in their opinion?
    • Would they recommend it?
    • Can they recommend a good website, company or association for more information?

Of course, you are not likely to have money lying around to just buy another flat to rent out, but consider the options, and maybe you won’t be doing this for another 10 or even 20 years, but if you want to get into the rental income industry at some point, you have to take it up in your financial planning, so start thinking ahead now!

And that takes us to the end of the 7 income streams series. We’ll wrap this up in our next step to come up with a plan of action from here on.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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