The Passive Income Myth

“Beware of little expenses. A small leak will sink a great ship.”  Passive Income Benjamin Franklin

Looking back at our early years as real estate investors, it’s astonishing how much money we paid that we shouldn’t have; how much income we should have made but didn’t; and how many problems we could have extinguished when there was smoke, instead of when the fire had consumed a large portion of our profits.

Our belief in passive income had us believing that we could work hard to buy a property, hire property managers and then kick back and let the money roll in. It only took a couple of years before this strategy blew up in our faces with terrible tenants, property managers robbing from us and even being charged with fire code violations. Then it took several more years to right the ship, but once we did it made a big difference. I’ve talked about my belief that passive income is a myth many times … today I want to talk about what you can do about.

First, let me give you one big example of how active involvement – even when you have property management in place – can save you thousands of dollars.

Every month Dave does a review of the expense and income statements for each of our properties. Because he does this every month, anomalies are easier for him to spot. In this one property, Dave noticed the water bill was double what it usually was.

He immediately contacted our property manager and asked that it be checked out. The property manager said it was because the billing frequency had decreased. We were now being billed fewer times, so it was expected that our bills would be double when we were billed.

Because we owned properties in four different cities at that time, Dave wasn’t sure if that was the case, but he seemed to remember that change had occurred over a year ago. He pulled up our property expense tracking spreadsheet – and sure enough – we’d moved to bi-monthly billing over a year ago.

He called our property manager back and insisted that he investigate.

Turns out we had a water leak. The leak was quickly fixed and the next water bill was back to normal. This home is a split level with a one-bedroom basement suite, and because the tenants aren’t on separate water meters we pay those bills. Dave’s swift action saved us hundreds of dollars that year, not just from wasted water but also because he minimized the damage to the home by catching the leak sooner!

It wouldn’t take too many little leaks like this to completely remove all the cash flow from this property.

So besides just monitoring the water bills … what else should you watch for with your rental property?

Rent payments: If you’re managing the property yourself, you’ll typically notice when you haven’t been paid; but when you have a property manager handling your rent collection, you might forget about it. You also might assume your property manager will let you know if rent has not been paid, but that is not always the case. Stay on it. If the rent wasn’t paid, find out why and what’s been done to address the matter. Never assume things are being handled. In every case, a non-payment-of-rent notice (or the equivalent type of notice for your state or province) should be issued, in case you eventually have to take steps to evict the tenant.

Utility bills: Whether you pay the utilities or not, you should keep an eye on the bills because increased utilities could indicate other issues, as in the case of the water leak. It could also indicate a broken seal on a window or a door if your heating or cooling costs have gone up … or just inconsiderate energy usage. When our tenants usage of electricity goes up more than 25%, we always let them know and remind them to turn lights off, turn the heat down, turn off the TV when not in use, and so on. It’s not just better for our bottom line; it’s better for the environment.

Repairs and maintenance: Your property managers should be getting three quotes for any major work. If it’s going to cost you more than $500 to do something, you need options. And you need to insist on this.

You also need to monitor what is going on. Unfortunately, we have many examples of where our property managers have mismanaged repairs and maintenance, not gotten more than one quote, or allowed the repair budget to go well over what was agreed upon. Even with diligent management, we still have these issues on a regular basis; and sometimes we don’t have enough time to deal with it ourselves so we spend money that we could have saved.

So listen to the warnings of Ben Franklin and watch out for those small “leaks.” Spend a few hours every month reviewing your monthly expenses and cash flow. Ideally, enter them into a tracking program or a spreadsheet so the discrepancies are easy to spot.

So what about financial freedom and buying enough property so you never have to worry about money again?

Let’s say you do the math … you figure out that if you own 30 properties that make you $300/month positive income, you will be able to quit your job. And if you can quit your job, you will have financial freedom! Finally!

What a romantic load of crap that is!

What is financial freedom? Most people try to convince me that it’s never worrying about money again. If that is financial freedom, you aren’t going to get there with real estate. “More properties” does not equal more freedom … more properties equals more roofs that leak, more appliances that break, more hot water tanks that flood, and a whole lot more tenants to deal with. Even if you have the best team, these things will still require your attention – and I assure you that it will be during the week when you’re trying to finally relax that you will have a tenant move out on short notice – leaving you with a property to fix up, a hot water tank split open, and a plumber that seems to have vanished off the face of the earth. And things don’t space themselves out nicely – they all happen at once. The expression “When it rains it pours” was not created because of the weather!

Let’s be clear on one thing: “Financial freedom” is bogus. It doesn’t really mean anything. It’s a fluffy phrase that sounds wonderful but doesn’t translate into any kind of reality.

And real estate is not the way to go if you never want to worry about money again. More properties is just that … more properties.

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 First Image Credit: © Photographerlondon | Dreamstime.com

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And from the Rev N You Video Archives … some additional tips to help you make more money when you’re working with a property manager:

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If you have questions about points raised in this post, or if you’d like to learn more, then send us a message and we’ll get back to you as soon as we can.

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