Stocks rebounded last week after a pullback of just over 5% as Congress passed short-term solutions for the debt ceiling and government funding. We’re still seeing weakness in labor, as September disappointed in the number of new jobs added. The unemployment rate has continued to drop and is now at 4.8%.
With all this uncertainty, I am often asked about generating passive income, mostly from people who are interested in rental real estate. Real estate that you own and rent out can provide a revenue stream, but it is rarely completely passive.
First, buying a new property with the intention of renting it out often requires either a large down payment, or the ability to be cash-flow negative, meaning you are paying part of the costs each month, for several years. If you are renting out a property you already own and have equity in, you can often rent it for more than your monthly costs. But it takes time to be in that position, because initially owning a property costs more than renting.
Once you have the property to rent, you need liquidity. If your own dishwasher breaks, you can wait until you have money to buy a new one. With a rental, you need to fix or replace it right away. You also need to be able to cover the monthly costs if you don’t have a tenant, or if your current tenant stops paying rent.
If you want things to be truly passive, where you just collect a check each month, you’ll also need to hire a property manager. Or, to save that money, you’re on call for repairs, following up on missed rent checks, managing the move-out process and finding a new tenant.
This is not to say that real estate isn’t a good investment. Over the long term, residential real estate grows at about 5% annually. That’s in addition to the monthly rental income. And there may be tax advantages. But it is rarely a truly passive income stream, and liquidity remains a concern. You need to be able to cover your own expenses and the rental property’s expenses without any rent coming in.
Real estate can be a part of your overall financial plan and a well-diversified portfolio. Like anything else, seek good professional guidance.
Your action to take this week is to review your life insurance coverage. A very rough guideline is that a million dollars of insurance will provide $40-50,000 of annual income. Learn more on our website at covingtonalsina.com, and be sure to check out our Facebook page for more information.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
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The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.