How To Create Passive Income With Rental Properties

Inspired by an interview with Jocelyn Paonita Pearson.

This piece was written by Rachel Schroath, creator of RachelSchroath.com and Podcast-Inspired Blogs.

Dreaming of money that grows on trees? Or at least money that finds its way directly into your savings account? What you’re looking for are passive income streams and for info on these beauties, I’m going to turn to my good friend, Jocelyn Paonita Pearson.

Jocelyn Paonita Pearson helps college students graduate debt-free, just like she did, with tools from her online business, The Scholarship System. Jocelyn knows how to make money and make it work for her. Instead of having to pay off debt, she creates passive income to continue building her wealth and do things most can only dream of like work from anywhere or take a last-minute international trip to Europe with a friend.

One of the many ways Jocelyn has created passive income for her and her family is through rental properties. It’s a simple concept that anyone can do and that’s why I asked Jocelyn to walk us through how it would work.

Here is how can you emulate Jocelyn and create major passive income through rental properties:

Decide to Be Debt-Free

Jocelyn financed her schooling with scholarships and graduated debt-free. This was a decision she made before she got out of high school, and that decision allowed her to create multiple income streams after college. Although she didn’t need to, Jocelyn still worked throughout college and saved up her money so she could put it to work in the future.

After graduation Jocelyn looked to invest that money she saved into a down-payment on a rental property. “It’s 100% because I don’t have those student loans sitting there” she said.

Is there debt holding you back from investing in a rental property? Get it down to where you’ll be able to save money and have it start working for you.

Decide What You Want

Immediately after graduating, Jocelyn bought a condo in Atlanta where she would be working. She knew it would start out as a place for her to live rent-free and then function as a rental property after moving out of Atlanta.

Going into the search for the right rental property, Jocelyn knew exactly what she wanted. She was looking for a 3 bed, 2 bath property. This decision was strategic as she would eventually have the possibility to collect rent from three roommates, and she also knew the three-bedroom plan was the most rentable type of property for families. Jocelyn knew this setup was a must from the get go.

Before you buy a rental property, do the research. Find out what’s most desirable in your area. A 3 bedroom condo might not be the most realistic if you live somewhere like NYC. Check out what’s online and what the people you might want to rent to are interested in.

Get Smart about the Location

When deciding between property locations Jocelyn was stuck between two places- one more pricey and better for her and another in a location that was less desirable to Jocelyn. To decide what would be a better rental property, Jocelyn posted potential listings on Craigslist to see which one would get the best response.

This is a phenomenal way to test the waters with location, style, and price.

If you’re thinking about buying in a different state or somewhere you aren’t familiar with, make sure you understand the area before making the purchase. Besides saying, “That area is cheap,” visit it or talk to people from around the area to see which location is the most rentable.

Family or friends can also tell you where you’d want to buy. You’ll have a much easier time selling tenants on your property when you know the ins and outs of the location.

Rent to People You’d Want to Live With

To find quality tenants, Roomster is a great site to utilize. Fill out a profile and make a post saying, “I’m the owner, but I’m looking for people that I would want to live with.” This is the rule that Jocelyn swears by. Even if she’s not planning on living in the rental property, she looks for people she would want to live with. Having this relationship with her tenants has been a huge bonus and helped solve issues before they became drastic.

Consider matching roommates to live in your rental property. You’ll be able to charge extra and take your pick of roommates without compromise. Get on Skype with potential tenants if you aren’t in the area and get to know them. It’ll pay off later!

Cash Flow over Increase in Value

Jocelyn pointed out that while many look for properties that will increase in value, what an investor should be more concerned with is cash flow. It would be great if your property increases in value, but that’s what we like to call ifcome. You're making bets and not focusing on the real cash coming in.

Look for properties where you could easily charge enough for rent to cover the mortgage. Your focus should be on the money flowing in and out each month, not years down the road.

Final Thoughts: Making your money work for you is a financial sweet spot.

Not sure how to get there? Let’s talk! I’m a financial coach, and I offer a personal and affordable way to get your debt in check and your cash flow positive.

This blog post may contain affiliate links. Learn more.

To Invest or Pay Off Debt? - It's Easier Than You Think

Love this! - Pay Off Debt or Invest? It's Easier Than You Think - And it really is! This post guides you through how to prioritize paying off debt or investing and makes it easy to understand how to finally make a decision (and stop freaking out about the future)! Thanks for pinning!

Should you invest or pay off debt?

Seriously, this may be the bane of our existence as millennials laden with student loans and first-hand observers of our boomer parents, grandparents, or great-aunties working well into their 70s in fear of suffering from a serious retirement income drought.

The constant choice we have to make? :: Invest for the future or pay off debt from the past?

Nobody wants to be in debt, nor do they want to be paying off debt for the next 20 years of their life.

But I don't think anyone wants to be old and broke either. (Especially when it's more difficult to make money when you start really showing signs of the aging process. Hey, that's evolution for ya.)

Make The RIGHT Choice

We're facing this fork in the road in making a smart, sound, financial decision. And it's filled with all this pressure and has us freaking out about the future.

It's like choosing between the black suede lace-up flats or the camel suede wedges.

You need shoes, you know you need to make a choice, you don't think you can afford to get both, but God forbid you make the wrong decision.

So you walk out, barefoot. No choice - No progress.

That may sound like a ridiculous comparison, but I think you get the point.

And then you hear the "smart" friend expressing their rationalization about why they do what they do with their debt and investments.

But is that the right decision for you? What is the right choice for you to make?

I hate having to say this but... it depends, per usual.

 

But there are some rules-of-thumb that you can follow when you're making this decision.

And if you implement and act on them in your financial life, you'll be much better off than not doing anything at all.

Whether you have a mortgage loan, a car loan, or a student loan, and you're facing the long-term decision of investing in retirement, then this post should be helpful.

Meet The Minimum

First rule of thumb, always meet the minimum. You're loans need to be paid, and you want to avoid defaulting on these as much as possible so do the responsible thing and meet the minimum monthly payments.

If making those payments is difficult, consider applying for an income-driven repayment plan if you have federal loans. If your loans are private, look into refinancing for a lower rate.

If you have a bajillion different loans and want to have only one or two monthly payments to make sure you're meeting all of your minimums, look into consolidating your student loans.

Meet The Match

The absolute best (and easiest) return you will ever get on your money is from the match your employer gives you for your contributions towards your retirement plan.

If you have a retirement plan at work, specifically an employer-sponsored 401(k) or SEP IRA, your work may provide a matching contribution as a benefit for you being a loyal worker.

Detailed in your benefits package (or you could just call your HR representative) is the terms around your employer's matching contributions.

Whether they are "100% up to 6% of your paycheck," or a more funky and confusing "100% up to 3% and then 50% of the next 3% and nothing after 6% of your paycheck," this is still a great return on your money. - Trust me.

Let me break it down.

If you make $2,000 (before taxes) every time you get paid, and you contribute money to your retirement plan up to the employer match (the full 6%), you will be putting $120 into your retirement with every paycheck.

If your employer follows the first scenario from above, they will give you a 100% return, instantly, on your $120 investment by also contributing $120. After a year, that's approx. $3,000 of free money each year from your workplace!

If your employer is more like the second scenario, they will still give you $60 off the bat (100% matching up to 3% of your salary) and then another $30 for the next 3% you contribute for a total of $90 extra buckaroos. That's still a 75% immediate return on your $120 investment. Not too shabby.

Like I said, this is the easiest way to get the best return from your money. If you're purely looking at the numbers, and can spare to set aside 6% of your salary while meeting your minimum payments, then this is the absolute next step for you!

Never put your "Oh, Shit Account" in the corner

There are two kinds of people in this world.

The humans that like to see A LOT of money in their bank account because it make them feel safe at night. (Like teddy-bear-in-bed safe.)

The humans that can't stand to see a significant sum of money in such a low-interest bearing account. Just think of all the gainz they're missing out on! (When I put a "z" on the end of any word that doesn't require a "z", the sentence should be read with a sarcastic tone.)

Here's the deal. Your emergency savings account is an absolute necessity for feeling like you can handle any disaster that comes your way. (The way I assume Olivia Pope would, obvs.)

But it's also essential for actually handling disasters without going into more debt.

So you're going to need to prioritize this next. You don't need to get up to 3 or 6 months of emergency savings before throwing extra money at investing or debt, but you do want to at least be doing both.

My tip is to get to $1,000 or one-month's worth of rent. Then split the excess cash between funding your "Oh Shit Account" and the next step.

Look At Interest

Alright, you are meeting your minimum payments, investing for retirement by scooping up that fantastic employer match, and you got the ball rolling on (or have fully-funded) that emergency savings account.

But you still have some extra dough that you want to use responsibly, according to the Surgeon General. (Who I always envisioned looked a lot like Colonel Mustard.)

This is where things get muddy, you will never know if your decision is going to be the right one, and it's always going to depend and things will definitely change throughout the years.

First, look at your interest rates on your debt.

Anything with a rate higher than 8% has GOT TO GO.

Credit cards and private loans are the bloodsuckers here.

Use the debt snowball or debt avalanche method with these guys and hit 'em hard.

Why? Because the average long-term rate of return (on a good day) is around 8%. And I'm talking over the course of many many years here. Hence the phrase "long-term rate of return."

You're better off paying down this debt and then focusing on investing. But good on you since you're already making those contributions that get a solid match right off the bat!

Debt with an interest rate at 4.5% or lower can take the slow-and-steady route.

If you're purely concerned about maximizing the power of your money, than take the slow road with this. I know it's difficult to do, and of course you can pay this off when you become a millionaire or receive a large windfall of cash in the future, but for now, ride out the storm by just making the required monthly payments.

Things like a mortgage and a majority of federal student loans will fall in this category.

Debt with an interest rate between 4.5% and 8% is up for debate.

You're going to have to make the decision on this one, but don't drive yourself crazy. The whole point of this is that you're moving forward.

Gauge how paying down debt makes you feel versus investing.

When your debt is all paid off in the future, determine if you will be disciplined enough to use all your debt repayment money towards investing. 

There will be a day when suddenly you have $275 extra dollars a month to your name. - I promise.

No matter your choice, you can't really go wrong here.

Sure, you can analyze all the variables and assumptions and tax savings and interest savings and drive yourself crazy. 

But at the end of the day, you have to do what makes you feel better about your money sitch.

My Final Thoughts

You can do all of this or you can do none of this. Everyone has their own opinions on how to handle their financial situation, but if you're overwhelmed by adulthood and just want to make the right fricken choices, then I got you babe.

In fact, you can work with me on it. (I'm a financial coach, after all.)

We will put together a game plan based on the general rules-of-thumb (and probably a lot of me working with your numbers in a spreadsheet because I'm a nerd like that), set your plan on autopilot, check-in with it periodically, and together we will finally stop freaking out about the future.

Oh, and finally buy both of the suede shoes. Because suede is so in right now.

Fancy a chat with me to see if we should work together? I only take on 3 clients a month so snag your spot pronto.

This blog post may contain affiliate links. Learn more.

Student Loan Consolidation and Refinancing: What is Right for You?

This is great! - Student Loan Consolidation and Refinancing: What is Right for You? - I've been having so many questions on how to make my student loan payments easier and less of a headache. Definitely going to look into these options! - Thanks for pinning!

Should you consolidate or refinance your student loans?

Making 8 different student loan payments at varying interest rates to both private and federal institutions is the reality for most millennials today, and I'm willing to bet it feels like a giant shit storm.

Nobody said adulting was going to be easy, but sometimes it feels like we've been a little mislead. Between the lack of financial literacy education in our school system and the golden gift of making an $80,000 purchasing decision at the age of 18, the majority of us have entered the "real world" feeling blind-sided by life's financial responsibilities.

Now, we don't need a pity party or a free pass, we just need some guidance on what the heck our options are and how to make a damn decision.

Today, we're focusing on how to manage all those student loan payments that are driving us crazy every single month.

What are your consolidation and refinance options and are they right for you?

Student Loan Consolidation

Loan consolidation allows you to combine multiple student loans into one loan so you only have to make one monthly payment at a single fixed interest rate.

If you're having difficulty making your monthly payments each month, consolidation may also lower these payments by extending the repayment period by up to 30 years.

However, if you extend the repayment period and only ever make the minimum monthly payment, you will end up paying more, sometimes double, in interest over the life of the loan.

Only extend the payment terms if you're struggling to meet those monthly payments. Then, when you have a windfall of money, apply the extra dough to the principal of your loan(s).

Federal Student Loan Consolidation

You can consolidate your federal student loans when your school enrollment drops under part-time status and your federal loans are in the grace period or repayment. Note: Parent PLUS loans cannot be consolidated with your other federal loans. <sad face>

You cannot consolidate your private loans with federal loans in the preferred method.--Through the Direct Loan Consolidation Program.--It is possible to combine your federal and private loans, but that's considered refinancing - which I talk about below, and have a few warnings about.

With federal student loan consolidation your federal loans will be combined into one loan by the federal government and will have one fixed interest rate which is made up of the weighted average of the interest rates from your old loans.

So you won't be saving any money, but you will manage to get your bills/payments down to a single one each month for those federal loans.

If you do have a variable rate loan, consolidating can switch it to a fixed rate which could save you from unpredictable rate hikes in the future. (The last variable rate loans were dolled out in 2006. Ever since, we've seen fixed rate federal loans.)

And, as mentioned above, you may be able to lower your monthly payments - but this will not save you any money in the long run. It will cost you more money in interest.

Private Loan Consolidation

Like federal student loans, you can also consolidate your many private student loans and receive the same benefits of one single loan payment, a single fixed interest rate, and a lower monthly payment if needed.

However, when you consolidate your private loans, you do not simply receive a weighted average of the interest rates from each of the loans.

Instead, the bank or private institution responsible for consolidating your loan will determine a new interest rate based on your credit history (how well you have paid debt and other financial obligations in the past).

Preferably, this will be a lower rate than the rates you were paying in the past, but you will want to make sure your credit score and reports are up to snuff before diving into your private loan consolidations.

You might also like: An Interview With The Broke Millennial and The Biggest Credit Score Myth

Essentially, when you consolidate your private loans with a private institution, you are refinancing them.

This is why you hear the words "consolidation" and "refinancing" used interchangeably when talking about student loans. Though, there is a significant difference.

Student Loan Refinancing

(And Private Consolidation vs. Federal Consolidation)

As we mentioned, you can consolidate your federal loans and consolidate your private loans, but private loan consolidation is refinancing.

Student loan refinancing is when you use a single private loan to pay for your existing loans (can be one or more) preferably at a lower interest rate.

With student loan refinancing (at a lower interest rate) you can:

  1. Lower the amount of your monthly payments.
  2. Streamline your payments into a single monthly payment.
  3. Shorten your repayment period to pay off your loans faster.
  4. Decrease the amount you will spend on total interest.
  5. Opt for a variable interest rate loan, assuming you are determined to pay your loan off at lightning speed.

Only consider refinancing if you have significantly improved your financial situation (credit score) and get an interest rate that is lower than the weighted average of your current loan's rates.

You might also like: The Deal With Student Loan Debt - an Interview with Natalie Bacon

Some institutions will allow you to refinance your private and federal loans into one loan repayment. But be warned! When you refinance your federal student loans, they become private loans, and there are some federal benefits you will lose.

Federal student loans offer:

  • Lower interest rates than your private loans.
  • Public-Service Loan Forgivenes.
  • Income-based repayment plans.
  • Deferment and Forbearance
  • Loan forgiveness if you die... (sorry, but we all do it)

It's important that you read the terms of your new loans very carefully to understand what may change when refinancing your federal and private loans into a new private loan. Many of the above federal protections will go away as private lenders are less forgiving.

There are many options to make your student loan repayments easier and less stress-free, but you should consider the costs and the benefits on how each method may impact you. Not only does streamlining your payments have financial benefits, but they may also have significant mental, emotional, and mindset benefits around how you handle your finances.

Final thoughts: Don't be paralyzed by your options. The worst thing we can do when it comes to our money is not take action.

Need someone to knock around your finances with? Check out my girlfriend's money coaching program (at least jump on a 30-minute call with me). We will come at your money management as a team to identify the gaping black holes where your money is disappearing to, set up a system to automate your finances, and start planning for your future so you can stop freaking out about it.

This blog post may contain affiliate links. Learn more.