I should start by confessing that this is a misleading title.  Just as nothing comes free, the concept of passive income doesn’t really exist in reality (but it sure is nice in theory!).  It is the notion that you don’t have to work to generate a sustained income.  In real estate, the most obvious form of passive income is for property managers or landlords, who an external observer might think simply sit back and wait for the monthly checks to come in the mail.  Obviously, those of us in the industry know that this is not the case.  Maintaining “passive income” requires continuous effort on your part—after all, if you are making money, that means someone is paying you, and no one is willing to pay for nothing.  The work of a landlord requires constant attention to tenants’ issues, failures to pay, legal and contractual work, maintenance, etc.

All that being said, property management is still the most reliable way to generate passive income, in that you can multiply your monthly income without making new investments.  If you are an investor who purchases single family homes, then you can probably generate a pretty substantial income by going out and doing 5 or 6 deals.  That’s great—hats off to you!  But those 5 or 6 deals probably required an enormous amount of time and effort on your part, not to mention the hundreds of bad deals you probably had to wiggle around in order to land on those few good ones.

On the other hand, what if you could focus all your time and energy on doing one big deal, and then getting a few smaller deals in order (it is infinitely easier to secure tenants than buyers) to generate 5 or 6 monthly checks delivered to your door.  This is the nature of multi-unit investments, and although they are not the most glamorous prizes in real estate investment, they are a great way to secure a substantial monthly income with room for expansion.

As I said, the reality of making money anywhere is that it requires work, and so this monthly income is of course not really passive income.  Unless you hire a property manager (which can be done relatively cheaply), you will be spending a great deal of time dealing with tenants, and it is essential that you maintain friendly, healthy, honest, and unfailingly polite relationships with them (that’s your income!).  Happy tenants become long-term tenants, and they become more likely to refer more business to you.  This means you can focus less time and energy on marketing, and have fewer tenant-related issues (because you retain the good ones).  This will allow you to pool your monthly income and put it toward expansion or simply enjoying the fruits of your labor.

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Most of us in the business of selling real estate are unsatisfied with our ratio of listing presentations to sales.  Ideally, we’d all like to sell a house every time we present one, but obviously it doesn’t work that way.  In reality, there are ways to maximize the use of your time by closing deals on more of your presentations.  The key, in many cases, is simply persistence.

Everyone has had the feeling of wrapping up a really good presentation, and sitting down to talk it over with your prospective buyers.  You come to the table confident about the tour you’ve given and the response and interaction of your customers, and you’re ready to do a deal.  But you sense their hesitation, and when it comes time to talk brass tax, they begin to pull away.  The most common line is, “We need to think about it.”  Clearly, there is nothing wrong with thinking about a major purchase, and you should encourage your buyers to consider the decision seriously before signing any contracts.

But the mistake many investors/sellers make is to allow the buyers to simply walk away when they say they need some time to think.  Whether or not you expect a call back from them eventually, allowing potential buyers to get up from the table and leave is a resignation of failure on your part; and while many people consider persistence in sales too be tasteless, keeping your customers interested and engaged can be done both tactfully and gracefully.

One of my first observations of sales as a kid was watching a sales manager at a fitness gym.  His job mostly involved employing borderline sales tactics to sell memberships, but that experience offered some valuable fundamental lessons about sales which can be applied in any industry—but particularly in real estate sales.  You never, never tour a new customer and let them leave.  When they say they want to think about it, you offer to think it over with them.  To hash out all the things holding them back from moving forward with something they want to do for themselves (after all, they got up and came to the gym, or attended your listing tour, or sought out whatever else you may be selling).  Offer to discuss the issues, to figure it all out together, now.

If not approached tenderly, this effort to maintain involvement can understandably be mistaken for prying into the buyer’s personal affairs, but you can always appeal to your experience with helping buyers and sellers through many transactions to encourage your customers to open up and share with you.

You will be surprised at how often simply keeping the conversation moving along (as opposed to allowing buyers to get up and walk away) can open the doors that ultimately lead to a sale.  As silly as it sounds, sometimes a buyer wants to feel wooed, like you care enough about their reasons for buying to get involved and help them work through their issues by providing information and expertise.  After all, you are a professional, right?

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In the world of professional real estate investment, it is widely understood that marketing is one of an investor’s top priorities—if not the distinguished number one.  You can’t do business without customers, and you can’t get customers without reaching out and bringing them to you.  If money doesn’t grow on trees, then it certainly doesn’t earn itself either.  So everyone knows you have to be willing to spend some cash on your marketing efforts, in order to bring the business your way.  But in tough economic times like these, it’s of vital importance to squeeze every drop out of the money you spend, and too many investors make simple mistakes that end up costing them.

The first major mistake commonly seen in advertising of all types, is that the marketer attempts to reach too many people.  It’s called a catch-all, when you put out a very general message (e.g., “We buy homes!”), and attempt to attract a wide market of deals.  It’s a nice concept, but for whatever reason people do not respond to advertising that is not specifically targeted to them.  Whatever media you choose to spread your message, be sure to make it as specific as you can.  This will serve two purposes: 1) you will only get the kind of deals that meet the needs of your business model, and 2) the interested sellers/buyers/renters to whom the criteria in your advertisement do appeal will feel more acutely that you are the person they want to do business with.

Although you want to be specific and detailed, bear in mind that chances are your advertisement will probably only have a few seconds of your audience’s attention, so it’s important not to overwhelm them with too much detail.  Grab their attention, explain what you are looking for or offering, describe what you can do for your customers, and let them do the rest.  It’s the same logic that dictates the sales adage to “stop selling when you make the sale”.  Once you reach the right audience, step away and let them come to you.

In order for that to work, obviously, you need to tell your customers how to get in touch with you.  Provide an email address and phone number with appropriate hours to call.  I say obviously, but I see a shocking number of flyers, signs, etc. that provide a name and a service, and I am left with no idea what to do.  Am I supposed to remember this person, and go home and look them up in Google, and see if I can find a number on a social media page?  No, I will just look across the street at that other real estate advertisement with a big phone number at the bottom of it.  Don’t forget.

You really can’t go wrong with any of the marketing types—whatever puts your name in people’s minds is a success.  Obviously the internet is a must, and TV (though expensive) has proven successful.  But there’s nothing wrong with fliers and signs, provided you grab your target market’s attention with a good header, you provide specific details that narrow your audience to those who fit your business profile’s needs, and you provide a way to get in touch with you.  That’s it.  Be prepared to spend quite a bit of resources (money, time, and energy) on your marketing campaign, but remember that 100% of your business will come from marketing, so every single deal you do should make your marketing efforts worthwhile.

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When getting started in real estate investing, it is essential to approach with the right angle and attitude.  The days of walking onto the scene and making millions in your first year are long gone (if they ever existed at all), and these days it is all about baby steps.  There has not been a better time to be a start-up investor in decades, since interest rates and prices in general are so low right now.  The key to starting out with reliable success in real estate, at a time when the market is not blowing up, is to invest in income-generating properties.  They may not be glamorous, but small condos, duplexes, triplexes, and even four-unit buildings, will produce steady and reliable monthly cash flow.  Garnering and maintaining a few of these is a great way to start development of an ownership portfolio, and—more importantly—they should allow the start-up investor enough income to quit a day job and focus on making some real income moving forward.

Again, the key is to start out slow and steady.  Do not expect huge immediate returns.  Imagine your first investment is a duplex, for which you charge $800 rent for each side.  If the property only costs you $1,200/month to maintain, then you are earning an easy $400/month.  It doesn’t sound like much, but it is a great launching platform, and not a huge risk for a first-time investment.  If that works, you’ll buy more, and once you have five of these, you will be earning almost $25,000/year.  Once again, it’s not an overwhelming amount of money, but you could do much worse working much harder.

Once you’ve developed a bit of a portfolio, some capital, a whisper of a reputation, and—most valuable of all—the experience of owning and maintaining an investment property, you will be much better equipped to focus on bigger, and more fruitful investments.  Plus, in that first year or two of development, you may even collect enough funds to quit your day job, allowing you to focus your attention on your investment projects.

After a while, you will see that you are not paid in labor hours as an investor.  At first, acquiring properties, tenants, lawyers, etc., will be a lot of work, and you will feel underpaid.  But if you take it slow, adding one property at a time, you can learn all of these skills at a very manageable rate, until eventually the money is coming in with very little labor input on your part.  This is the beauty of investing: if you prepare correctly, and start from a good portfolio launching point, you can plant the seed of an investment, and then simply sit back and watch your money grow.

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As a landlord, one of your most important responsibilities is to manage your tenants.  This means two things: 1) getting monthly payments on-time and in-full, and 2) making sure your property is being taken care of.  Generally, property owners who fail are the ones who cannot accomplish one or both of these tasks.  They either have tenants who haven’t paid the rent in ages, or their property has been destroyed and left in shambles.  Either way, the landlord is bound to lose money and face quite a bit of unnecessary stress.  Most of this cost and stress can be avoided by being conscientiously up-front and firm from the onset of your relationship with a tenant.

            During the application process, make it very clear to the potential tenant that your business is very strict about the two tasks I mentioned above.  Clearly state that if payments are not made on-time and in-full, or if the property is not properly taken care of, then the tenant will be evicted without a moment’s hesitation.  Generally, this brief but important conversation can eliminate a whole population of “professional tenants”—those who enter into rental agreements with no intention of paying the rent, and live there for as long as they can before the landlord finally forces them on to the next location.  Don’t give anyone the impression that you can be taken advantage of during the application process.

            Once you have your tenant under contract, consider charging late fees on rental payments.  This will keep your tenants in check, and train them to respond to your rules and regulations.  If they know there are no consequences for making a late payment, then they will not respect you, and you will be paid whenever your tenants get around to it.  Most rent is due at the 1^st of the month—make the rent late after the 5^th.  Charge a percentage of the rent (5-7% is reasonable), and enforce it.  If you don’t enforce the late fee policy firmly and consistently, then it is worthless.  Don’t let a tenant slide simply because it’s the first time he’s been late; if he faces the penalty, it will be the last time as well.

            In addition to commanding the respect and obedience of your tenants, the late fee will also help put a little extra cash in your pocket.  Anything that increases your property’s monthly cash flow is good for business, especially when it ensures continued on-time payments in the process!  Although it may be difficult to establish yourself as the enforcer over your tenants, remember that you run a business, and you must maintain control over your interests.

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There is an age-old debate as to whether it is more cost-effective to invest in single-family homes or multi-unit apartment complexes.  As with all types of investment, the more you put down, the more you stand to make on returns.  Generally speaking, multi-units provide a wider range of investment opportunities which will turn enormous profits, relative to those of single-family homes.  While investing in apartments is not neccesarily smarter or safer, the investor does stand to become much wealthier, much more quickly.

The first advantage of multi-units of single homes is simply the cash flow.  Renting a home provides one source of rent, while renting a series of apartment units provides as many separate incomes as there are units in the complex.  Although logic states that the rent is based on the expenses of the investors, so more rental payment streams should merely compensate the investors, consider the small margin of profit built into every rental rate, and then multiply that by the total number of units rented.  An owner of a multitude of units stands to make enormous income based on what may be a tiny margin of profit on each individual renter.  The owner of the home, on the other hand, builds whatever profit he can into the structure of his single rental contract and is limited to that profit thereafter.

Economies of scale favor multi-units.  That is to say, when many people share commodities, it becomes much less expensive to maintain those commodities.  Two families living separately in separate homes must each care for the home, the roof, the lawn, the repairs, etc.  However, if those two families share one building divided into two units, now they can pool their resources to maintain one home, one roof, one lawn, etc.  Because maintaining one building with a number of units is infinitely easier and more cost-effective than trying to maintain as many individual homes, for which the maintainance alone could bankrupt an investor.

Another factor favoring multi-unit investment is that observed fact that there is much less competition for multi-unit investment than for single home.  Although this cannot be explained with any degree of certainty, it seems that the house “flipping” market has been saturated by investors trying to make a quick profit rehabbing or reselling a home.  For whatever reason, the same saturation has not yet occurred when it comes to investing in apartment complexes, so it is much easier for investors to find a good deal.  At the very least, single-home investors should diversify their portfolios by adding in some multi-units.  The losses suffered by a failed single-unit purchase are too heavy not to be tapered by a different kind of investment.

Since multi-units generate more cash-flow, an owner can afford to hire management companies to mediate between owner and tenants.  This allows the investor to continue making a profit from his investment, while focusing his attention (and the profit he generated) on new investments.  Finally, when the investor finally decides to “cut and run”—to sell his property and try something new—he stands to make much more money selling a multi-unit property than a single home.  Obviously, if managed properly, the world of multi-unit investment is a potential gold mine for investors, but it has remained relatively undiscovered by the casual investing population.

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