We’ve come a long way in our quest to live overseas on passive income, but today we will face our greatest challenge yet—passive income from rental properties. The main concern with rental properties is who is going to oversee them while you are overseas?
Before we get into our concerns, I want to welcome you back to the Living Overseas Passively series (101, 102, 103, 104). If you haven’t already, go ahead and go back through and pick up the accompanying free pdfs for each of the prior articles.
Now, back to rental income and living overseas. The idea of managing a few rental properties while you are overseas can seem daunting. The hardest part of this scenario will be finding a good, reliable property manager.
RE Lifestyles 2: Investor vs. Lender
Do we need rental income as one of our primary sources of passive revenue? Before we discuss the possibility of finding a good property manager, we need to talk about the importance of rental income.
I’ll be honest; if I could find a way to avoid depending on rental income while overseas, I would. In theory, rents would be the perfect supplement to your overseas lifestyle. If you had just one home without a mortgage, you could probably live overseas on just that one revenue stream.
Rents also go up with inflation, so this natural flow would help protect against inflation against the US Dollar. Rental income is also consistent, which will be a great help as you navigate your overseas life.
The problem is that I am not a massive fan of property managers. Currently, I am stationed in Japan, and I have a property manager in Arizona. It has been a nightmare. Imagine someone who doesn’t care about your money or your home, then put them in charge of your money and your home. It is not fun.
Everything we do to prepare for rental income overseas needs to be with the mindset of having a crappy property manager. I say this because chances are, you will have a crappy property manager.
The Wealth Accumulation Phase
The first thing we need to do is find out exactly what a property manager does daily, weekly, and monthly. We can do this by reading the book “The Book on Managing Properties.” If we understand their job, we have a much better shot of finding a good one.
Remember, trust is the most crucial element of the relationship between you and your property manager. They will be controlling your income, and they can create phantom maintenance issues (if they are dishonest).
If you can find a great property manager, then moving overseas will be a breeze. Your rental income will flow from the heavens, and everything will be excellent. So, your number one job in preparing to move overseas is finding a good property manager.
There are some other steps we can take to mitigate the influence of our property managers on our day-to-day lives. The first step is to save a considerable cash pile just for our rental properties. It is similar to what I wrote in “Be Smarter Than the Average Bear (Market).” We need to hedge against bad managers by having a buffer to protect us from their negligence.
Real Estate is a Mindset (Intermediate)
Second, have a plan for your rental income and rental properties. If you have multiple properties, you should be able to TAP your home equity at alternating times. You can use this cash to build an income from other sources, mainly Real Estate Investment Trusts (REITs).
I like the idea of continuously increasing your mortgage amount by performing cash-out refinances because it lowers your taxable income. Each time you complete a cash-out refinance, your mortgage will increase, causing your rental income profits to decrease. Let me explain.
Let’s say we have a mortgage of $1500/month and a rental income of $2,000/month. Each month, the government will attempt to tax us on that $500 cash flow. Of course, we will use things like deprecation and maintenance to lower our profits. That is why real estate is the I.D.E.A.L. investment.
However, if we perform a cash-out refinance, our new mortgage might be $1,800/month. Our new monthly cash flow total would be $200/month. But, we withdrew, say, $100,000 cash from the home. That $100,000 is tax-free because it is debt. That’s why I love reading Robert Kiyosaki (“Unfair Advantage”) and learning the difference between good debt and bad debt.
Can You Live the Laptop Life?
Basically, you would be keeping your rental properties to harvest cash-out refinances. It may sound like a profound concept, but it can work with proper planning. My wife and I extracted $80,000 from our home in Arizona, so having a bad property manager isn’t that disturbing. We already took profits; we just need to break even until the next harvest. It’s a different way to look at things.
Do you have children? If you have great children, they could be your saving grace. You all can then start a family business around property management. This plan would help supplement their income and bolster your rental income safely. It’s a win-win.
I have two boys, and I would integrate them into my real estate ventures as soon as possible. I would also consider paying off my main home before I left; here’s why. We currently have two roommates in our primary residence, and they both pay us $800/month. That’s why I wrote the article “The Magic of House Hacking.”
Become a Bonafide Real Estate Investor: The 1% Rule
If one of my boys wanted to live in the home, I could pay it off first. Then, he could keep the roommates, and we could split the difference. So, if he had two roommates, each paying him $1,000/month, we could have $1,000 net cash flow each. Do you see the value in this approach?
The main idea for using rental income to live overseas is that you must be creative. It wouldn’t be a good idea to have three properties, no savings, and a bad property manager. It would stress you out every time something went wrong or a tenant missed a rent payment.
The better idea would be to have your children manage your properties, have a huge cash pile, and harvest your home equity to invest in REITs. Let’s talk about REITs before we go.
Mortgage Positive
Are REITs a good substitute for rental income? Luckily, I just wrote an article on rents versus REITs, but let’s put it in the context of living overseas passively. As much as I would love to go the entire passive route of owning only REITs, real estate has some tangible and intangible benefits.
Owning real estate is an excellent hedge against inflation. Also, your net worth and property values would continue to rise along with the US dollar decline (inflation). Plus, don’t you want a place to live if you move back to America? The last thing you want is to price yourself out of the market when you return.
I would keep 2-3 properties while I was overseas. It might be a pain in the rear-end, but the wealth creation is worth the issues. Now, I would still use my cash flow from cash-out refinances to build up my REIT portfolio.
There are so many REITs to follow that it could be a part-time job to keep up with them. I would separate my REIT portfolio from my dividend growth and income portfolios. Even though REITs trade on the stock market, you should treat them differently. I also invest in Fundrise, which is a REIT that doesn’t trade on the stock market.
Welcome to Stress Freedom
Conclusion. There is a lot to take in when owning physical properties. The main concern is who will run your properties while you are overseas. If you have children, start preparing them now to take over your interests. Trust me, you don’t want your well-being in the hands of strangers.
How to Accumulate Your First $100,000
Next, you should have lots of options. Learn how to extract income from your properties, save a nice cash pile to protect against emergencies, and invest in REITs to supplement your income from rental properties.
There is a lot of preparation for real estate, more so than most of our passive income sources. Start planning your escape overseas today. Remember, who “will run my real estate business?” is the number one question.
Hopefully, this article was helpful and got your creative and critical thinking juices flowing. You want to give yourself options, so you aren’t placing yourself in a box. To read more about real estate, passive income, or moving overseas, follow me on Twitter. You can also join my Facebook Group or Facebook Page. Enjoy and Happy Investing.
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