Is Rental Income Considered Passive Income? -

You’ve probably heard the term “passive income” thrown around a lot lately. It seems like everyone is looking for ways to make money without having to do any work. Rental income is often touted as a great way to earn passive income. But is rental income passive income?

The answer is both yes and no. If you’re collecting rent checks each month with no involvement in the property beyond that, then yes, your rental income can be considered passive. However, if you are actively involved —collecting rent, paying bills, dealing with repairs, etc.—then your rental income is not considered passive.

You may be wondering how you could invest in a piece of real estate and have it become more passive. Below we will discuss a few different ways.

Property Manager

One way to make your rental income more passive is to hire a property management company. This company will take care of all the details of being a landlord, from collecting rent to dealing with repairs. You will still be responsible for the mortgage and taxes on the property, but the day-to-day headaches will be taken care of by someone else.

The downside to this option is that you will have to pay the property management company a percentage of the rent collected each month, which will eat into your profits. But if you don’t want to deal with the hassle of being a landlord, it may be worth it.

you may want to wait until you have more than one rental property before you consider this option, as it doesn’t make sense to pay someone else to manage just one property.

Rental Property Investment Trusts Also Known As Reits

Another way to invest in rental real estate without having to be actively involved is to invest in a rental property investment trust (REIT). REITs are companies that own and operate income-producing real estate.

You can buy shares of a REIT just like you would any other stock, and the company will use your money to buy and operate rental properties. You’ll earn a share of the profits generated by the property, but you won’t have to deal with any of the day-to-day management.

The risk of REIT’s that they can be more volatile than other stocks, as they are affected by the ups and downs of the real estate market. But if you’re looking for a hands-off way to invest in rental properties, REITs may be a good option for you.

Investing In Fundrise

If you’re looking for a very hands-off way to invest in rental properties, you may want to consider investing in Fundrise. Fundrise is a real estate crowdfunding platform that allows you to invest in a diversified portfolio of properties without having to go through the hassle of being a landlord.

With Fundrise, you can start investing with as little money as you’d like. And because they are a crowdfunding platform, they allow you to spread your risk by investing in many different properties.

Does Making Your Real Estate Portfolio Passive Change Your Tax Liability?

No, your tax liability does not change whether your rental income is considered passive or not. The only difference is how you report the income on your taxes.

If your rental activity is considered passive, then the income will be reported on Schedule E of your tax return. This is the form that is used for reporting all other types of passive income, such as investment income.

If your rental activity is not considered passive, then the income will be reported on Schedule C of your tax return. This is the form that is used for reporting all other types of business income.

You would file schedule C for a vacation rental, as your involvement would be considered active, while you would file Schedule E for a property that you hired a property management company to take care of, as your involvement would be considered passive.

In Summary

There are a few different ways that you can invest in rental real estate and have it become more passive. You can hire a property manager, invest in a REIT, or invest in Fundrise.

It’s important to do your due diligence before investing in any type of real estate, as there are always risks involved. But if done correctly, investing in rental properties can be a great way to earn passive income.

Have you ever invested in rental property? What was your experience? Let us know in the comments below.

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Is Rental Income Considered Passive Income?