How to Create Passive Income with Real Estate

Last Updated on July 5, 2020 by Mark Ferguson

I love passive income because it is money that you make without working. Examples of passive income are cash flow from rental properties, stock dividends, interest from loans, royalties, money from businesses, or other investments that you are not spending time on. A lot of people will argue that there is no true passive income because it takes some amount of work to create any type of passive income. Even the kid who inherits a billion dollars must do some work to not completely piss off their parents and become disowned. I agree that almost all passive income takes some work, but I still think the idea of passive income exists. To me, passive income is an investment or business that might take some front end work to set up, but once it is running, there is little to no work needed to keep the money coming in.

The great thing about passive income is it reduces stress because you know you don’t have to work all the time, it can allow you to be more aggressive with investments or business because you have something to fall back on, and it can help you live the lifestyle you want because you don’t have to worry about running out of money.

Why is passive income important?

A lot of people think someone is rich based on how much money they make per year. That is one way to judge if someone is rich, but if they lose their job, are they still rich? Did they have investments, or were they totally dependent on that income?

I think of someone as rich when they don’t have to work and can still live the lifestyle they want to live. They may continue to work because they love it or need a challenge, but they have passive income coming in that will pay for all of their expenses and then some.

I made a lot of money as a real estate agent selling foreclosures from 2007 to 2013. While I was making a lot of money, I was also stressed out. I did not have as much money in my bank accounts as I thought I should have. I was spending a lot, and things always cost more than you think they should. I knew I had to invest my money better, and I did by purchasing rental properties. I started to have passive income come into my accounts without working! Just the thought that my hard-earned money was now making me more money instead of wasting away reduced my stress. It also gave me the confidence to pursue my goals and more aggressive strategies because I had a safety net of passive income.

I also knew that if I built enough passive income, I would not have to work anymore. I could essentially retire knowing I would have a certain amount of money coming in every month, and that money would increase with inflation. I also knew that if I got sick or lost my income, I had money coming in to keep me going. It was not the end of the world.

When I have passive income, I do not have to worry about getting sick, missing work, or going on vacation.

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Why did I choose real estate?

I looked at many businesses and investments before choosing real estate. Yes, I was a real estate agent, and it may seem like the obvious choice, but I purchased my first rental property in 2010 right during the housing crash. Most real estate agents told me I was digging my own grave investing in rental properties.

I researched every investment I could because it was my money, and I wanted to make it grow as fast as possible. I did not want to take the easy way out. Real estate kept coming back as the number one choice for a number of reasons:

Cash flow

With every good rental property you buy, it should bring in a decent amount of cash flow or profit each month. I was seeing properties that would make me around a 15% cash-on-cash returns. That was a great return and really caught my eye.


The cash-on-cash return is high on rental properties because you can leverage real estate fairly easily. That means I can get a loan for most of the purchase price. When buying an owner-occupied house, I can put as little as nothing down! On investment properties, you usually need at least 20% down, and that is what I was basing my 15% cash-on-cash return on. By using leverage, it increases your returns on the right properties.

Tax advantages

Real estate has some amazing tax advantages, like the tax-free gain on a personal house or the ability to depreciate a rental property. You can also sell a rental tax-free using a 1031 exchange or using an opportunity zone.

Buying below market

Another huge advantage to real estate is that you can buy properties below market value. A house could be worth $100,000, and I can buy that house for $60,000. It may need some work or none at all. It is not easy to find deals like that, but it is possible and a massive advantage when it comes to building wealth.

Is real estate really passive?

I hear all the time how people do not want to be real estate investors because they don’t want calls from the tenants at 2 .m. or they do not want to change out toilets. Guess what: I don’t want those things either, and I do not have to do those things. I have a property manager who handles all of that, and it leaves me time to do other more profitable things. Once I get a property set up, it is very passive.

While it is passive owning rentals after they are set up, it takes some time on the front end. I have to find the deal, which takes time. I might have to have repairs made to get the property rent ready, and I need to get financing lined up. All of these tasks take time. Once the property is ready to rent, I can hand it over to a property manager. In some cases, you may be able to find a property manager that will handle many of those things for you.

I will admit that using real estate for passive income can be more time consuming than investing in stocks or other investments. The reason I love real estate is that I make more money than investing in those asset classes because of the advantages I listed above.

How did passive income change my life?

I made a lot of money in real estate, but I felt stressed because no matter how much I made, I did not have much to show for it. When I bought rentals, I created instant net worth and passive income that would always be coming in. In fact, passive income allowed me to buy many things that I am passionate about, the big ones being exotic cars.

In 2014 ,I bought a Lamborghini Diablo, which had been a dream of mine since I was a kid. I felt comfortable buying the car because I had more than $5,000 a month coming in from rentals. That $5,000 a month was not enough for me to live on, but it provided a safety net, and coupled with my income, it allowed me to buy a dream and not feel bad about it. The car was well worth it and has helped my business in many ways, as well as doubling in value since I have owned it! I have since bought a few more cars: 1981 Aston Martin V8, 1998 Lotus Esprit V8, 1994 Supra 6 speed twin-turbo, and I had a couple of other cools ones before I bought the Diablo.


The great thing about passive income is that you make money when you sleep. I don’t have to constantly struggle to bring money in. My money works for me by making more money. If I keep investing that money I make, then the passive income grows and turns into a snowball that gets bigger and bigger. It can be tough saving the money to invest, and finding the right investments, but the effort is worth it!


How to File Bankruptcy: Everything You Need to Know

The mere thought of filing for bankruptcy is enough to make anyone nervous. But in some cases, it really can be the best option for your financial situation. Even though it stays as a negative item on your credit report for up to ten years, bankruptcy often relieves the burden of overwhelming amounts of debt.

United States Bankruptcy Courthouse

There are actually three different types of bankruptcy, and each one is designed to help people with specific needs. Read on to find out which type of bankruptcy you might be eligible for. We’ll also help you determine whether it really is the best option available.

What are the different types of bankruptcy?

In general, bankruptcy is the process of eliminating some or all of your debt, or in some cases, repaying it under different terms from your original agreements with your creditors.

It’s a very serious endeavor but can help alleviate your debt if you calculate that it’s unlikely to you’ll be able to repay everything throughout the coming years.

The two most common for individuals are Chapter 7 and Chapter 13. Chapter 11 is primarily used for businesses but can apply to individuals in some instances. Take a look at the other details that set them apart from each other.

Chapter 7

Chapter 7 bankruptcy is designed for individuals meeting certain income guidelines who can’t afford to repay their creditors. You must pass a means test in order to qualify. Then, instead of making payments, your personal property may be sold off to help settle your debts, including both secured and unsecured loans.

There are certain exemptions you can apply for in order to keep some things from being taken away. It all depends on which debts are delinquent. If your mortgage is headed towards foreclosure, you might only be able to delay the process through a Chapter 7 delinquency.

If you’re only delinquent on unsecured debt, like credit card debt or personal loans, then you can file for an exemption on major items like your home and car. That way they won’t be repossessed and auctioned off.

Eligible exemptions vary by state. Usually, there is a value assigned to your assets that are eligible for exemption. You may keep them as long as they are within that maximum value. For example, if your state has a $3,000 auto exemption and your car is only valued at $2,000 then you get to keep it.

Most places also allow you to subtract any outstanding loan amount to put towards the exemption. So in the situation above, if your car is valued at $6,000 but you have $3,000 left on your car loan then you’re still within the exemption limit.

Chapter 7 is the fastest option to go through, lasting just between three and six months. It’s also usually the cheapest option in terms of legal fees. However, keep in mind that you’ll likely have to pay your attorney’s fees upfront if you choose this option.

Chapter 13

A chapter 13 bankruptcy is the standard option when you make too much money to qualify for a Chapter 7 bankruptcy. The benefit is that you get to keep your property but instead repay your creditors over a three to five year period. Your repayment plan depends on a number of variables.

All administrative fees, priority debts (like back taxes, alimony, and child support), and secured debts must be paid back in full over the repayment period. These must be paid back if you want to keep the property, such as your house or car.

The amount you’ll have to repay on your unsecured debts can vary drastically. It depends on the amount of disposable income you have, the value of any nonexempt property, and the length of your repayment plan.

How long your plan lasts is actually determined by the amount of money you earn and is based on income standards for your state. For example, if you make more than the median monthly income, you must repay your debts for a full five years.

If you make less than that amount, you may be able to reduce your repayment period to as little as three years. You can enter your financial information into a Chapter 13 bankruptcy calculator for an estimate of what your monthly payments might look like in this situation.

To qualify for Chapter 13, your debts must be under predetermined maximums. For unsecured debt, your total may not surpass $1,149,525 and your secured debt may not surpass $383,175. However, unlike Chapter 7, you may include overdue mortgage payments to avoid foreclosure.

Chapter 11

Chapter 11 bankruptcy is usually associated with companies. However, it can also be an option for individuals, especially if their debt levels exceed the Chapter 13 limits. A lot of the characteristics of Chapter 11 and Chapter 13 are the same, such as saving secured property from being repossessed.

Having to pay back priority debts in full and having a higher income bracket than a Chapter 7 are also common characteristics. However, unlike a Chapter 13, you must make repayment for the entire five years with a Chapter 11. There is no option to pay for just three years, no matter where you live or how much you make.

Another reason to pick Chapter 11 is if you are a small business owner or own real estate properties. Rather than losing your business or your income properties, you get to restructure your debt and catch up on payments while still operating your business, whether it’s as a CEO or as a landlord.

One downside to be aware of with a Chapter 11 bankruptcy is that it’s usually the most expensive option. However, you can pay your legal fees over time so you don’t have to worry about spiraling back into debt.

What are the long term effects of bankruptcy?

It should come as no surprise that going through a bankruptcy causes your credit score to plummet. Depending on what else is on your report, your score could drop anywhere between 160 and 220 points.

Those effects linger. A Chapter 13 bankruptcy stays on your credit report for seven years. And a Chapter 7 remains there for as many as ten years. Their effects on your credit score do, however, begin to diminish as time goes by.

You’ll probably have trouble getting access to credit immediately following your bankruptcy. Eventually, you’ll start getting approved for loans and credit cards, but your interest rates are likely to be extremely high.

A new mortgage will probably be out of reach for at least five to seven years from the time you file for bankruptcy. Additionally, any employer performing a credit check can see all of these items on your credit report.

Government agencies can’t legally discriminate against you because of your bankruptcy, but there is no specific rule for privately-owned companies. It could be particularly damaging if the job you’re applying for deals with money or any type of financials. No matter where you work, though, you can’t be fired from a current employer because of a bankruptcy.

Should I file bankruptcy?

bankruptcy stress

There’s no correct answer to this question and it’s ultimately something you’ll need to decide on your own. However, there are a few things you can do to make sure you’re making the best decision possible. Start off by finding a licensed credit counselor to help analyze your individual situation. They’ll help you review the guidelines for each type of bankruptcy and determine if you’re even eligible.

At first glance, filing for bankruptcy may seem like a great way to settle your debts and move on with your life. Unfortunately, the process isn’t as simple as filling out a form. The effects of bankruptcy will stick with you for years.

As you begin the evaluation process of whether or not bankruptcy is right for you, there are a number of considerations to take into account. This overview will get you thinking about your situation. It will also point you in the right direction for more in-depth resources when you need them.

Is your current status temporary or permanent?

You should also look at your expected future and compare your potential earnings to your amounts of debt. If you don’t realistically see how you’ll ever pay off that debt, then bankruptcy may be a wise option. Also, understand the types of debt you owe. Tax payments, student loans, and liens on your mortgage or car will not be discharged even when you file for bankruptcy.

Once you figure out which specific options are available to you, it’s time to contact a bankruptcy attorney. You’re certainly able to represent yourself, but the process is complicated. It’s usually best to have a professional work on the case on your behalf. Just be sure to interview a few different lawyers to get multiple opinions and prices to compare.

Evaluate Your Situation

Even when your bankruptcy is underway, it’s smart to spend some time evaluating how you got there. Was it due to a one-time financial hardship, like a long bout of unemployment? If that’s the case, then you know that you have a brighter future ahead of you with the promise of work and steady income to pay your bills.

However, if you’re on the path to bankruptcy because of reckless spending, you really need to look inward and address your overspending habits. Otherwise, it becomes too easy to put yourself in the same situation a few years down the road. Use your bankruptcy as a second chance to start fresh with a clean financial slate.

Why Consider Bankruptcy?

If you’re considering bankruptcy, then you’re most likely feeling overburdened with debt and other financial obligations. You probably have a tough time paying your bills each month and may even worry how you’ll ever pay off some of your outstanding balances.

If you’ve already exhausted your other options, like working overtime and cutting back on your non-necessities, it might be time to seriously think about potentially declaring bankruptcy. Some signs that you might be ready include:

  • Increased interest rates because of late payments or bad credit
  • Using credit cards for daily purchases without paying off the balance each month
  • Already downsized things like house, car, and other assets
  • Working multiple shifts or jobs
  • Paying off debt with retirement funds
  • Wages are being garnished

If one or more of these situations apply to you, then you should probably continue your research into bankruptcy. If not, try finding other ways to improve your financial situation. For example, you could rework your budget if there are easy places to cut back on.

You can also try negotiating with your lenders, particularly if you’re experiencing just a short-term setback. Most lenders are willing to work with you. They would much rather set up a new payment plan than have the debt discharged or settled through bankruptcy.

Understanding Bankruptcy and Alternatives

If you want to file for bankruptcy it takes careful planning. Due to the long-term legal and financial consequences of bankruptcy, there are many rules that must be followed before you’re eligible.

For example, it’s necessary to show the courts you have obtained credit counseling and considered alternatives like debt settlement or debt consolidation. Bankruptcy is controlled exclusively by the federal judicial system, which strongly recommends hiring an attorney before attempting to file.

If you need help finding a bankruptcy lawyer contact the American Bar Association. They offer free legal advice and you may qualify for free legal services if you are unable to afford an attorney.

Creating a Checklist to Avoid Dismissal

Before you file for bankruptcy, there are a number of important questions you should ask yourself. There are also several key steps that you need to take. First, it’s necessary to ask yourself if you really need to file for bankruptcy.

If you don’t, you probably won’t be approved anyway. You also need to calculate income, expenses and assets, find a trustworthy attorney, and select a credit counseling program.

It’s helpful to be methodical and to use a checklist. Failure to take the right steps and find the right credit counseling could result in more wasted money and a bankruptcy dismissal where they throw out the case.

Reasons to Delay Bankruptcy

Even if bankruptcy is the best choice for you, there may be some situations where it’s smart to delay the process so you can maximize your benefits. First, if you had a high income within the last six months that no longer applies to your situation, then you might want to wait.

That’s because the court weighs your last six months of income to determine your eligibility for Chapter 7. If you had a nice monthly salary a few months ago but have been laid off since then, that means test isn’t going to reflect your current situation accurately.

Another reason to delay bankruptcy is if you are anticipating an upcoming major debt. New debt isn’t allowed to be discharged once you file for bankruptcy.

So, for example, if you’re about to have a major medical surgery, you might consider waiting until it’s over to include the medical bills as part of your bankruptcy plan. Talk to a professional to see the eligibility requirements. Luxury items charged right before bankruptcy, for example, likely won’t be included as part of your debt discharge.

Changes in Bankruptcy Law

Before getting started, it’s important to note the changes that went into effect in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). While the changes don’t affect some people applying for bankruptcy, they may affect others.

The law requires mandatory credit counseling to make sure you fully understand the consequences of declaring bankruptcy. It also created stricter eligibility requirements for Chapter 7 bankruptcies. For Chapter 13 bankruptcies, the law requires tax returns and proof of income.

An informed decision begins with understanding the law, the bankruptcy process, and what has changed. It’s important to better understand these changes before you make any final decisions.

Filing Under Chapter 7 or Chapter 13

Understanding how bankruptcy works means understanding the process and laws related to Chapters 7 and 13 of the Bankruptcy Code. Depending on the details of your situation, you might be eligible to file under Chapter 7 or Chapter 13. Which route you choose has a lot to do with your income and what assets you want to keep.

Your debts can either be resolved quickly or over a several-year period. It’s helpful to read up on in-depth frequently asked questions related to each route.

Calculating Chapter 7 Means

To have all your unsecured debts completely eliminated under Chapter 7, you must qualify under the Chapter 7 means test. Using your personal information, or a basic estimate, an online calculator can help determine this for you. When filing, you must also fill out an appropriate form in which you enter your income, expense information, and data from the Census Bureau and IRS.

If you don’t meet the income level requirements to file for Chapter 7, you can still file for Chapter 13. A Chapter 13 will settle many of your debts after you successfully complete a three to five-year repayment program.

Qualifying and Qualifying Debts

Your debts qualify for bankruptcy relief when you can prove you are unable to pay them, but a great deal depends on your situation and which chapter you are filing under. Debts can be either unsecured or secured. Secured debts include mortgages, cars, and debts related to a property you’re still paying for.

Unsecured debts include credit card debt, bills, collections, judgments, and unsecured loans. It’s important to know which debts qualify for bankruptcy. But, it’s even more important to know whether or not your situation makes you eligible for this major step. To determine this, a full financial assessment is necessary. You can start by reading more about debts that qualify.

Defaulting on a Student Loan

If you have defaulted on a student loan, there are several options open you. Bankruptcy is one of them, but if your goal is to have a student loan discharged under Chapter 7, this can very difficult.

Nevertheless, taking certain steps as soon as possible can help prevent wage garnishment. Knowing your options can help you make the best choice before matters become more difficult. Under Chapter 13, your defaulted loan can be consolidated with your other bills. This will give you a better payment plan or a temporary reprieve from making payments.

If you have a federal student loan, check out your repayment options, especially if you are facing financial hardship. Otherwise, read more to figure out how to pull yourself out of student loan default.

What Assets You Can Keep During Bankruptcy

Depending on how you file for bankruptcy, there are certain assets you can keep. Different states have different exemptions, and in certain states, you can choose between state and federal bankruptcy exemptions.

If you need to have debts discharged, are out of work, and cannot afford a repayment plan, some assets might be lost. In most cases, however, people who file for bankruptcy can keep their homes and cars and much of what they own while they repay their debts under a modified plan. It all depends on your unique circumstances and how you file.

Get a FREE Credit Evaluation Before You File Bankruptcy

A bankruptcy can affect your credit for 7 to 10 years and should be considered a last resort option when all other options have failed. Many times people file bankruptcy when it is completely unnecessary. A credit professional can help you fix your credit and deal with your creditors so you can avoid filing for bankruptcy.

Before filing bankruptcy, talk to a credit specialist:

Call 1 (800) 220-0084 for a FREE Credit Consultation with a paralegal.


Is Home Insurance Required When You Buy a House?

If you’re buying a home, one question you might wonder is this: Is home insurance required when you own a house?

In many cases, homeowners insurance is indeed mandatory—and even in cases where it isn’t absolutely necessary, it’s still a good idea. To help you understand why, we’ve put together this Home Buyer’s Guide to Home Insurance, which will help walk you through what you need to know from beginning to end.

In this first article, we’ll introduce you to what homeowners insurance is, why it’s often essential, and what can go wrong if you don’t have it.

What is homeowners insurance?

With home insurance, as with other types of coverage (including health insurance), you pay a relatively small amount of money either monthly or annually in exchange for the promise that your provider will help you pay for unexpected costs you might incur as a homeowner.

What can go wrong? So much, including natural disasters, fires, crimes, accidents, and other emergencies, many of which can be expensive to fix. Without home insurance, you run the risk of getting stuck with a bill that could be in the tens of thousands of dollars. Home insurance offers protection and peace of mind that you won’t get hit with expenses that might be hard to pay on your own.

Why you need home insurance with a mortgage

If you need a mortgage on your home, most lenders will require you to get home insurance before they approve your loan and close the deal.

The reason: By loaning you money for the house, lenders are also investing in your property. If this investment suddenly plummets in value—since, say, a tornado turned it into a pile of rubble—it’s in your lender’s interests for you to have a home insurance plan that will rebuild and restore what you (and your lender) have lost.

“Homeowners insurance is typically required by a mortgage company,” says Brian Rubenstein, senior director for Ally Home. “A lender wants to protect the financial investment they made in your home.”

When to get homeowners insurance

At closing, most mortgage lenders will need you to show proof that you have an insurance policy already in place—even though you don’t officially own the home yet! This proof is known as an insurance binder, and serves as a temporary agreement between you and the insurance company that becomes permanent once you officially close on the home.

In fact, most lenders will want to see an insurance binder at least a few days before closing. As such, you’ll want to start shopping for insurance a few weeks before your closing date, so you have time to compare policies and find the right insurance company for you.

Do you need homeowners insurance without a mortgage?

Now, what if you don’t have a mortgage? Technically speaking, no, you’re not required to have homeowners insurance. But then the question becomes “Should you pay for home insurance?” The answer is still a resounding yes.

“Even if you don’t have a mortgage, home insurance protects the investment you’ve made in your house,” says Amy Danise, chief insurance analyst at Forbes Advisor.

“Think of the worst-case scenario, because that’s really what insurance is for: If your house burned down or was destroyed by a tornado, would you suffer financially?”

Reasons to get home insurance: What home insurance covers

If you don’t have homeowners insurance, you could be in for a rude awakening if disaster strikes and you need to pay engineers, contractors, electricians, masons, painters, roofers, and other highly specialized (read: expensive) professionals to repair the damage to your house.

According to the Insurance Information Institute, about 1 in 20 insured homes will file a claim each year. Meanwhile, data from the Insurance Research Council finds that, on average, insurance companies pay out about $8,787 per claim to help defray homeowners’ costs. Below are some of the most common and expensive insurance claims homeowners experience.

  • Wind and hail: Wind and hail damage is the most frequent reason why homeowners file insurance claims. Every year, 1 in 40 insured homeowners files claims related to wind and hail, with claims paying out an average of $11,200.
  • House fire or lightning strikes: Every year, about 1 in 350 insured homeowners files claims due to fire or lightning. These accidents are also among the most costly to repair, with claim payments averaging $11,971. Furthermore, lightning strikes are becoming more expensive. Why? Because our homes are rigged with an increasing number of electronic systems like smart home technologies, which can go haywire when struck by lightning.
  • Water damage or freezing water: About 1 in 50 insured homeowners files a property damage claim caused by water damage (like a leaky roof) or freezing water (burst pipes) each year. The claim payments average $10,849.
  • Theft: About 1 in 400 insured homeowners files claims due to theft every year, with claims paying an average of $4,391.
  • Personal injuries damage: In addition to covering your home and belongings, home insurance often includes liability coverage. This means that if a visitor gets hurt on your property, her medical bills should be covered by your home insurance company. About 1 in 900 insured homeowners files claims related to bodily injury every year. This injury could happen inside your home or, in some cases, elsewhere. For instance, if your dog bites someone on your property or even on the street or down the block, that is typically covered by your home insurance. The reason: Although we all know that dogs are members of our family, pets are considered property in legal terms. As such, any damage they inflict on others is often covered by insurance, wherever the incident happens. And good thing, too, since the average claim to cover the injured party’s medical bills hovers around $45,000.

All that said, what exactly is covered under a home insurance policy—and what you’ll pay for it—varies by provider. As such, it’s important to shop around and understand your options.

So how much does home insurance cost, and how much do you need? We’ll cover that in future installments of this guide. Stay tuned!