Top tips for starting a real estate side hustle so it can generate consistent passive income

"If you are buying property for the short term like flipping properties, you are taking a huge risk."

Dr. Disha Spath and her husband Josh.
Courtesy Disha Spath

When my husband and I moved to Nashville, I was a medical resident and my husband was a first lieutenant in the Army. We were ready to buy a house, but we knew we would most likely need to move in three years after I finished my residency, so trying to find a "forever home" seemed like a bad idea.  

Instead, we decided to use a VA loan to buy a place with no down payment, with the intent of making it a rental property once we moved to a new city. Over the last nine years, we've been able to find great tenants, and the house has appreciated in value by 175%. And the property has provided us with cash flow.

We've had to pay off the mortgage and spend on repairs and management fees. Still, our real estate side hustle has been worth it. It has created a consistent, mostly passive, additional income stream for us each month. This has allowed us to pay down debt faster. Now it's helping us achieve our other investment goals and grow our net worth.

We've also learned that there are tax benefits that can come with investing in real estate, like being able to deduct mortgage interest on the property from our taxes, and spending on upkeep and maintenance that can be classified as expenses.

In 2020, we refinanced to a lower interest rate and requested a "cash out." Banks will often lend up to 75% to 80% of a home's value out when they do a refinance. So after paying off our mortgage, we were able to take some of the equity out of the property and put it to work. We're planning to use the money as down payment to buy our next one or two properties.

Our good credit history and low debt would allow us to take out another mortgage, and we have our beginner's luck and the lessons we learned with that first home. Still, we have some trepidation about building out our real estate portfolio. So I decided to reach out to some more experienced real estate investors before we make our next purchase. Here is what I learned. 

When investing, take the long view 

Dr. Cory Fawcett, the owner of 55 rental units and the author of "The Doctors Guide to Real Estate Investing for Busy Professionals," mitigates risk in a few different ways. "I want safe loans and a good cash flow," he says. To him, a safe loan "means no adjustable rate mortgages and no balloons for at least 10 years." 

He buys properties that he intends to hold on to for the rest of his life. "If you are buying property for the short term like flipping properties, you are taking a huge risk," he says. "You are dependent on market fluctuations. If it goes up, you win. If it goes down, you lose."

Adopting this long-term view takes any concerns about market fluctuations out of the equation. "It is a pretty safe bet that my properties will be worth a whole lot more in 40 years than they are worth today," he says.

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Consider living in your investment 

Ali and Josh of The FI Couple own four apartments. Over the years, they have purchased a series of duplexes and lived in one unit while renting out the other, a concept known as house hacking. This move has cut their housing expenses significantly and has allowed them to save 70% of their income, Ali says.

Since she and her husband are opting to live in their properties, they look to buy in locations where they both feel safe and where they see the potential for stable appreciation.  

As a general rule, when analyzing an investment, "we make sure that the income on the property is far above what the total monthly expenses would likely be," she says. "This extra cash flow gives us a hedge against downturns and short-term volatility."

Prioritize cash flow 

Dr. Kate Mangona and Dr. Victor Mangona own three single-family houses: two that are long-term rentals, and one that they live in that they previously used as a short-term rental for about four years that they still rent out occasionally. They also own 13 multifamily apartment complexes in syndications with other investors.

When analyzing properties, Victor prioritizes buying assets that will generate cash flow from the start. He has typically purchased rentals that are already home to paying tenants but that would see an appreciation of value through improvements to the building or the unit. 

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The Mangonas have also focused on investing in metropolitan areas with net job and population growth. Depending on where you live, laws about rent and tenant/landlord agreements will vary, so they recommend getting up to speed with the laws on the books in your state as you build a real estate portfolio. 

Real estate investing can be intimidating. But having spoken with others who have built passive income through real estate, Josh and I feel more comfortable identifying the kinds of properties we will look for as we move forward to build our own portfolio, grow our wealth, and work toward financial freedom. 

Disha Spath is an internal medicine physician, a mother to two awesome boys, and a wife to Josh. She writes about money-saving hacks and personal finance to help doctors and other high-income professionals get out of debt and design their ideal life at The Frugal Physician.

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