Hot on the tails of Keir Starmer's controversial assertion that landlords aren't "working people", as it's passive income, like income from shares, Suzanne Smith and Richard Jackson discuss objectively the extent to whether income from residential rental properties can be considered "passive". Stepping back from the political debate, they examine "passive income" means, and contrast it to what landlords need to do to earn money from their rental properties. Although property "gurus" claim that rental income is passive, there is a trade off between outsourcing and profit. It's also the wrong mindset. >> Blog post: Can landlords make passive income from rental property? >> Ask a question: Click here for question form What we cover in this episodeDifferent types of landlordsWhat does "passive income" actually mean?How do landlords make money from rental properties?What do landlords actually do to earn money?Landlords' legal obligationsOther strategiesFinal thoughts Different types of landlords There are two key types of residential landlords: part-time landlords who manage properties alongside a full-time job, and professional landlords who manage their property portfolios as their main occupation. Richard emphasises that even part-time landlords work very hard, juggling their careers with property management. Suzanne adds to this by discussing the responsibilities and engagement required, even for those landlords who might have fewer properties. Landlords who manage properties themselves do not earn passive income - it is a job. On the other hand, income from landlords with full repairing commercial leases is more passive. What does "passive income" actually mean? HMRC considers passive income to be investing in assets, and not from running a trade or a business, or being an employee. They give examples such as interest payments from bank accounts, annuities, and dividends from money invested in the stock market, and don’t refer to rental income. Forbes frames it as income that doesn’t need a significant commitment of time or effort to earn, with only minimal monitoring on an ongoing basis. They say that rental income doesn’t fall within the definition of passive income as it requires a large up-front investment, as well as ongoing maintenance and management of the property. Despite what the "property gurus", earning rental income as a landlord isn’t the same as getting interest from money in a bank account, or dividends from stock market investments. However, is it right to say that landlords really earn money with minimal effort? How do landlords make money from rental properties? Landlords earn money from rental income and capital growth. Landlords need cashflow from rent in order to pay the bills while they are waiting for capital growth, unless they are going to dip into their savings. Capital growth is never guaranteed. Although property prices boomed in London in the past, anyone who bought a flat in London over the last 5 years will know that capital growth is not a given. Suzanne barely broke even on her flat in Cambridge in 7 years, despite it being a fantastic flat a great location. What do landlords actually do to earn money? But before landlords earn anything, they need to find, finance and buy a new rental property, which is time-consuming and expensive. Then they need to refurbish the property (unless it's a new build), make sure it's compliant, and then find suitable tenants to rent the property. Once tenants move in, they will need managing, and the property will need ongoing repairs and maintenance to keep the property in great condition, and compliance with landlords' various legal obligations like the annual gas safety certificate. There is always a lot of work when tenants change over. It is running a business. If landlords outsource these activities, the income can be more passive, but that will reduce margins.
