Real estate is an excellent way to create a substantial net worth and owning rental properties can be just the thing to get you there. However…this is not a get rich quick plan…
It is…a plan that can be created and executed by almost anyone who is willing to put in the time and effort. Think about your goal and some of the things in this article to decide if creating wealth through rental properties is right for you.
What Are Your Goals?
There are lots of ways to invest in real estate and owning rental property is just one of the ways. Is it the best way to accomplish your goals? Well…that depends on what you are trying to do…Are you trying to create cash flow? Do you want to increase your net worth by acquiring equity in multiple properties? Are you looking to invest your money in a tried and true process that has worked for centuries?
The good news is that investing in rental properties can give you all three. Wait, slow down…it may not be just like you think…
Cash Flow – Can you create positive monthly cash flow with rental properties? Absolutely! But it may not be quite as much as you think. Keep in mind that you will probably have a mortgage payment, taxes, insurance, repairs, and vacancy. All these numbers need to be accounted for in order to access your real monthly cash flow. If you end up with $100-$200 per month in cash flow, this may not set you up for financial freedom quite as fast as you had hoped.
Increase Net Worth – Rental properties can be a great way to increase your total net worth through the increased equity you will have in the properties as you own them for a longer period of time. You can get a huge jumpstart on this equity acquisition by buying properties at a discount or buying them at a discount and repairing the properties to increase their value.
Tried and True – Real estate and real estate investing has created thousands of millionaires and has proven itself to be a good investment strategy over hundreds of years. Now…of course, you can lose money and you can’t just buy anything and do whatever and everything works out. You still need to educate yourself and do things the right way in order to be successful.
If these are some of your goals then investing in rental properties might be a good idea for you.
Increases Over Time
One of the GREAT things about owning rental properties is that things tend to get better over time! Tenants will be tenants and more houses will always mean more repairs, but what I’m talking about are the financial benefits over time.
Rents tend to increase over time. So, if you have a fixed interest mortgage where your payments remain the same, this will increase your monthly cash flow the longer you own the property. You will have to account for increases in taxes and insurance but these are usually more than offset by the increase in market rents.
Property values increase over time. This can vary greatly depending on your location but it would be reasonable to assume that property values will increase at an average of 4-5% per year. If you combine the increase in property value with the reduction in your mortgage balance over time, you will continually be increasing your net worth because your equity in the properties is increasing.
Most rental property owners have a regular 9-5 job and this is a way for them to invest their money while still continuing to work that can have major benefits over the long run.
Costs Of Owning Rental Properties
I wish the houses were free…the repairs were free…and people would just send you money…but sadly it ain’t so…
This does not mean that the costs outweigh the benefits, it just means that you need to know what the costs are and make sure you account for them before you jump in.
The costs of the properties – Houses aren’t free and you will usually have to come up with at least a down payment to buy your first rental property. Depending on your credit, lender, acquisition cost, and a few other things can impact how much money you will need to put down. There are ways through certain finance programs or working with financial partners that you can use other people’s money to fund 100% of your acquisition costs, but that is for another article, so you should plan to have some skin in the game.
Taxes and Insurance – We all have to pay taxes…and these tend to increase as the value of your property increases. This doesn’t mean you shouldn’t do it but it might be a good idea to find out where you can save on taxes and what deductions are available. If you have a lot of money in a rental property, you are probably going to want to insure it…and if you have a mortgage, the lender is going to require that you insure it. Shop around and find the best product for you.
Repairs – There will be repairs…I don’t care how much you try to make the property perfect before your tenants move in…things will break, its just part of the game. Most of the time they are minor things but sometimes there will be more expensive items like water heaters or A/C units. You need to have some money set aside to address these issues as they come up.
Vacancy – It’s nearly impossible to keep a property rented at all times with no vacancy. Make sure that you will be financially secure if you have a month or two without any rent coming in. You can greatly reduce your vacancy but giving your tenants a quality place to live at a fair price and addressing your tenant’s concerns in a reasonable amount of time.
Do You Really Want To Be A Landlord?
I wish I could tell you that everything will always be sunshine and lollipops…but that would be a lie…If you do this for long enough, you will eventually have a disagreement with a tenant, someone will pay late or refuse to pay, and one of your properties will be damaged by a tenant.
I would like to balance that by saying that that is the minority and not usually the majority. We have had many fantastic tenants, who took excellent care of the property, always paid on time, and we were sad to see them go when they decided to move on. This is the relationship that we strive for in all of our properties with all of our tenants, but it just doesn’t always work out that way.
Being a landlord and owning rentals properties can be tough. You need to take an honest look at yourself and decide if you can handle the headaches and the stress that can occur when you own rental properties. If you know that you can’t take a few bumps and bruises, then this may not be the best path for you.
Yes, you can always hire a property manager and this is the best choice for some people. Just make sure that you weigh the pros and cons. You will have someone to help you lease the properties, work with your tenants, and coordinate repairs, but this is another cost that you need to factor in, many times your repairs will cost a little more, and no one will look after your investment like you will.
What Do I Think?
Rental properties are a fantastic way to supplement your income, greatly increase your net worth, drastically change your financial path for the better, and almost anyone can do it. But you need to know what you are getting into and what kind of results you can reasonably expect.
If you have no money to invest and you need to create monthly income right now…then there are probably better strategies for you in the short-term and you can consider coming back to rental property a little later.
If you are looking to create some cash flow and increase your net worth and you are willing to commit for the long haul…then it is my opinion that rental properties are hard to beat for the majority of people.
Thanks for reading and I hope you found this article informative. If you have any questions, please feel free to reach out or if you would like to suggest another article topic let me know and maybe I can give it a shot!