I’ve been taking concrete steps to get closer to investing in rental property. While I consider myself experienced in precious metals, stocks and mutual funds, I am very much in the early stage of learning about real estate. In this article I’ll share what I’ve done so far.
Action 1: Found a mentor and started building a network
I’ve taken it upon myself to learn as much as I can about real estate but I don’t want to try to figure it all out on my own. I’ve reached out to an individual who is experienced in real estate investing who is open to mentoring me and I’m looking forward to bouncing ideas off my mentor and leveraging the knowledge of this experienced professional.
I’ve also been talking about real estate investment with a good friend who recently began purchasing properties. This friend closed on a house that will be rented out and is gracious enough to answer my questions and share experience.
Action 2: Attended a real-estate investing workshop
I attended a free real estate investing workshop put on by the Rich Dad company. This was interesting but not very practical. They did A LOT of sales, trying to get you to buy books and attend one of their three day workshops. I expected as much, after all, they aren’t really doing this for free. But I was hoping to glean more actionable information.
I wouldn’t necessarily recommend going to one of these Rich Dad workshops unless you plan on spending upwards of $300 to purchase their training and/or materials.
Action 3: Started Listening to the Bigger Pockets Podcast
I don’t gain anything by promoting Bigger Pockets. My real estate investing friend recommended I start listening to their podcast. I also signed up for their newsletter and got a copy of their free “Ultimate Beginner’s Guide to Real Estate Investing” which I’ve been reading through.
It’s got me thinking about different ways I can get into real estate investing.
On such way is “house hacking”. I’m considering buying a duplex, renting out one side, and living in the other side. This could allow me to live rent free and learn the basics of buying a property before I move onto something bigger.
My Next Steps
- Determine how much capital I can raise to make a down payment on a property.
- Learn what locations close to my area are optimal for investment.
- Research loans rates and lenders.
- Get a handle on my credit rating.
- Develop a network of potential partners interested in investing in real estate with me.
- By pooling capital I can invest in a larger property and potentially get more scale, versus sticking with duplexes and single family homes.
So that is what I’ve been doing as I research getting into real estate.
Buying Rental Property and Real Estate has helped create many a millionaire. Robert Kiyosaki, Barbara Corcoran, and even Donald Trump amassed fortunes via Real Estate.
Buying rental property is an investment that hits on three out of five of my Investment Goal Categories: Capital Appreciation, Preservation of Purchasing Power and Passive Monthly Income.
At it’s most basic level, investing in rental property consists of buying a property and then renting it out to gain monthly income.
I don’t directly own any rental property at this time but it is an area I’m investigating and learning more about.
Buying Rental Property has Five Great Benefits
1) Passive Monthly Income (Cashflow)
2) Equity Build-Up
3) Leverage Utilization
4) Very Favorable Tax Benefits (in the US)
Let’s explore the five benefits of buying rental property.
Passive Monthly Income
In many areas it’s feasible to purchase a rental property that generates positive cashflow each month. Even after making a monthly mortgage payment, taxes, fees and maintenance expenses, a good rental property can be have net positive cashflow from the rent payments of the tenants.
This meets one of my investment goal categories of passive monthly income.
Many banks will loan qualified persons enough money to purchase a rental property but typically require a 20-30% down payment. By renting the property you can use the rental income to pay the mortgage and continue to build equity in the property until you own it outright.
With equity in a property you have the option to choose between selling the property, taking a loan out on the property and re-mortgage it, or simply hold onto the property and continue to enjoy the monthly income.
By taking out a loan to buy a positive cashflow rental property you are leveraging the capital you have to make more money. For example by using $16,000 for a down payment you could purchase an $80,000 property and rent it for $600 per month. Lets say after making the mortgage payments, paying property taxes, and other expenses, you are bringing in $150 per month in cashflow. At the end of the year that $150 monthly income would be $1,800 from a $16,000 investment, or over an 11% return. And that doesn’t even include the increase in equity.
Because of the use of leverage, price inflation actually reduces the cost of the remaining loan balance over time. This combined with the universal human need (and hence demand) for shelter even when the economy is not performing well makes buying rental property a great investment for preserving purchasing power.
I’m not a CPA or tax advisor, but I understand that when it comes to investment properties, mortgage interest, depreciation of the property, and other expenses that go into maintaining the property are tax deductible. Often times the 11% profit can be made tax free because of all the deductions the tax code (at least in the US) provides to real estate investors.
Partly due to price inflation, partly due to an increasing population and demand for housing, real estate prices tend to rise. So it is possible to grow wealth because the value of the property has gone up. While this is more on the speculative side of the housing and real estate market, appreciation can be a very nice bonus.
This meets one of my investment goals of capital appreciation as well as preservation of purchasing power.
What has stopped me from Buying Rental Property in the past?
- Capital I need money for a down payment. Most of my savings go into stocks and I want to buy a rental property with new money. So I’m going to start earmarking money for buying rental property. While it might be possible to buy a property with zero down I think this is reckless and irresponsible. It’s a good way to find yourself underwater on your mortgage. By making a 20% down payment you can weather a 20% drop in the value of the property and still be even in terms of equity. Plus if the property is cashflow positive, even if you are not making money via appreciation, you can still make money via cashflow and equity building.
- Knowing how to make an offer I would like to better learn how to coordinate having a loan pre-approved with making the offer. With real estate you have to be able to move quickly. In some markets if you go eat lunch to think it over the property will be sold by the time you get back.
- Maintenance Costs and Expenses If you know purchase price of a property and how much you can rent it for (by looking at similar properties being advertised in the same area) and what your costs are going to be you can determine if a property will be profitable (or not). However, I find the most difficult part to research is estimating maintenance costs. The hot water heater breaks, furnace needs repair, a crazy tenant tears up the place, etc. As someone who has been a renter all his life I don’t have a good sense of how much I need to budget for maintenance costs for a rental property. These costs are a huge factor in the profit and loss calculations.
There are five great reasons why real estate investing is a superb way to build and grow wealth. I’ll be sharing my progress in the coming months as I continue to learn more about real estate investing.