There are approximately 16,000 TV shows about flipping houses. For good reason. It’s cool to watch transformations, and the payday’s are huge!
I don’t know of any TV shows about landlords. Where is the love? I think it’s because owning rental property is not exciting or sexy. If done right, it’s boring.
Rental properties may not make for good TV, but they’re possibly the best tool for building wealth over time. Here’s the 16 reasons why I love the rental game.
The Basics
Cash-flow
You get to keep the difference between what comes in and what goes out each month. This money can be reinvested or used to pay living expenses. Everyone loves cash-flow! This is the focus of most rental investors.
Appreciation
Rental properties can go up in value. I think this becomes more likely with the consistent gentrification of urban neighborhoods.
Depreciation
Buildings deteriorate over time. The IRS recognizes this and allows you to deduct a paper loss each year. The reality is that if you take care of your building, it should last longer than the 27.5 years allotted by the IRS. To the tax man, it looks like you’re losing money. It’s theoretical. I’ll take theoretical losses any day.
Leverage
Rental properties are fairly easy to borrow against. It’s pretty easy to find conforming loans with great terms. But the options are endless. You can utilize commercial loans, private loans, or owner financing. Because of the stability in real estate prices, you can easily leverage your money 4 to 5 times. (I.e. 20,000 will allow you to buy a 100,000 property.)
Consistent
Rent comes in at the beginning of each month. When you sign a lease with a tenant, you can expect to receive that rental payment for at least 12 months. Once the income starts it’s likely to continue.
Control
You get to make all the decisions about how to buy, sell, and manage rental properties. In the beginning this is intimidating, because you don’t know what to do. With some experience, I’ve learned to love this control.
Time Is On Your Side
Rentals are a long term game. So many things are working in your favor, It’s hard to lose over time. Options traders have a concept for this called “long theta.” It basically means that your portfolio, or strategy, benefits from the passage of time. I like for time to work on my side.
Do Less
Minimize Transaction Costs
In any market there are transaction costs. Great investors find ways to minimize those costs. Warren Buffett preaches the importance of minimizing transaction costs. Compared to other methods of real estate investing, rental properties greatly reduce annual transaction costs.
Minimize Renovation Costs
Renovating homes for retail sale requires the highest level of craftsmanship. Home buyers want high end materials, and features. This can get very expensive. With rental properties, higher end finishes don’t matter much. It’s just not important to most tenants I talk to. They want climate control, and for things to function properly. It’s much less expensive to accomplish.
Minimize Taxes
You’ll pay less taxes on rentals. Often times you’ll pay none at all. You get to write off depreciation, interest paid, property taxes, maintenance, and more.
Minimize Your Marketing Budget
There are multiple places to advertise your rental properties for free. Facebook Marketplace, Zillow, and GoSection8.com are my favorites. Some investors spend thousands in marketing for properties each month. This is completely optional for rental property investors. I mostly use the MLS and Wholesalers to find deals so my marketing budget is $0 right now.
The Characteristics Of A Great Business
Easy To Outsource Management
In many businesses it’s hard to step out, and turn over management to someone else. Not the case with rental properties. If I ever wanted to stop managing rentals myself, I could hire a property manager. You definitely want to interview them thoroughly though. I learned some valuable lessons from hiring the wrong manager. Here’s who I would use if I was going to hire a property manager. Tell him I sent you!
Ability To Scale
Investing in rental property is pretty easy to scale. You have very predictable revenue and expenses. You also have the ability to easily outsource any part of the business that you don’t like. Many businesses are not this easy to scale.
Low Entry Point
You can buy rentals for under $20,000 in Birmingham. You can get them even cheaper if you learn about tax deeds. This is about as cheap as you can start any business.
Potential For Infinite Returns On Your Investment
The BRRR strategy is hugely popular. It stands for buy, rehab, rent, refinance. At the end of that process, the goal is to have none of your own money left in the deal. At this point, you can recycle that money and repeat the process. You’ll still be generating rental income on the first property, which is essentially an infinite return. It’s one of the best things going in real estate. But it’s nuanced and harder to execute than it sounds. It all starts with getting a great discount when you buy.
Minimal Regulation
I came from a financial background. We were regulated by FINRA, the SEC, State Financial Boards, etc. Everyone wanted to tell us how to do things, and charge us fees for the privilege. Real estate has been refreshing. It’s way less restrictive. Less regulation means less fees and costs for compliance. Landlords don’t need to register or get a license. However, having my real estate license has definitely helped me in so many ways.
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