Rags To Riches From Rentals
Thursday, September 4th, 2008
Why should you be excited about rental properties? First, residential rental properties are the easiest way for a new investor to get started investing in real estate. Investing in rentals makes it possible for you to buy houses using other people’s money and earn an income in doing so.
You do not need a single dollar to buy your first rental property. Rental properties offer a number of different ways to build wealth. You simply buy a property and rent it out for more than it costs you to own it. You gain with the appreciation the property realizes, the equity that increases as the mortgage is paid off for you, and the positive monthly cash flow. By purchasing just one rental property you have started the domino effect to acquiring many more. Once you own one property, you can use it to acquire your next, and so on.
Second, rental properties open the door to an abundance of tax strategies. Through potential tax deductions and tax credits, an investor who is used to paying a large amount to Uncle Sam each year can instead keep more of his income and in turn use it to expedite his path toward financial freedom.
Finally, the knowledge and income you will gain through investing in residential rentals will better prepare you for all other areas of real estate investing. You will learn how to establish a large cash pool that can put you in the ball game with the investors that frequent the foreclosure auctions. You will learn that “Cash is King,” and if you do not have any, this is the best way to get some.
They pay you a positive monthly cash flow. They pay for themselves. They increase in value. They save you thousands in taxes. They multiply!
Case Study:
While waiting tables, Josh acquired 12 houses in a period of three years. He purchased each property for $100,000 using a 30-year mortgage and no cash out of his pocket. His annual mortgage payments for his properties totaled $86,400. After all expenses, these properties cash flowed $30,000 per year. He also took out a $20,000 equity line of credit on each property totaling $240,000. He used these funds as a down payment along with a 30-year mortgage costing $300,000 annually to purchase a large four-million-dollar apartment complex. After all expenses, the complex cash flowed $100,000 annually. Needless to say, with a passive income of $130,000 per year, Josh stopped waiting tables. He also stopped buying more real estate. In 30 years, when all his mortgages are paid off, Josh will own $5.2 million of real estate free and clear. Without his mortgage payments, Josh’s cash flow will increase to $516,000 per year, and this is assuming Josh’s rents never increase and his properties realize zero appreciation. In a more realistic world, his rents will have increased by an average annual rate of between three and ten percent and his properties will have appreciated at about the same rate. Imagine what the power of time and compounding will do for Josh’s portfolio!
Case Study:
Nicole tied up a fourplex for $205,000 with a closing date for August 5 and the seller paying up to $5,000 of her closing costs and bank fees. At closing, instead of having to bring a check to the table, Nicole was given a check made payable to her for $6,000. She was able to do this through 100 percent financing, seller-paid concessions, and prorated tenant rents and deposits. Because she closed on the fifth of the month and the property rents were due in advance on the first, a proration of the rents collected from the 5th to the end of the month were rightfully hers. Tenant deposits are always transferred with the property to the new owner’s care.
