As I have been learning throughout my time as an investor, there are so many great things about investing in real estate, and more specifically rental properties. I believe rental properties are the best investment that anyone can invest in. It doesn’t take a rocket scientist to figure it out, it just takes time and effort. I am so excited about each of these reasons and how you can profit from them like I do.
Rental properties have many benefits to the investor and I have seen them first hand. All my years of investing has brought my family and I terrific wealth and security. When you look at how the laws are created to benefit those who own real estate, you too will see that real estate rental properties are the only true way for wealth creation and long term passive income.
If you have one rental property or one hundred, these benefits will apply to you immediately. Cash flow from the rent received is one the easiest the think of, but there are many more.
15 Reasons Real Estate Rental Properties Are The Best Investment
1. Cash flow from monthly rent
When you buy your rental properties, you must buy them to earn cash flow from day one. The rent minus expenses is your cash flow for the property. It is not uncommon to have anywhere from $200-$300 in monthly cash flow from each property you own.
2. Equity Capture
You MAKE your money on a real estate purchase when you BUY the house. You REALIZE the money when you SELL Buy low, sell high.
Just as you buy the property to earn cash flow from day one, you also want to buy the property below market value, so you automatically gain equity on the property. If a three bedroom, two bath, single family home market value is $120,000 and you buy it for $100,000, you automatically gain $20,000 in equity for the property.
3. Equity Buildup
You, as an investor, want to get paid for the value that you bring, not the hours that you work. To build up equity yourself, you can find the worst house in the best neighborhood, fix it up with minor repairs like paint, carpet, etc. and make the value of the home increase beyond the current market value. The same $120,000 home that you bought for $100,000 will be worth $140,000 after you fix up the property and make it worth more. Also, when you build the value, the rental income goes up because the property demands a higher rent due to the superior property compared to the others for rent in the area.
4. Market Appreciation
For the last 200 years, the real estate market has doubled in value every 20 years. Two of the main reasons for this are inflation and interest rates. The value of the dollar is reflected in the current gold price. An ounce of gold is worth the same 200 years ago as it is now. It is just the way in which we buy the gold that has changed in value. The dollar, through inflation, has lost its buying power over the years, and the government quantitative easing (governments’ term for printing money out of thin air with nothing backing the value of it) to stimulate the economy. With inflation, your homes you buy will increase in dollar value and history shows the value doubles every 20 years.
Interest rates are also a cause for price fluctuations in the real estate market. As interest rates lower, which we have seen in the past 10 years, prices go up because the ability to borrow money is cheap (currently 3%-4% interest rate), and people can buy more expensive homes for less money each month out of their pocket. If people can only afford a $1,500 a month mortgage payment, a $400,000 home at 4% interest for 30 years is a home they can afford. But if the interest is at 9% (as it was in the 80s and 90s) for 30 years, their $1,500 a month will only allow them to buy a $235,000 home.
5. Tenants Pay Your Mortgage for You
With the monthly rent you collect each month, part of the money goes to pay the mortgage you took for the purchase of the property. A $100,000 home, which can be rented for $1,200 per month, with a 4%, 30 year mortgage is only $477 per month. That leaves $723 per month to pay the property manager and the expenses. The balance is yours to keep as passive income.
6. Complete Control Over Your Investments
Unlike stocks, where you have no control over the business, you have complete control over your real estate business. Want to increase rents? Increase the value of the property. Need to replace an AC unit and want to save money by buying a smaller unit because the original was too big? That is your choice. Want to pass on a tenant that has bad credit and prior evictions? Again, all in your control. You have complete control over the business and property to do as you see fit.
7. Owning Real Estate is Seen as a Business
Because owning rental properties is seen by the IRS as a business, you get many tax deductions. These deductions makes it look like your passive income is lower and because of that, you save money.
- Depreciation – The IRS lets you deduct the value of the property over 27.5 years. Depreciation is looked at as an expense, but no money was ever spent. You purchased the property, which makes you money and still has its actual value, and the IRS lets you deduct part of the value of the property over 27.5 years.
- Another great thing about depreciation is that if you give the property to your children, they get to start the entire depreciation cycle of 27.5 years all over again at the current market value!
- Operating expenses
- Mortgage interest, insurance, repairs, advertising, Property Manager, utilities, yard maintenance, losses, etc.
- Ownership expenses
- Property taxes, mileage, business cell phone, professional fees for accountants and lawyers, travel, convention attendance, business education, home office, etc.
8. Taxes on Your Properties can be Deferred Almost Indefinitely
With real estate, you can defer the taxes you incur when you sell your property almost indefinitely. With an IRS 1031 exchange, you can exchange the property for a like-kind investment. Like-kind is real estate exchanged for more valuable real estate. Like-kind is not selling a Coffee Shop business in exchange for real estate. For example, you buy a single family home, sell it 10 years later, and make $50,000. Use a 1031 exchange to buy a more expensive property like another single family home that makes more income or even an apartment building! Do all this without paying any taxes today and defer them to a much later date if you decide to cash out completely.
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9. No Liability, But All the Control
When you purchase properties as rentals, the best way to own the property is with a company like an LLC. You want to “control” the rental properties and not “own” them. You may buy your personal residence in your name, but the investment properties should be put into a company you create, like an LLC or an S-Corp. An LLC is a Limited Liability Company that you own and control, and the LLC then owns the property. Since it is the LLC that owns the property and not you personally, if the property ever gets sued, you are not personally liable and your assets will be safe. Remember that you “control” the property, not own it.
10. Low Volatility in the Real Estate Market
Unlike the stock market, the real estate market does not change overnight. Even if the real estate market crashes, at it did in 2007, you are able to see it coming as well as get out of the way if needed. But, no matter what happens in the market, if you learn how to buy right, you will never have to worry about another crash in the real estate market because your rent still comes in every month.
11. Making Money In An Up or Down Market
Even better, though, is if you purchase your properties right and they cash flow from day one, you will not have to worry about an up or down market. Since the mortgage is fixed at 30 years and you have income coming in to cover the expenses, you will always make money. Rarely do rents ever go down, and actually they are always going up with inflation. In an up market, you can sell your properties and use a 1031 exchange and buy a better property with your gains. Also, in a down market, homes are cheaper, and the rent to purchase price is more in your favor.
12. Constant Demand for your Product
The product you are selling is basically a place to live for anyone. No matter what happens to the economy, people need a place to live and will be there to sign a lease with you for the property that you own. Since everyone needs a place to live, your product will never go out of style.
13. Use O.P.M. to Start Your Real Estate Rental Business with Leverage
Go ahead and ask a banker to lend you $100,000 to buy stock in Apple or Microsoft. He would laugh you out of his office. Now ask the same banker to lend the same $100,000 to you to buy a home; be ready to sign the contract. Leverage is the most widely used means to acquire rental properties because banks are so willing to lend to the right investor who knows how to manage properties.
Leveraging a property and taking on a mortgage is using other people’s money to make you money. When you buy a home with all cash, your rate of return (return of money that you put into the deal) is much lower than if you use leverage.
- Purchase a $80,000 home:
- Paying cash in the amount of $80,000 would bring you $8,400 a year income. Equity capture of $18,000, Appreciation of $5,000 and Cash flow of $8,400 is a total return of 38% on the $80,000 you spent
- You use leverage and put a down payment of $8,000 for the $80,000 home brings you $2,400 a year in income. Equity capture of $16,000, Equity increase from mortgage payments of $600, Appreciation of $5,000 and Cash flow of $2,400 is a total return of 200% on the $8,000 you spent.
Inflation averages about 3% per year. If you keep your money in the bank earning .01% per year in your savings account, you are losing money every day. You may be gaining a few meager dollars, but those dollars buy less and less every year.
As you can see from the savings vs. inflation image to the right, your $10,00 you saved for ten years with simple interest makes you $10 in interest. After the same ten years, your original $10,000 can only buy $9,930 worth of goods. So you may gain $10 after ten years but you lose $30 because of inflation which makes a net loss of $20.04 after ten years.
15. Insure Your Investment
You can insure your rental properties against things like loss, theft, fire, and liability. Just like you cannot get a loan for stocks, ask a insurance broker to give you insurance for losses in the stock market. He would laugh at you and then kick you out of his office. If you own a rental property with a replacement value of $250,000, you can pay yearly insurance on the property of only $700 for full coverage and protect your investment. How could that get any better? Easy! Have your tenants pay for the insurance by adding it into your numbers when you purchase the property. $700 a year is $58.33 a month. When you run your numbers when you purchase a property, make sure the costs of insurance is in there so you have it covered by the rents the tenants pay.
Now you can see why rental properties are the best investment that anyone can invest in. It is not reserved for the rich, just those who want to work hard and be independent. Master Passive Income is here to help you achieve the dreams and goals you have created for your life. Success breeds more success. Now is the time to act! Get out there, look at properties, analyze the deal, put in offers, and get started on your journey with Master Passive Income!
Do you have any questions or comments? I want to hear from you. Please comment below.
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