Do you want to get into rental property investing because of the positive cash flow? Many new real estate investors are first attracted to the idea of investing in rental properties because of the passive income and cash flow benefits.
But when you actually buy your first rental property, you are more likely to break even or make only a few hundred dollars a month in positive cash flow on your rental properties.
When you realize that you have to pay for maintenance and repairs, and that not all tenants pay their rent on time, you can easily find your positive cash flow turning into break even (or even negative cash flow).
This is very common, and unfortunately it is also the main reason why new investors get out of rental properties.
If you are going to invest in rentals, then you need to understand the bigger picture of why you are buying rental properties and this bigger picture needs to be more than just your currently monthly cash flow. Keep in mind that I am not suggesting that you EVER invest in a property that is negative cash flow.
What I am suggesting is that your first rental property is more likely to be break even or only moderately positive. If you don’t understand the bigger picture of why you are investing in real estate with rentals, then when the maintenance bills and evictions come, you will not have the fortitude to stick it out for the long term.
That is why I made this podcast. You can listen to the podcast at the bottom of this page by clicking on the black triangle to play the podcast.
To show you the long term benefits, and why you HAVE to invest in rental properties even if your initial year is only moderately positive cash flow.
On this podcast, I use an example of a house that you can purchase for $70,000 that has an after repair value of $100,000. We call that a wholesale deal.
Assume that you are my student, and I am willing to loan you $60,000 of my own personal money to buy this house (I do this with my coaching students all of the time).
In this scenario, you only need to put down $10,000 and I give you a personal loan for the other $60,000.
Let’s assume that this house is in pretty good shape and needs only $5,000 to be rent ready (clean and paint and some minor repairs).
Your out of pocket cash on this house would be $15,000 (I am not including closing costs, insurance etc in order to keep this example simple and easy to follow).
So you buy the house, clean it up and rent it out. And then you go to your mortgage broker and tell them you want to refinance to pay off the $60,000 loan that you owe me.
The appraisal comes in at $100,000 which is the initial ARV Estimate that you figured the house would appraise for.
The bank is willing to loan you 80% of the appraisal value ($80,000). Let’s assume fees to refinance are $5,000. You are left with $75,000. You take that $75,000 and you pay me back the $60,000 and you are left with $15,000. This is the same $15,000 that you put into the property. At this point you have effectively purchased a property with no money down. Remember that you would have paid closing costs, insurance etc to get into the house so you would really be out of pocket by a few thousand dollars.
Now you own a $100,000 house and you owe the bank $80,000. Your equity in the property is $20,000. By purchasing this property (which was at a wholesale price) you have increased your net worth by $20,000. You now own an asset. But this asset comes with headaches (tenants and repairs) and benefits (tax deductions).
Let’s talk about the tax deductions. The interest, property taxes, insurance, repairs and maintenance are all deductible. So is the depreciation. By buying a rental property, even if your cash flow was break even, you would make money from the tax deductions. This means less money would be taken out of your pay check.
But it gets better. If you get a 15 year mortgage, and you are able to endure the tenant, the repairs, and the maintenance, then 15 years from now you would own this property free and clear (with no mortgage).
If that property increased in value at just 4.8% per year (lower than average) your property would DOUBLE in 15 years and would then be worth $200,000. and you would own it free and clear.
If rents increased at just 4.8% per year then your rents would double too (from $900 per month to $1,800 per month).
So when you first start out investing in rental properties look at the bigger picture.
If you can buy a property for almost no money down, and 15 years later you will have an asset worth $200,000 and a LIFETIME of rental income then that is the bigger picture.
If you need to endure some difficult tenants, a few evictions and maintenance and repairs then always remember that all of that is deductible (and you will pay less taxes).
Make a commitment to buy at least one rental property. Hold it for the long term and you will be wealthy.