So You’re Looking To Get Rich with Rental Properties, Eh?
If you’re looking for a new way to build wealth and secure your financial future you’re not alone. Many Americans today have come to realize that traditional pension plans are likely a thing of the past and social security is, at the very best, a slim possibility.
Fortunately, this isn’t bad news for everyone. If you have managed to recoup all of their losses from the Great Recession in 2008, you’ll likely be just fine. Assuming that you’re among the 20% of Baby Boomers who were actually prepared for retirement in the first place…
If this doesn’t sound like your situation, don’t freak out. There’s still hope. Financial security can still be yours. The first step is to adjust your mindset. Continue reading to learn more.
Tip #1: Understand the power of inflation
If you think the safest place for you money is in a shoebox under your bed, think again. Why? Because of inflation.
Inflation causes the price of goods and services to rise over time. This includes food, rent, wages, real estate prices, stocks, etc. The only things that do not increase in value, as a result of inflation, are cash and bonds. In other words, cash actually holds less value over time, making it a poor choice for long-term savings.
On the flip side, there is one asset that is (almost) always guaranteed to increase in value with inflation. This asset is real estate.
Why does the cost of real estate fluctuate in response to inflation?
It’s because people always have, and always will, need real estate. As a result, real estate prices must stay aligned with average wages, taxes, and expenses so that residents can actually afford to buy homes. This is a good thing for investors: as long as you’ve invested in the right markets, at the right time, you’re real estate investment should increase in value along with inflation, at a rate of about 2% per year.
Tip #2: Know how to get immediate profits
It is possible to make profit from your real estate investment within the first six months, if you know how to “force” appreciation. This is the process of buying a home and making improvements that increase the property value. The profit is considered forced appreciation because it took effort, not just timing of market cycles or inflation. (Note: not all improvements increase value.)
Tip #3: Always sell last
Once you sell a house, it’s over. You will never make any more money off of it. But a property you hold onto will continue to make you money every year, and at the same time the value of the property will appreciate. The best part: you don’t even need to sell the home to free up money for another investment. This is where the saying “Ref til you die” comes from!
Successful investors will tell you the only time you should consider selling a property is if it’s not working for you.
Tip #4: Take advantage of fixed mortgages
Often people think they can’t buy real estate until they are already rich. This is false. It is definitely easier to pay cash, but your returns are much higher if you borrow money.
Tip #5: Take advantage of loan leverage
Leverage is one of the greatest advantages used by real estate investors. Investopedia defines leverage as: “the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.” This is an important concept to understand, because it can help you achieve a much higher return on your property.
Did You Know?
Banks will lend you up to 10 loans for investment properties, as long as you have good credit, a 2 year job history, low debt-to-income ratios and reserves? Assuming you are buying a rental property worth around $100,000, you’ll need to have about $20,000 for a down payment.
You’ll also need about $3000-$5000 for closing costs and approximately 6 months worth of mortgage payments set aside in savings to cover potential vacancies or unexpected expenses. All told, you’ll need around $30,000 in liquid funds in order to obtain an $80,000 mortgage.
With this kind of 80/20 leverage, you should be able to realize returns of 15-25% on rental property!
Tip #6: Take advantage of tax breaks
Did you know that owning rental property can give you huge tax advantages? That’s right. You can deduct almost all expenses incurred as part of your cost of doing business, and you can also deduct things like depreciation, property taxes, repairs, maintenance, and more. All this can add up to a lot of free money at the end of the year.