There are way too many highlights and benefits of real estate investing to hit on in a single blog post, so I’m shooting to give a basic overview here. I don’t think there is any better vehicle for achieving financial freedom for the average person that investing in cash-flowing rental properties. In the future we will dive into each of these (as well as other benefits) in much further detail, but for now lets hit very briefly on some of the biggest advantages.
SKILL LEVEL REQUIRED
Anyone can do this! This isn’t something that requires you to have some revolutionary business idea. It does not require that you are some tech guru with a big business ides. You don’t have to have incredible sales ability, or some other unique talent to leverage. There are only TWO things you have to do to be successful in this arena, and anyone can do these. 1) Take the time to educate yourself first. It is not a difficult subject and quite easy. 2) Get your first investment property. Even if you have to really bootstrap to get there or find creative ways to finance it.
Cash is king, and investing for cash flow is the way to an early retirement. Cash flow is simply all the cash that comes in, minus all the cash that goes out. The amount left is your cash flow. Real estate is an amazing cash flow machine. You collect the rents, pay the expenses, pay the mortgage and what’s left if your cash flow. If your monthly cash flow from investments is greater than your personal monthly expenses, you have achieved financial freedom. Buy enough properties and eventually that cash flow will exceed your monthly expenses, and then you’re free!
Stocks, bonds, and mutual funds typically don’t provide this huge advantage (although some do pay dividends). If you want to get cash out of your stocks or mutual funds, you have to sell it and drop the size of your portfolio. Rental properties can provide steady positive cash flow month after month. All while the tenant is paying the mortgage for you and your asset grows as well.
It’s all a numbers game and numbers never lie. With rental property you can easily factor your net cash flow after all expenses, vacancies, management fees, repairs, capital improvements, mortgage payments, etc. Making money is not based on having to build a business, or be a slick salesperson, or market a product. It’s based on correctly running your numbers when analyzing the property. If you can do that you will make money because the numbers never lie.
A word of caution though, it is very easy to calculate incorrectly. You can end up not making as much as you thought, or even having negative cash flow. That doesn’t mean the numbers lied. It just means you made a costly error like over-estimating the rental rate you could get or under-estimating the expenses. So be careful! Be sure to take the time to fully educate yourself on how to calculate these numbers, and always calculate conservatively.
You may look at your first property and think to yourself “How will this every get me to financial freedom when each rental unit is only netting me $xxx each month?? It will take forever to acquire enough to cover my lifestyle goals!” It is true that it takes a large number of rental units to get to financial freedom. And it does start very slowly. But there will come a point where you turn a corner and can begin acquiring large numbers of rental properties at an incredibly rapid pace.
For me I started to turn that corner about 5-6 years into my real estate investing career. Then it just EXPLODED and grew incredibly fast. I went from 20 to 107 rental units in less than twelve months by applying the principles to unlock the exponential growth potential of real estate. There are multiple reasons that attributed to this that you can read about in The Exponential Power of Real Estate.
If you have $20,000 in cash, how much can you put in your retirement account or mutual fund? Pretty easy right? $20,0000. If you invest that same amount of cash as a down payment into a piece of investment property, what size property can you buy? In most cases 20% down on investment properties is the minimum. That means with $20,000 you can buy a $100,000 piece of property. Let’s look a little more at that too and what that means for the future.
Assuming zero inflation, the Dow Jones has averaged 4.8% growth in its lifetime. At that growth rate in twenty years your $20,000 in the market is now worth $51,081. Let’s assume your rental property was put on a twenty-year note. Again we take inflation out of the equation again to compare fairly. In twenty years your mortgage is paid off and now you own your property outright so your $20,000 is now worth $100,000. Your investment is worth almost double what it would be if it tracked with market! And not only that you made money every year off of the rental income!
Real estate investments take advantage of this is multiple ways, but let’s look at the main one. The advantage that affects the cash in your pocket every year. Let’s say you put a rental property on a twenty-year note (very common for investment properties). It’s now year ten of your ownership. What’s your payment now? A: It’s the same as it was ten years ago when you started. What rents are you charging now? A: You’re charging the current market rent that has gone up with inflation… see where this is going? Your payment has remained the same and does not go up with inflation, but your rental rates have increased with inflation so your annual cash flow goes up!
There are a multitude of these but the there are two big ones. 1) Depreciation – this is a phantom expense, or paper loss. This doesn’t take any money out of your pocket but you get to lower your taxable income by this amount each year. That means some of your income from real estate, and possibly even all of it, is completely tax-free! 2) Tax rate – rental income is taxed at a much lower rate than traditional W-2 income. Therefore you get to keep more of every dollar you make that is taxed! So not only is some of your income tax-free, what isn’t tax-free is taxed less. Read more about this in the post Tax Advantages of Real Estate
Refinancing to capture equity is a powerful tool. If your mortgage has been paid down significantly, or your property has appreciated significantly through either market appreciation or improvements you’ve made, you have an excellent opportunity to withdraw cash through a refinance. ALL of the cash you are able to pull out through a refinance is 100% tax free. What you do with all that tax-free money is up to you, but I would tell you to buy another property!
These are just a few of the major advantages of real estate. It all adds up to making rental properties the best and quickest path to financial freedom. A path you should educate yourself on and begin as soon as you can and in less than ten years you can be living free as well.