Turbo 200 Universal Capacitor 67.5MFD: $501.00
Add Puron-410A, Replace Valve, Freon Charging: $729.00
CO2 Drain Purge, Remove Water: $437.00
2 Ton R 410A Coil: $2,000.00
Total for A/C Repairs: $3,667.00
If you’re thinking that’s a rough year for air conditioner repairs, you wouldn’t be wrong.
Unfortunately, those are all repairs we’ve needed on different units in the past 10 days.
It gets better (worse?)… the average high temperature in Chicago over the past ten days has been around 90 degrees.
Still want to own rental properties?
Why would anyone want to own rental properties?
We’ve spent a lot of time recently talking about the four main reasons why I invest in rental properties:
When these benefits combine, real estate investors can generate significant wealth over the long run.
But, make no mistake:
Owning rental properties does not generate passive income. Being a landlord is a job. Even if you rely on a property manager, it’s still a job.
Before we talk about the job of owning rental properties, here’s a quick breakdown of each of the four main benefits.
For a more detailed description of each benefit, you can read my series on investing in real estate here.
1. Rental property cash flow is king.
With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses.
For my money, cash flow from rental properties is the best way to pay for those immediate expenses.
If your present day expenses are already covered, you can use your cash flow to fund additional investments.
That might mean buying another rental property or investing in another asset class, like stocks.
2. Long-term wealth through appreciation.
Appreciation simply refers to the gradual increase in a property’s value over time.
While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.
Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.
To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.
3. With rental properties, other people pay off my debt.
When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.
However, I do not pay that debt back with my own money.
Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.
I then use those rent payments to pay back the loan.
As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.
When my equity in a property increases, my net worth increases.
4. Real estate investors earn massive taxes benefits.
When you earn rental income, you must report this income on your tax return. Rental income is treated the same as ordinary income.
However, the major difference between rental income and W-2 income is that there are a number of completely legal ways to deduct certain expenses from your rental income.
Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.
With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.
Yes, you read that right.
I’ll say it again, just to be clear:
Most savvy real estate investors legally pay nothing in taxes on their rental income each year.
Rental properties do not generate passive income.
At one point or another, you may have heard someone say, “I want to invest in rental properties for some passive income.”
Yes, we all want passive income.
No, investing in rental properties is not passive.
Think of owning rental properties as a way to earn “semi-passive” or “partially-passive” or “somewhat-passive” income.
Don’t think of owning rental properties as a way to earn “passive” income.
If you want passive income, you should be investing in index funds, like VTSAX. For more on investing in the stock market, you can check out my series on investing here.
For even more, JL Collins literally wrote the book on investing in VTSAX. His book is called The Simple Path to Wealth and is tremendous. You can read my review here.
By the way, there’s nothing wrong with wanting passive income. For those of us on our journeys to financial freedom, passive income is what it’s all about.
It’s just that owning rental properties is not passive.
To be a successful rental property investor, you have to appreciate that it is a job.
Owning rental properties is like having another job.
It’s not a full-time job. In fact, there might be months that go by when you don’t actually do much of anything. Your main job is to be at-the-ready in case a tenant messages with an issue.
On the other hand, there will be 10-day stretches where you have three a/c units break requiring multiple service calls, tenant coordination, and $3,600 in repairs.
Granted, this 10-day stretch was just about the worst stretch for maintenance and repairs we’ve had as landlords. It just so happened to occur in the days leading up to me writing this post about being a landlord. Life’s funny, huh?
Still, talk to any landlord and they will have similar stories to share about the stress involved with being a landlord.
Most rental property investors who give up did not realize the work involved.
I’ve known countless rental property investors over the years.
In my experience, the ones who end up selling their rental properties after a couple of years did not appreciate that becoming a landlord means taking on a job.
Unfortunately, they sell their properties long before getting the benefits from cash flow, appreciation, debt pay-down, and tax advantages.
These landlords had likely been misled into thinking that owning rental properties was an easy way to generate passive income.
Look back at the top of the post for the four main reasons I invest in rental properties.
Cash flow, appreciation, debt pay-down, and tax benefits.
Did I say anything about easily earning passive income?
Don’t make the same mistake that so many unsuccessful landlords have learned.
If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income. There will be tenant issues, work orders, money spent, and tough decisions to be made like in any other business.
This remains true even if you have a property manager. You’ll often hear real estate investors griping about “managing the property manager.”
The bottom line is owning rental properties is a job. It’s not a full-time job. It’s not even a regular part-time job. But, it is a job.
At times, it can be very easy. Other times, it’s very stressful.
If you can handle the job, you can generate massive long-term wealth for you and your family.
I accept that owning rental properties is a job and have benefitted immensely.
For me, the benefits of owning rental properties significantly outweigh the downsides of being a landlord. It’s a tradeoff that I would happily make again and again.
How does the old saying go? “If it were easy, everybody would do it.”
Being a landlord is not easy. It’s definitely not for everyone.
But, then again, neither is financial freedom.
Coming up, we’ll talk about tips on how to make your experience as a landlord as smooth as possible. You can also follow me on socials for current issues I’m dealing with as a landlord.
In the end, if you are willing to put in the effort, owning rental properties will accelerate your journey to financial freedom.
Are you a rental property investor?
Do you agree that owning rental properties is a job?
Let us know in the comments below.
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