Tag: Real Estate Investing

  • The Ultimate Landlord Tip: Choose Your Tenants Wisely

    The Ultimate Landlord Tip: Choose Your Tenants Wisely

    What’s more important: choosing the right property or choosing the right tenants?

    If you ask any experienced landlord, you’ll get the same answer every time:

    Choosing the right tenants.

    @thinkandtalkmoney

    One wrong tenant can turn your dream property into a nightmare. #landlordtips #RealEstateTok #thinkandtalkmoney #moneytok

    ♬ original sound – Thinkandtalkmoney

    Yes, choosing the right property is important. Of course, you need a property that will attract the right kind of tenants.

    But, selecting the property is a one-time decision during the acquisition process.

    As a landlord, choosing the right tenants is something you need to do constantly.

    When you choose your tenants wisely, your experience as a landlord can be very rewarding.

    When you fail to choose your tenants wisely, life as a landlord can be very difficult.

    Let’s dive in.

    Choosing the right property is just the first step as a real estate investor.

    When my wife and I bought our first rental property, we were fortunate that our real estate broker took the time to mentor us.

    He was a fellow investor and landlord and had learned a lot over the years.

    He has helped us in countless ways, including putting together a list of features we look for in every rental property.

    Here are some of the most important factors we evaluate when considering rental properties in Chicago:

    1. Location, location, location. In Chicago, proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
    2. Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
    3. Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
    4. Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
    5. Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.

    There are certainly other factors we consider, but these are some of the first things we look for thanks to the guidance of our real estate broker.

    Once you choose the right property, the hard part begins.

    If you are going to be a landlord, selecting the right property is just the first step.

    An equally important decision soon follows, one that you will need to repeat every time you turnover an apartment.

    Of all the lessons our mentor taught us, this is probably the most important one:

    Choose your tenants wisely.

    You can have the best property in the world in the best location with the best amenities.

    If you have lousy tenants, managing that property will be a total nightmare.

    Not only will the experience be miserable, your bottom line will likely suffer.

    I know a number of landlords who have had such bad experiences with tenants that they sold their properties.

    I’ve known other landlords who stopped offering up their homes for short-term rentals because of difficult guests.

    When you’re forced to sell your rental property too soon or stop earning rental income, you’re missing out on the four main reasons to invest in real estate.

    If you don’t choose your tenants wisely, you’ll miss out on the four main reasons to invest in rental properties.

    Here are the four main reasons to invest in real estate:

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    Below is 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.

    If you don’t choose your tenants wisely, you might not be able to collect the rent on time.

    You may have to evict a tenant or ask a tenant to part ways.

    Or, you may have costly maintenance and repairs that eat away all your profits.

    Whatever the case may be, when you are not receiving timely and consistent rent payments, your cash flow suffers.

    This is especially problematic if you depend on monthly cash flow to pay your living expenses.

    Old Caucasian woman shopping for fruit and choosing wisely like what a landlord needs to do when selecting tenants.
    Photo by Beth Macdonald on Unsplash

    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.

    Appreciation takes time to materialize.

    When you don’t choose your tenants wisely, your experience as a landlord may be so miserable that you end up selling prematurely.

    If you have lousy tenants and choose not to hold your property long-term, you won’t benefit from his massive wealth-generator.

    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.

    Of course, if your tenants are not paying rent consistently and on-time, you’ll be stuck paying off your own debt.

    Depending on your overall financial situation, you might not be able to pay the mortgage without the rental income coming in.

    That’s a big problem for obvious reasons.

    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.

    However, if you don’t have rental income coming in because you didn’t choose your tenants wisely, this benefit is not so helpful.

    How to choose your tenants wisely.

    Now that you understand why it’s so important to choose your tenants wisely, the next question is how to do it.

    The first, and most important, rule to remember is that you are not allowed to discriminate when screening potential tenants.

    That should go without saying.

    For more information, please refer to The Fair Housing Act, which prohibits discrimination based on race, color, national origin, religion, sex, familial status, and disability.

    You also need to be aware of any local rules in your area.

    Disclaimer: While I am a lawyer, I am not your lawyer and am not providing legal advice. This post is for educational purposes only.

    The next most important rule is that you need to personally meet every tenant before you sign a lease.

    Forget about credit scores and income sources and references for a minute. You can confirm all of that during the application process.

    Before you get to any of that, you need to see what kind of person you may be getting into a relationship with.

    You are going to be depending on this person for your livelihood for the next 12 months or more. You can’t afford to get this decision wrong.

    Choosing the right tenant is like dating. No, you don’t have to love this person. You don’t even have to like the person. But, you have to do your best to figure out if he’s going to make your life miserable.

    Avoid the temptation to sign a lease with the person qualified applicant who walks through the door. Make sure an applicant is a good fit, even if this means saying no to people who otherwise qualify on paper.

    Ask yourself these questions when you’re sizing up a potential tenant.

    When meeting a potential tenant, ask yourself these questions:

    • Is he pleasant to be around?
    • Does he seem reasonable?
    • Is he a jerk?
    • Is he rude?
    • Does he seem respectful?
    • Is he a complainer?
    • Does he give off “party-until-2am” vibes?
    • Is he sloppy?
    • Does your apartment seem to match what he’s looking for?

    By asking yourself these questions, you give yourself a better shot at finding a good tenant for your apartment.

    Why is this so important?

    There are going to be times when things go wrong. Dishwashers break. The tenant upstairs will be too loud. The hot water heater stops working.

    When these things happen, the last thing you want is to be dealing with a jerk on top of the problem that needs to be fixed.

    Trust your gut. Use your common sense.

    You won’t be right 100% of the time, but you will be in a much better situation if you put in the effort to personally meet potential tenants before signing a lease.

    A landlord working in an office on a virtual call interviewing a prospective tenant because choosing your tenants wisely is critically important.
    Photo by LinkedIn Sales Solutions on Unsplash

    Does your apartment seem like a good fit for the potential tenant?

    Don’t ignore that final question above.

    A landlord-tenant relationship is a two-way street. You want to find someone who will be happy in the apartment.

    However, landlords oftentimes focus only on whether a potential tenant is a good fit for the landlord.

    Yes, that’s important. But, it’s just as important that the apartment seems like a good fit for the tenant.

    For example, maybe a potential tenant tells you that outdoor space is on the top of his wish list.

    If you convince him that outdoor space is not very common in your area, sure, you may close the deal. But, is closing the deal all that matters?

    In this example, you’re stuck with someone for 12 months or more who’s living in an apartment without the number one thing he wanted. That could lead to an unhappy tenant who can’t wait to move on after his lease expires.

    Think about it like this: if you end up with a tenant who doesn’t really like the apartment, he could make your life difficult during the lease term.

    He might go out of his way to find things to complain about. Or, he might not be cooperative when you need to access his apartment for routine maintenance or future showings.

    Plus, he’ll be more likely to move out at the end of his lease instead of renewing for another term.

    Because vacancy is a landlord’s worst nightmare, your goal should be to find tenants who might end up renewing their lease at the end of the term.

    The point is: part of your job as a landlord is to think about whether your apartment is a good fit for a potential tenant, not just whether a potential tenant can afford the rent.

    You won’t always be successful in choosing your tenants wisely.

    Despite your best efforts, you may end up in a difficult situation with your tenants. This happened to me recently.

    We have an apartment building in a terrific location with units that are in great shape. We’ve never had any trouble finding tenants.

    This year was no different.

    After three showings and very little effort, we happily signed a lease with new tenants. As a bonus, the former tenants had moved out early, so we were able to fill this unit with zero days of vacancy.

    All was well… until it was not.

    Let’s just say that after about six weeks, it was apparent that the relationship with our new tenants was not working out. The tenants were not bad people, but it was clear that we could not meet their expectations.

    Instead of living through a difficult year with these tenants, we offered them the chance to break their lease, without penalty. They accepted our offer and moved out two weeks later.

    We all remained civil and amicably split up. The tenants left the apartment in good shape and we all avoided unwanted confrontation. 

    We re-listed the apartment and found a wonderful new tenant after one showing.

    In the end, we lost out on three weeks of rent between leases but now have a very happy new tenant.

    Upon reflection, I’m confident this was the right decision for all parties involved.

    The tenants could find a place more to their liking, and we could start over with a new tenant.

    If you can’t do the tours yourself, set up a virtual meeting before signing the lease.

    Since 2018, my wife and I have done every apartment showing ourselves (except one unexpected occurrence when we were out of town).

    This is the best way to truly get a read on what kind of person you may be renting an apartment to.

    If you can’t do the tours yourself, the next best thing is to set up a virtual meeting before you enter into a lease.

    With apps like Zoom and FaceTime, it’s easy to set up a 15 minute call. At that time, you can find out more about the potential tenant and ask yourself the questions we covered above.

    Putting in this extra effort is what separates successful landlords from those who give up and sell their properties prematurely.

    Choose your tenants wisely.

    Showing apartments and interviewing tenants is not always fun.

    It’s time-intensive. It may lead to awkward conversations. You may not love meeting new people.

    But, it’s critically important to the success of your rental property business.

    Being a landlord takes effort. If you are hoping for completely passive income, opt for index funds, not rental properties.

    Choosing the right property is just the first step.

    Choosing the right tenants is equally as important.

    Landlords: what are things you look for in a potential tenant?

    Have you made mistakes in choosing your tenants previously?

    Let me know in the comments below.

  • Don’t Buy a Cute Condo: Do This Instead to Create Wealth

    Don’t Buy a Cute Condo: Do This Instead to Create Wealth

    Have you ever dreamed about owning a cute condo in a bustling city?

    You know, the type of place where you can have your friends over and everyone gushes over how great your condo is?

    If so, you’re not alone.

    Many young professionals follow a traditional path in hopes of buying that cute condo as a “starter home.”

    First, they spend a lot of money for an education to get a good job.

    Then, after a few years of working that good job, they think about buying a starter home instead of continuing to rent.

    These young professionals go into the home-buying process knowing that the home they may purchase will only be a temporary fit.

    Even though it may be years down the road, they tell themselves they can simply upgrade if a significant other or children enter the picture.

    For professionals living in cities, the search for a starter home typically leads them to condo buildings.

    This makes sense. Condo buildings are attractive for a number of reasons.

    I get the temptation to buy a cute condo.

    Condo buildings are usually in locations ideal for young professionals.

    Condo buildings oftentimes come with enticing amenities.

    Plus, condo buildings typically offer one or two bedroom units, the perfect size for an individual.

    Because of these features, condo buildings tend to attract other young professionals, making the building even more attractive.

    While I never owned a condo in Chicago, I happily rented directly from owners in condo buildings for 10 years before buying my first rental property. So, I certainly appreciate the allure of living in a condo.

    All this being said, I highly encourage you to think twice before buying a condo, or any other “starter home” for that matter.

    That’s because owning a unit in a condo building comes with two significant downsides: (1) the actual cost and (2) the opportunity cost.

    Instead, I recommend you think about these two alternatives to buying a starter condo:

    1. Continue renting until you’re ready to buy a more permanent residence; or
    2. Buy a small multifamily building where you can live in one unit and rent out the other units.

    Before covering these two alternative ideas, let’s talk about the (1) actual costs of owning a condo and the (2) opportunity costs of owning a condo.

    What are the actual costs of owning a condo?

    The actual cost of owning a condo is like owning any other property, with one additional cost to be acutely aware of.

    Besides the mortgage, insurance, taxes, and maintenance, condo buildings involve an additional cost that can be very expensive:

    HOA Dues and Special Assessments.

    Remember all those attractive amenities that drew you to the building in the first place?

    Those amenities come with a price. Oftentimes, a substantial price.

    On top of the HOA dues, be aware of unexpected special assessments, which can wreak havoc on your finances.

    Special assessments may be needed to cover major maintenance or renovation projects in the building. When special assessments are due, you don’t have a choice but to pay up.

    Ask any former condo owner why they no longer own a condo. My bet is most of them will blame the HOA dues and special assessments.

    exercise equipment inside a typical condo building showing an amenity that you probably won't use very often and why you shouldn't buy a cute condo.
    Photo by Point3D Commercial Imaging Ltd. on Unsplash

    The other reason you’ll hear from former condo owners?

    They outgrew their place.

    This should not come as a surprise to any single person who buys a condo while also seeking a significant other.

    You know how the saying goes: first comes love… then comes marriage… then the condo’s got to go.

    That means additional money to prepare your condo for sale, for closing costs, and for moving expenses.

    By the time you add up all these costs, you likely won’t walk away with any profit from owning a condo as a starter home because you only gave yourself a few years to benefit from appreciation.

    Even if you do make a profit, it’s a gamble. Owning any home for a short period of time is not a good investment strategy. The transactional costs are simply too high.

    Besides these actual costs, you should also consider the opportunity cost of owning a condo early in your career.

    What is the opportunity cost of owning a condo?

    While you may be OK with taking on the risk and these actual costs, don’t ignore the opportunity cost of owning a condo.

    The opportunity cost refers to what you are losing out on by choosing to buy a condo.

    In this context, the opportunity cost is that whatever you paid for the condo could have been used to invest in other assets. For example, instead of a down payment on a condo, you could have invested in stocks.

    Or, you could have purchased a rental property that generates long-term wealth for you and your family (or future family). More on that below.

    So, before you opt for the cute condo, think about both the actual costs and opportunity costs involved.

    There’s nothing wrong with renting until you are ready to buy a more permanent home.

    Owning real estate is a long-term proposition. The conventional wisdom is that you should not buy a property unless you plan to hold it for at least 7-10 years.

    If you are not planning on staying in your starter home for at least that long, just keep renting. Invest your money elsewhere.

    Save yourself the headaches of being a homeowner while building your net worth through an increased saving rate and other investments.

    This is not groundbreaking information. This is Personal Finance 101.

    Yet, many young professionals can’t resist the temptation to finally own a property after years of school and finally earning an income.

    It’s up to you to set aside your ego, keep renting, and build a strong financial foundation.

    By the way, many smart people think it’s financially foolish to buy a primary residence instead of renting.

    And, I’m not just talking about buying a cute condo early in your career.

    These really smart people think it’s almost always a better idea to rent instead of own in any circumstances.

    While it’s beyond the scope of this post, you can find an in-depth analysis on the question of buying vs. renting in this video from Khan Academy.

    I believe in the power of real estate as an asset class, especially small multifamily properties.

    Instead of buying a condo for a starter home, consider these four reasons to invest in rental properties: 

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    Below is 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.

    brown and white concrete building under blue sky during daytime reflecting you should buy a small multifamily property instead of a cute condo.
    Photo by Krzysztof Hepner on Unsplash

    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.

    I highly recommend you consider house hacking if you’d like to start investing in real estate. 

    When you buy a small multifamily property, you can live in one of the units and rent out the others.

    If you pick the right property, you can end of living for free because your tenants pay your mortgagee.

    The strategy of living in a building you own while tenants pay for it has been around for ages. Brandon Turner popularized the name “House Hacking” for this timeless concept. 

    You can read all about house hacking on BiggerPockets here.

    For even more information on house hacking, Craig Curelop wrote a book for BiggerPockets called The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom.

    My wife and I house hacked for years before buying our forever home.

    Without a doubt, there is no better strategy for entry level real estate investors than house hacking. We talked about the financial upside earlier in this post.

    Besides the financial upside, it’s like landlording with training wheels. Since you live on site, you can more easily learn how to manage a rental property, including responding to tenants and handling routine maintenance.

    The naysayers will say something like, “I don’t want to live with my tenants. They’re going to stress me out. I don’t want to be bothered at 2 a.m.”

    Ignore them.

    My wife and I lived with our tenants for five years at our first property and two more years at a subsequent property. We did this while working full-time jobs as lawyers and raising two kids (now three kids). 

    Because we didn’t listen to the naysayers, we now have four income-generating properties and our “forever home” just outside Chicago.

    Even though we’re no longer living for free, the income from our rental properties is enough to cover the expenses of our home.

    Before buying that cute condo, think about house hacking instead.

    There’s no better time to house hack than at the beginning of your career. This one decision can pay massive dividends for years to come.

    No, your friends might not gush over your cute condo.

    But, you’ll be well on your way to generating long-term wealth for you and your family.

    Even if you’re not just starting out in your career, house hacking is still an incredible wealth-building strategy.

    My wife and I house-hacked until I was nearly 40 years-old with two kids. We wouldn’t be where we are today if we instead opted for a cute condo.

    Did you buy a starter home in your 20s or 30s? Any regrets?

    What do you think of house hacking?

    Let us know in the comments below.

  • How to Think About Investing in Both RE and the Stock Market

    How to Think About Investing in Both RE and the Stock Market

    Let’s say that you have $200,000 that you want to invest.

    Up to this point, all of your investments are in the stock market, mostly through tax-advantaged retirement accounts like a 401(k).

    However, you’ve recently started thinking about buying your first rental property.

    You have an important question to sort through:

    Should you buy your first rental property or just keep investing in the stock market?

    This is a common dilemma for all real estate investors, not just people thinking about buying their first rental property. Personally, I’ve been thinking about this question quite a bit lately.

    The way I see it?

    Why not do both?

    Why not build your overall investment portfolio to include both stocks and at least one rental property?

    @thinkandtalkmoney

    Happy to provide the geniuses a place to live. #thinkandtalkmoney #realestateinvesting #rentalproperty #genius

    ♬ original sound – Thinkandtalkmoney

    Today, we’ll explore why you may want to invest in the stock market and own rental properties.

    If you’ve been on the fence about buying your first rental property, this post will help you think about why it may be a good idea.

    Real estate is my favorite asset class.

    It’s no secret that real estate is my favorite asset class. Without my four rental properties, my journey to financial freedom would look much different.

    I’m confident that real estate will remain a powerful asset class moving forward.

    That’s because no matter how much the world changes with AI, quantum computing or any other new technology, I know one thing will always be true:

    People will always need a place to live.

    At this point in my life, I know that I’ll never become a brilliant coder or software engineer solving the world’s hardest problems.

    But, I can provide the geniuses a place to live.

    That’s why I’m comfortable with the majority of my net worth being in real estate right now.

    By investing in rental properties, I can make money in four different ways:

    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.

    Even though I love owning rental properties, I still invest in the stock market.

    While there are certainly real estate investors out there who are 100% committed to real estate, I’m not one of them.

    Even with my passion for rental property investing, I have a significant portion of my net worth in the stock market.

    For one reason, I enjoy having some totally passive income streams. Compared to being a landlord, there is essentially zero work involved in being a passive stock investor.

    For another reason, I see the value in having multiple, diverse streams of income to help protect me against life’s uncertainties.

    Plus, like many of you, my investing journey began with my employer-sponsored 401(k) plan.

    401(k) investing is easy and relatively straightforward. With automatic contributions from my paychecks, I don’t even need to think about funding my account.

    As a W-2 employee since 2009, without even thinking about it, I’ve invested regularly in the stock market and enjoyed the benefits of compound interest.

    As my career progressed and my family grew, I added investment accounts to my portfolio.

    Besides my 401(k), my favorite investment accounts include a Roth IRA, 529 college savings accounts for my three kids, and a Health Savings Account.

    In conjunction with my rental properties, I view each of these different investments as part of my overall strategy to reach financial independence.

    Combined, I refer to these different investment and income streams as Parachute Money.

    Reach for the sky. Sometimes normal is too boring. invest in both real estate and the stock market for a safe landing with Parachute Money.
    Photo by Vlad Hilitanu on Unsplash

    What is Parachute Money?

    Parachute Money is one of my favorite concepts in all of personal finance.

    Pretend your life is like flying on an airplane.

    For whatever reason, you decide you need to get off this airplane. You decide to take control and make a change. You’re ready to jump.

    All you need is a parachute.

    You have a choice between the only two parachutes on the plane.

    The first parachute has only one string (or line) connecting the canopy to the harness . You think to yourself, “This doesn’t seem very safe. What if that one string breaks? That would end very badly for me.”

    Then, you look at the second parachute.

    The second parachute has 10 strings. You say to yourself, “OK, this one looks much safer. If one string breaks, the parachute still has nine other strings to keep me safe. Even if something goes wrong with one or two strings, I would glide safely to the ground.”

    It’s obvious which one of these parachutes to choose, right?

    Why is having Parachute Money important?

    The central idea of Parachute Money is to create multiple sources of income so you are not beholden to any one source.

    Picture each source of income as a string on your parachute. The more strings on the parachute, the stronger it is.

    With Parachute Money, if one of your sources of income dries up, you are more than covered with your other sources.

    Likewise, the more sources of income you have, the stronger your personal finances are.

    Parachute Money includes your primary job, any side hustles, any income generating assets, and your emergency savings account. It also includes the income of your significant other, if you share finances.

    The key to Parachute Money: protect yourself with as many investment and income sources as you can.

    That’s why I own stocks and own rental properties.

    Should I buy a rental property or stick with the stock market?

    Lately, I’ve been asking myself this very same question, “Should I look into buying a fifth rental property? Or, should I invest that money in the stock market?”

    There are certainly lifestyle considerations that go into this question beyond just the strength of the investment on paper.

    For example, owning rental properties means taking on a job. On the other hand, investing in the stock market is mostly passive.

    If you’re not ready for the job of being a landlord, then you should stick with investing in stocks.

    Setting lifestyle considerations aside, we all have limited dollars available to invest. And, we work hard for those dollars.

    When we choose to put those hard-earned dollars to work for us, we want to make sure we’re getting a good return on our investment.

    It’s hard enough deciding where to invest your money once you’ve decided on the asset class. Take real estate, for example.

    Even if you know you want to buy a rental property in a specific area, there might be hundreds of potential properties available.

    Picking the right property is not easy and requires some careful analysis.

    How much more difficult does the decision become when you’re not even sure if you should invest in real estate or invest in the stock market?

    That decision can start to feel overwhelming.

    The perfect landing with a parachute indicating the importance of having parachute money through real estate and the stock market.
    Photo by Ali Kazal on Unsplash

    Deciding between various asset classes can feel overwhelming.

    With so many investment choices out there, it can be difficult to choose where to invest your money. That’s why it’s useful to have a way to compare one type of asset class to another.

    Then, you can consider investment opportunities in different assets classes and make informed choices on where to invest.

    Fortunately, we can use two simple metrics to help with this analysis:

    1. Cash on Cash Return on Investment (CoCROI)
    2. Return on Investment (ROI)

    Real estate investors have long used these two metrics to decide if a potential property is a good deal compared to investing in the stock market.

    In our next post, we’ll take a close look at each of these metrics. We’ll learn how each of these metrics can help you compare a rental property investment to typical stock market returns.

    Don’t worry if math is not your favorite thing.

    These two numbers are easy to calculate with an online calculator. The key is to make sure you understand the underlying principles and variables that go into the calculations.

    Are you comfortable investing in rental properties and the stock market?

    I like to invest in rental properties and the stock market to protect myself from economic and life uncertainties.

    I don’t want to be all-in on only one asset class.

    So, I view my rental properties and my stock investments as parachute strings working together to protect me should my airplane start going down.

    Because I’m comfortable investing in both rental properties and the stock market, I need a way to help choose between options across those asset classes.

    In our next post, we’ll learn how to do just that.

    Do you invest in the stock market and in rental properties?

    Which asset class did you invest in first?

    Is part of your reasoning for investing in both asset classes to add layers of protection to your overall finances?

    Let us know in the comments below.

  • Shrink Your Magic Retirement Number With One Rental Property

    Shrink Your Magic Retirement Number With One Rental Property

    “Wait- how much do I need to save for retirement!?”

    Have you ever felt that way after learning how much money you think you need to retire?

    I’ve certainly felt that way in the past.

    The prospect of saving millions of dollars in order to retire can seem impossible, especially when you’re just starting out.

    You may have even wondered, “How do people even come up with these retirement numbers?”

    The most common answer to that question is the “4% Rule.”

    Using the 4% Rule, you can calculate your magic retirement number and determine how much money you need to save for retirement to maintain your current lifestyle.

    The 4% Rule suggests that you can safely withdraw 4% of your investments in year one of retirement. Then, you can safely withdraw 4% plus an adjustment for inflation in subsequent years. 

    If you do so, you can expect your money to last for 30 years.

    Today, we’ll take it one step further.

    Let’s explore how owning even a single rental property can further reduce the amount you need to save for retirement.

    The results may shock you- in a good way.

    @thinkandtalkmoney

    4% rule plus a rental property=chef’s kiss for retirement #thinkandtalkmoney #rentalproperty #retirementplanning #4percentrule

    ♬ original sound – Thinkandtalkmoney

    How to use the 4% Rule to forecast your magic retirement number.

    First, let’s look at an example using the 4% Rule to forecast your magic retirement number.

    In some fun news, Bill Bengen, creator of the 4% Rule, just released a new book showing that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    If you’re at all interested in FIPE (Financial Independence Pivot Early), Bengen’s book is a must read.

    Bengen’s research is significant because it means you can safely retire with even less money. That’s because the higher your safe withdrawal rate, the less you need squirreled away to maintain your lifestyle.

    In light of Bengen’s updated research, we’ll use 4.7% as our safe withdrawal rate.

    Let’s say that your lifestyle costs you $10,000 per month, or $120,000 per year.

    To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .047.

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $120,000 / .047 =$2,553,191.49 

    Based on the updated 4.7% Rule, you need $2.55 million to maintain your current lifestyle in retirement.

    By the way, under the original 4% Rule, you would need $3 million in investments ($120,000 / .04 = $3,000,000.00).

    See why people are excited about the updated 4.7% Rule?

    Does saving $2.55 million for retirement seem like an impossible task?

    Saving $2.55 million for retirement may seem like an impossible task.

    If that’s your initial reaction, be sure to check out my ongoing series on investing. We cover everything you need to know to start investing with confidence.

    You may be surprised to learn that If you start investing early and often, reaching $2.55 million is actually not that hard.

    Even so, there’s another way to massively shrink your magic retirement number: owning rental properties.

    Why would anyone want to own rental properties?

    There are four main reasons why I invest in rental properties: 

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    decorative lights under a tree at night showing how one rental property can shrink your magic retirement number.
    Photo by Jay on Unsplash

    Before we look at an example of how owning rental properties shrinks your magic retirement number, 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.

    With these benefits in mind, let’s see what happens when we add a single rental property to your portfolio.

    How owning a single rental property lowers your magic retirement number.

    Let’s continue our example from above where your current lifestyle costs $120,000 per year. We learned that means your magic retirement number is $2.55 million based on the 4.7% Rule.

    Now, let’s add a single rental property into the mix.

    Let’s assume that you own a rental property that cash flows $2,000 per month. That’s a total of $24,000 per year.

    Remember, your cash flow is the profit remaining after paying your mortgage, taxes, insurance, and any other costs.

    To learn how to properly run the numbers on a potential rental property, click here.

    With $24,000 per year generated by your rental property, you don’t need your investment portfolio to fund your entire $120,000 lifestyle.

    Instead, your investments only need to generate $96,000 per year ($120,000 – $24,000 =$96,000).

    So, let’s plug $96,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $96,000 / (.047)=$2,042,553.19

    By adding a single rental property to your portfolio, you’ve lowered your magic retirement number by half a million dollars!

    You now only need $2.04 million to maintain your current lifestyle in retirement.

    Macro X-ray of some mushrooms with false coloring showing how to shrink your magic retirement number with one rental property.
    Photo by Mathew Schwartz on Unsplash

    What happens to your magic retirement number if you pay off your mortgage?

    This example shows how your magic retirement number drastically shrinks with the addition of just a single rental property.

    Keep in mind that in this example, we assumed that you have a mortgage on your rental property. That mortgage obviously reduces your cash flow.

    But, what if you paid off that mortgage before you retired?

    Let’s finish our example by assuming that you have a 30-year fixed rate mortgage and your payment is $3,500 per month. And, you make it a goal to pay off that mortgage before you retire.

    Once the mortgage is paid off, you can add that $3,500 to your monthly cash flow.

    That increases your monthly cash flow on this property from $2,000 to $5,500. Annually, that’s $66,000 in cash flow.

    Continuing our example, you now only need your investment portfolio to generate $54,000 per year ($120,000 – $66,000 =$54,000).

    Look what happens when we plug $54,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $54,000 / .047 =$1,148,936.17

    By paying off the mortgage on this single property, you’ve now reduced your magic retirement number by $1.4 million dollars!

    You now only need $1.15 million to fund your current lifestyle in retirement.

    Have you considered adding a rental property to your overall investment portfolio?

    The point of this post is to show you how owning even a single rental property can reduce your magic retirement number.

    Think about what would happen if you owned two rental properties. Or, what about three rental properties?

    If you can handle the job of being a landlord- which I’m betting is easier than your job as a lawyer or consultant or doctor- owning rental properties is a great way to accelerate your journey to financial freedom.

    After seeing the math, you may want to consider adding a rental property (or two) to your overall investment portfolio.

    Are you intimidated by the thought of saving enough for retirement?

    Have you done the math with the 4.7% Rule to see how much you really need?

    Have you considered adding a rental property to your portfolio to shrink you magic retirement number?

    Let us know in the comments below.

  • Be Sure to Have an Experienced Accountant on your RE Team

    Be Sure to Have an Experienced Accountant on your RE Team

    I invest in real estate for the massive tax benefits.

    In fact, the massive tax benefits are one of the four main reasons why I invest in real estate. The other three reasons are cash flow, appreciation, and debt pay-down.

    I’ve previously written about how I earn rental income and legally pay close to nothing in income tax on my rentals each year.

    How is that possible? Am I some type of tax wizard?

    Of course not.

    But, I do have a tax wizard on my real estate team.

    OK, more accurately, I have a Certified Public Accountant (CPA) on my real estate team.

    Your accountant is so integral to your financial success that he is the next person you need to have on your real estate team.

    Why is it so important to have an accountant on your team?

    The federal government has long encouraged investment in real estate. People need places to live, work, and socialize. The government long ago decided to reward investors who take on the risk of providing these opportunities.

    These incentives come largely in the form of tax benefits.

    The challenge for real estate investors is to actually take advantage of all these tax incentives.

    That’s where your accountant comes in.

    Because I work with an accountant, I don’t have to be a tax expert. I just have to know enough to have intelligent conversations and make decisions when the time comes.

    My accountant makes sure I get all the tax benefits for owning rental properties.

    Before talking further about accountants, let’s review the first three members that you’ll want to have on your real estate team.

    Your Spouse is the Most Important Person on Your RE Team

    The most important person on your real estate team is your spouse. Make sure you each understand the financial, time, and emotional commitments involved.

    Owning rental properties should not be a solo adventure. The entire experience is better when you have someone to share it with.

    Isn’t that true for most things in life?

    If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income.

    Before you buy a rental property, I encourage you to talk to your spouse first. Make sure you both are on the same page. 

    No, you do not have to have an equal division of labor. 

    Yes, you each have to commit to the good and the bad that comes along with owning rental properties.

    If you both can make that commitment, you have the best shot at owning your properties for a long time and reaching that ultimate goal: financial freedom.

    Build Out Your RE Team Starting with a Five-Star Broker

    Once you and your spouse are on the same page, it’s time to start building out the rest of your real estate team.

    Start building your real estate team by finding a great broker. Your broker is like a five-star hotel concierge who can make your entire experience so much better.

    During your search for a great rental property, a good broker will:

    • Educate you about the market you’re investing in.
    • Send you properties that match your goals.
    • Tour properties with you to help identify any red flags.
    • Negotiate on your behalf to ensure you get the best possible price.
    • Connect you with other key members of your team.
    • Steer you away from making poor choices.

    But, you don’t just want a good broker. You want to work with the best brokers as a rental property investor.

    The best brokers will do all of things for you during the acquisition process. But, that’s just the beginning.

    The best brokers are in it for the long run and will help you navigate challenges as they pop up. That might mean helping with marketing and showing your property.

    More importantly, that means continuing to give you advice and tutelage as you learn to be a landlord.

    two businessmen having a meeting in the park reflecting the next most important people on your real estate team are your accountant, lawyer, insurance advisor, and handyman or general contractor.
    Photo by Medienstürmer on Unsplash

    How to Evaluate a Great Mortgage Broker for your RE Team

    With a five-star real estate broker on your team, it’s time to find a great mortgage broker.

    A great mortgage broker is like a tour guide who is the local expert and knows the ins-and-outs of the neighborhood. She has an intimate knowledge of the local food scene based on years of experience. 

    She’ll show you the hidden gems and recommend what to order at each restaurant based on your personal preferences. She can educate you as to what’s in certain dishes and why you may like to try them.

    She’ll also steer you away from the tourist traps and prevent you from going to the wrong places to ensure you have the best experience possible.

    Recommendations? Education? Preventing mistakes?

    Love all those things.

    And, this is exactly what a good mortgage broker will do for you.

    A good mortgage broker will:

    • Recommend the best loan for your goals.
    • Stop you from borrowing more than you really can afford.
    • Help get your loan approved. 
    • Explain the numbers.
    • Not let you refinance until the time is right. 

    Take your time finding a good mortgage broker. It’s important to work with someone who does more than just promise the best rates and terms.

    With your spouse, a five-star real estate broker, and a great mortgage broker on your team, it’s now time to fill out the rest of the key positions.

    Seek out an accountant with real estate specific experience.

    I mentioned earlier that the key way the government incentivizes real estate investors is through tax deductions. 

    To accomplish its goal, the government allows real estate investors to deduct certain rental property expenses from their income.

    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.

    The key is to work with someone who has significant experience specific to rental property investing.

    The truth is there are numerous tactics and strategies that apply to real estate investors that don’t apply to all businesses.

    An accountant who may be ideal for a restaurant owner or law firm might not be a good fit for real estate investors.

    This is not a knock on accountants, either. In this day and age, professionals in all industries tend to specialize in niche areas.

    For example, I am a lawyer who specializes in helping people with mesothelioma. You wouldn’t hire me to represent you in a divorce.

    If you broke your foot, you wouldn’t go see a brain surgeon.

    You get the idea.

    When seeking out an accountant, be sure to work with one who has experience specific to real estate investing.

    How can you tell if an accountant has experience specific to real estate investing?

    When my wife and I were searching for an accountant, it became very clear to us that not all accountants work with real estate investors.

    For instance, most accountants are well-versed in common rental property expenses. These common expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

    We met with plenty of intelligent accountants who understood these basics.

    Brainstorming over paper representing having a good real estate accountant on your team.
    Photo by Scott Graham on Unsplash

    But, we wanted more than just basic help. We wanted help in crafting a long-term strategy for achieving financial freedom through real estate.

    When you start meeting with accountants, ask them how many real estate investors they work with. Ideally, you’ll find an accountant who works with a number of investors similar to you.

    You’ll also want to find an accountant whose style matches yours. Some accountants are more aggressive and some accountants are more conservative.

    For example, say you own a vacation condo that you rent out sometimes and use personally other times. You may get different advice from two accountants on what counts as a rental property deduction for that condo.

    It’s ultimately up to you to find an accountant that matches your style.

    Find an accountant who answers your phone calls.

    Maybe this goes without saying, but you want an accountant who answers the phone when you call. As investors, we never know when an opportunity may pop up that we need timely advice on.

    You might be surprised how many real estate investors don’t have an open line of communication with their accountants. I think it’s a mistake to only consult your accountant after you’ve gone ahead with a decision.

    As one example, a few years ago, I thought about buying an 8-unit apartment building with a number of partners. It seemed like a good way to earn some cash flow with only a small amount of my own money in the deal.

    Before I moved ahead with the deal, I called my accountant. We had a long chat about all the additional complexities involved from a tax perspective.

    He took the time to educate me so I could make a good decision. In the end, I walked away from the deal.

    If I didn’t have a good relationship with my accountant, I might have made a big mistake.

    A good accountant will help you reap the massive tax benefits of investing in real estate.

    As a real estate investor, you don’t have to be an expert in every part of the business.

    There’s no better example than when it comes to taxes.

    Find a good accountant who is willing to educate you and strategize with you. You want more than just someone to prepare your tax returns.

    When you have a good accountant on your real estate team, you’ll move that much faster towards financial freedom.

    What other traits should real estate investors look for in a good accountant?

    Let us know below.

  • Build Out Your RE Team Starting with a Five-Star Broker

    Build Out Your RE Team Starting with a Five-Star Broker

    Owning rental properties should not be a solo adventure. The entire experience is better when you have someone to share it with.

    We recently talked about how the most important person on your real estate team is your spouse. Make sure you each understand the financial, time, and emotional commitments involved.

    Isn’t that true for most things in life?

    Whether it’s a project you’re working on or a vacation you’re taking, it’s better when you do it with other people.

    Owning rental properties is no different.

    If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income. 

    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… as long as I have good help along the way.

    That help starts with a real estate broker.

    If you find the right broker, he will guide you in building a rental property portfolio that you’re proud of.

    Let’s take a look.

    Start building your team by finding the best real estate broker.

    Start building out your team by finding a real estate broker (or real estate agent) who matches your style and understands your goals.

    Think of your real estate broker as a concierge at a five-star hotel in a foreign country.

    My wife and I went to Australia years ago. It was probably the best trip we ever took. We started in Sydney and eventually made our way up the coast to the Great Barrier Reef.

    While in Sydney, we took a couple of day trips to the Hunter Valley wine region and the Blue Mountains. We climbed Harbour Bridge and saw some animals at a zoo we had never seen before.

    We met some amazing people and had some wonderful meals.

    All of these experiences were arranged through the concierge at our hotel.

    Before we ever left Chicago, we coordinated with the hotel’s concierge. He asked us what our priorities were, sent us options to consider, answered our questions, and then made all the arrangements.

    The decisions were ultimately ours, but the concierge used his expertise and what he learned about our priorities to help us make the best decisions. Importantly, he steered us away from making poor choices.

    We would have been completely lost without his guidance.

    Just as the concierge helped us navigate Sydney, your real estate broker will help you navigate the rental property experience.

    Your broker will wear many hats in helping you find a great rental property.

    During your search for a great rental property, a good broker will:

    • Educate you about the market you’re investing in.
    • Send you properties that match your goals.
    • Tour properties with you to help identify any red flags.
    • Negotiate on your behalf to ensure you get the best possible price.
    • Connect you with other key members of your team.
    • Steer you away from making poor choices.

    These are all invaluable services that a good broker can provide.

    But, you don’t just want a good broker. You want to work with the best brokers.

    The best brokers will do all of things for you during the acquisition process. But, that’s just the beginning.

    The best brokers have one other trait in common.

    The best brokers remain a key part of your team (life?) long after the transaction has concluded.

    Getting a good rental property is just step one. Keeping the property is just as, if not more, important.

    We’ve talked about how owning rental properties is a long-term game. You want a broker on your team who’s in it for the long run to help you navigate challenges as they pop up.

    That’s why you want a broker who is willing to help you keep that property for the long run. That might mean helping with marketing and showing your property.

    More importantly, that means continuing to give you advice and tutelage as you learn to be a landlord.

    For that reason, if you are going to buy a rental property, I recommend you work with a broker who also owns rental properties.

    Ugmonk lady looking out window and talking on phone while closing a real estate deal.
    Photo by Dane Deaner on Unsplash

    I recommend you find a broker who is also an investor.

    There are different factors to consider when buying a rental property compared to buying a primary residence.

    A property could be a great home but would be a poor rental.

    When it comes to working with a broker, you want somebody on your team who has personally experienced the challenges in owning rental properties that lie ahead.

    Real estate brokers who are also investors are better equipped to teach you if tenants will love or hate a certain rental apartment.

    Here’s a very basic example to illustrate this point:

    I use the garbage disposal in my home multiple times every day. I never really thought about it before, but the garbage disposal is a wonderful invention. I’ll go as far as to say that I love my garbage disposal.

    However, in my rental properties, I refuse to install garbage disposals.

    In rental properties, garbage disposals constantly break because tenants are not always careful about what they put down the drain. Each time a garbage disposal clogs or breaks, that’s a costly repair. It’s just not worth it in a rental property.

    I first learned to avoid garbage disposals in my rental properties years ago from my broker.

    Yes, it’s a small consideration overall. You’re not going to pass up on a wonderful property because of a garbage disposal.

    But, each property you look at will have countless little elements like this that need to be considered.

    A broker who is an experienced rental property investor will have a better eye for these types of things.

    Find a real estate broker can help make a list of the most desirable features for renters in your market.

    My wife and I have worked with the same broker in Chicago for almost a decade. He’s been a mentor and a friend. He has helped us in countless ways, including putting together a list of features we look for in every rental property.

    It’s not an exhaustive list, but here are some of the most important factors we evaluate when considering rental properties in Chicago:

    1. Location, location, location. In Chicago, proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
    2. Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
    3. Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
    4. Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
    5. Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.

    There are certainly other factors we consider, but these are some of the first things we look for thanks to the guidance of our real estate broker.

    Key in white door with black handle representing what is possible when you have a good real estate team.
    Photo by Jaye Haych on Unsplash

    A good real estate broker is absolutely critical if you’re investing outside your home market.

    I live in the Chicago area and own a rental property in Colorado. Everything we just talked about becomes even more important when you invest outside your home market.

    In your home market, you have the benefit of relying on your daily experiences to help select the right property.

    I rented apartments in Chicago for 15 years before I bought an apartment building. That gave me a huge advantage when looking for a good rental property.

    I didn’t have the same level of intuitive knowledge in the Colorado market.

    Even if you have personal experiences in certain out-of-state markets, your knowledge will never match that of your hometown. No matter how many times you’ve visited a place, it’s not the same as living in that place.

    That’s why having a good broker on your team becomes even more critical when you’re investing out-of-state.

    I’m happy to say that our real estate broker in Colorado is the best there is.

    And if you ever tell him I said that, I’ll deny it and say I was hacked.

    Our Colorado broker spent hours and hours educating us about the local market when we were shopping for a rental property.

    Even though my wife and I had vacationed in the area for years, we didn’t know the first thing about real estate in the area.

    Before we considered any specific units, we had numerous conversations with our broker about our goals and preferences. He helped us pinpoint locations and features that we had not previously through about.

    I still have the pages of notes I took during these conversations, which I reviewed constantly during our search.

    If you are going to shop for properties outside your home market, be sure to find a good broker first.

    The most successful rental property investors have a team of professionals working with them.

    It’s not an exaggeration to say that having the right people on your real estate team can make or break your investing experience.

    Having a good team in place, starting with your real estate broker, will help you avoid mistakes and stay motivated so you can keep your properties long-term. 

    I’ve seen too many investors sell their rental properties after a couple of years because they didn’t have the right people on their team. They end up making preventable mistakes and give up because being a landlord is too hard.

    Unfortunately, that means they give up their properties long before getting the benefits from cash flow, appreciation, debt pay-down, and tax advantages.

    If you’re going to take on the challenge of being a landlord, you might as well hold your properties long enough to reap the benefits. 

    And, you should take all the help you can get along the way, beginning with a great broker.

    You will not regret having a great broker on your team.

    My wife and I have been incredibly fortunate to work with two top-class brokers, first in Chicago and then in Colorado.

    Thinking about it now, our brokers are similar in that they have been teachers and mentors to us.

    Before you start looking for your first rental property, be sure to work with a great broker. Don’t just settle for the first broker you meet with.

    This may take some time. Years ago, my wife and I met with six different brokers in Chicago, who all came highly recommended.

    We were patient, asked a lot of questions, and went with the person who matched our style and who we felt comfortable with. The time we took during this process was well worth it.

    Like a five-star hotel concierge, our brokers have made our investing experience as smooth as possible.

    Without their guidance, I highly doubt we would have bought, and still own, five properties today.

    Have you worked with a real estate broker before?

    What should new rental property investors be on the lookout for?

    Tell us about your experience in the comments below.

  • Your Spouse is the Most Important Person on Your RE Team

    Your Spouse is the Most Important Person on Your RE Team

    If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income.

    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.

    There will be tenant issues, work orders, money spent, and tough decisions to be made like in any other business.

    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.

    But, I wouldn’t be saying that if my wife wasn’t also fully committed.

    Before you buy a rental property, I encourage you to talk to your spouse first. Make sure you both are on the same page. 

    No, you do not have to have an equal division of labor. 

    Yes, you each have to commit to the good and the bad that comes along with owning rental properties.

    If you both can make that commitment, you have the best shot at owning your properties for a long time and reaching that ultimate goal: financial freedom.

    Before building out the rest of your real estate team, get on the same page with your spouse.

    Owning rental properties should not be a solo adventure. The entire experience is better when you have someone to share it with.

    Isn’t that true for most things in life?

    Whether it’s a project you’re working on or a vacation you’re taking, it’s better when you do it with other people.

    Owning rental properties is no different.

    In fact, the most successful rental property investors have a team of professionals working with them.

    Having a good team in place will help you avoid mistakes and stay motivated so you can keep your properties long-term.

    It’s not an exaggeration to say that having the right people on your team can make or break your investing experience.

    I’ve seen too many investors sell their rental properties after a couple of years because they didn’t have the right people on their team. They end up making preventable mistakes and give up because being a landlord is too hard.

    Unfortunately, that means they give up their properties long before getting the benefits from cash flow, appreciation, debt pay-down, and tax advantages.

    If you’re going to take on the challenge of being a landlord, you might as well hold your properties long enough to reap the benefits.

    And, you should take all the help you can get along the way.

    There is plenty to say about building out your real estate team. And soon enough, we’re going to talk about the key professionals that can help you run your rental property business successfully.

    But, that’s all for another day.

    Before we get to any of that, we need to talk about the single most important member of your team:

    Your spouse.

    The same holds true whether you have a significant other, partner, girlfriend, boyfriend, or anyone else you share your life wife.

    Don’t worry about analyzing the numbers and finding the perfect deal. The rest of your team came wait.

    Start with your spouse.

    Here’s why.

    Your spouse is the single most important person on your team.

    To be a successful rental property investor, your spouse needs to be on board.

    Even if you are going to be the one actively running the business, you won’t get very far if your spouse is not as committed as you are.

    Before anything else, the first thing you need to do is sit down with your spouse and talk about why you really want to own rental properties.

    That’s because owning rental properties is all about commitment.

    It’s a financial comment, a time commitment, and most of all, an emotional commitment.

    With these kinds of commitments involved, it’s essential that your spouse understands the full scope of what you’re both getting into as rental property investors.

    Here’s what I mean.

    Walking down a remote road near Reykjavik, Iceland indicating that investing in real estate takes a team, the most important person being your spouse or partner.
    Photo by Rod Long on Unsplash

    Owning rental properties is a financial commitment.

    This one should be obvious. Owning rental properties is a major financial commitment. It takes capital to buy properties and capital to maintain them.

    When you choose to invest your hard-earned money in rental properties, that means you’re not spending that money elsewhere.

    That might mean sacrificing retirement savings. It could also mean having less money to spend on your dream home. Or, less money to spend on vacations.

    The point is that before you make the financial commitment, your spouse needs to be on board with why you’re making these sacrifices.

    I’m fortunate that my wife and I have been on the same page with our rental properties since Day 1. Neither one of us needed any convincing once we did our homework and learned what was possible.

    Today, we both understand why we’re still doing it: owning rental properties speeds up our journey to financial freedom.

    It took some major financial sacrifices to get here, but we made those sacrifices together.

    As the most obvious example, we delayed buying our “forever home” until I was almost 40 and we already had two kids.

    Instead of buying a home in a nice neighborhood to raise our kids, we used our savings to buy rental properties. We were doing something different and it was important to be committed to our plan.

    It wasn’t easy to see our friends and family members buy beautiful homes in wonderful areas. We definitely noticed more than a few confused looks when we would have people over to our small apartments in the city.

    At times, we both wondered whether we were making a mistake.

    As it turned out, the trade-off was well worth it.

    Owning rental properties is a time commitment.

    Make no mistake about it, owning rental properties is a time commitment.

    We’ve talked about how owning rental properties means having a job. For lawyers and professionals, this means having a second job on top of a primary job. 

    Even with the best team and systems in place, there’s no getting around the fact that owning rental properties will always be a time commitment.

    What does the time commitment look like? What does this have to do with your spouse?

    Depending on your availability and skills, the time commitment will vary from one landlord to the next.

    You might be the type that heads over to the property every weekend to mow the lawn. To take it one step further, maybe you’re the type who has the skills to handle all maintenance requests yourself.

    Or, you might handle all showings and tenant issues personally.

    The truth is that in the beginning, many rental property investors do all of the above themselves.

    Rental property investors think of this time commitment as “sweat equity.”

    Sweat equity is what you contribute to your business but don’t exactly get paid for. When cash flow is tight, as it is for most beginners, we make up for it with sweat equity.

    The more jobs we take on ourselves, the less we pay out to other people.

    The tradeoff is that the more sweat equity you put into your properties, the less time you have to spend at home with your spouse.

    If your spouse is not on board with you being away from home, it’s going to be difficult to succeed as a rental property investor.

    If you have young kids, it’s even harder. When one spouse is at the rental property, the other spouse is usually alone with the kids. Anyone with kids knows which of those two jobs is harder.

    For example, there have been entire weekends that I’ve spent fixing up one apartment or another.

    By the way, if you’ve ever wanted to take a tour called “The World’s Worst Drywall Repairs,” I’ve got you covered.

    If it’s not repairs eating up your free time, it could be analyzing new properties, doing apartment showings, meeting with contractors, or basic bookkeeping.

    With all these time commitments, I’m lucky that my wife and I are on the same page when it comes to our rental property business. We split up these tasks and cover for each other when one person is busy with other responsibilities.

    Yes, you can outsource these jobs. We outsource as much as we can. But, there are certain jobs that you’ll always need to, or want to, handle yourself.

    real estate team meeting near a transparent glass indicating the importance of having the right people on your team before you buy rental properties.
    Photo by Charles Forerunner on Unsplash

    As just one example, we do all our showings ourselves.

    Finding the right tenants is the most important job in owning rental properties. If we outsourced this particular job, we could end up with tenants who could cause us major stress for the next year.

    Regardless of the recipe that works for you and your spouse, have the conversation before investing in rental properties.

    Make sure you each understand the time commitment involved.

    Owning rental properties is an emotional commitment.

    The financial commitment and the time commitment are only the beginning.

    Most of all, owning rental properties is an emotional commitment.

    Without having a spouse on the same emotional wavelength as you, it will be very hard to succeed as a rental property investor.

    When you own rental properties, there will be stressful times and you’ll want to lean on your spouse for support.

    There will also be moments to celebrate, and you’ll want to share those moments with your spouse.

    If your spouse is not on the same wavelength as you, these moments can feel very lonely. The lows can feel much lower and the highs don’t feel quite so high.

    Without someone to commiserate with and celebrate with, you’ll be more likely to give up.

    My wife and I have endless stories about our experiences as landlords that very few other people would truly appreciate. We can each list off the jerks we’ve rented to and the biggest headaches we’ve encountered.

    We once offered a lease renewal to a tenant at her same price. She responded that she would be happy to stay for another year if we simply replaced the kitchen countertops and appliances, added an additional bedroom and built out some new closets.

    Ummm, we’ll pass.

    My wife and I can laugh about these moments because we’re both emotionally committed to the journey. Living through these experiences together has helped us stay the course.

    Unfortunately, I’ve met a number of real estate investors over the years who tried to go it alone. I think that’s a mistake. Oftentimes, these investors don’t stay invested very long.

    It’s not because they bought bad properties or had bad tenants.

    The problem was they never prioritized the most important person on their real estate team.

    When challenges arose, they didn’t have a spouse to lean on.

    When you’re spouse is on board, investing in real estate is a rewarding challenge.

    It’s all about the journey, right?

    When times get tough in our real estate business, my wife and I lean on each other. When we miss out on evenings with the kids or nights out with friends, we remind each other what it’s all about.

    We remind each other that we wouldn’t be where we are today if we didn’t start buying rental properties in 2018.

    We both realize the commitments involved, whether it be our money, our time, or our emotions. If we weren’t in this together, there’s no way we could run our rental property business as well as we do.

    Before you buy a rental property, I encourage you to talk to your spouse first. Make sure you both are on the same page. 

    No, you do not have to have an equal division of labor. 

    Yes, you each have to commit to the good and the bad that comes along with owning rental properties.

    If you both can make that commitment, you have the best shot at owning your properties for a long time and reaching that ultimate goal: financial freedom.

    Did you talk to your spouse before buying rental properties?

    Do you run your rental property business with your spouse?

    What lessons have you learned along the way?

  • Fix Your Personal Finances Before Investing in Real Estate

    Fix Your Personal Finances Before Investing in Real Estate

    When my students ask me a question about how to start investing in real estate, I tend to respond with a question of my own:

    “How much savings does your personal budget generate each month?”

    Yes, I know. It’s so annoying to answer a question with a question.

    This particular question usually leads to a double dose of annoyance from my students.

    My students are first annoyed that I ignored their question about real estate. They didn’t come to me to talk about something boring, like budgeting. They want to know about the exciting stuff, like becoming a real estate investor.

    What I’ve noticed is that after this initial annoyance fades away, another form of annoyance sets in. My students get annoyed because they can’t actually answer the question.

    They realize they have no idea how much money they’re saving each month because they don’t have a personal budget.

    That’s a problem.

    @thinkandtalkmoney

    Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out. The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out. #thinkandtalkmoney #realestateinvesting #realestateinvestor #personalfinance

    ♬ original sound – Thinkandtalkmoney

    Not having a personal budget is a problem for anyone who wants to be a successful real estate investor.

    Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out.

    This is obvious stuff, right?

    The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out.

    The problem is most people have a hard enough time managing their personal finances. How are they going to handle managing business finances?

    That’s why I ask my students, “If you haven’t mastered this idea with your personal budget, are you sure you want to take on the stress and risk of an investment property?”

    It would be much easier to simply invest in an index fund, like VTSAX. At least in that case, you don’t have to manage a business budget. You just have to do your best to constantly add money to your investment account.

    It’s usually around this point when my students start nodding in understanding.

    Before investing in real estate, make sure your personal finances are in order.

    My goal here is not to dissuade you from investing in real estate. I am a big proponent of rental property investing.

    I’ve said it before: I think every professional or lawyer can benefit from owning rental properties.

    My only goal is to help you avoid the mistakes that crush so many beginner real estate investors. One of the biggest mistakes I see is people taking on a major financial commitment (and time commitment) without starting from a strong foundation.

    If you’ve been following along on the blog, you likely noticed the progression in topics we’ve covered.

    You’ll see links to each one of these topics featured on the top of the Think and Talk Money homepage:

    We initially covered each of those topics in order from top to bottom. First, we talked extensively about the mental side of money. Without having your money mindset in the right place, nothing else matters.

    We then spent a lot of time talking about personal finance fundamentals, like budgeting, saving, and handling credit and debt responsibly.

    Only after having our personal finance foundation in place did we talk about more fun concepts like investing and real estate.

    There’s a reason we’ve covered these topics in this order.

    If your money mindset is not in the right place, you won’t be able to stay on budget.

    If you can’t stay on budget, you’ll likely fall into debt.

    When you’re falling deeper and deeper into debt, it doesn’t make a lot of sense to prioritize investing.

    A woman holding a jar with savings written on it suggesting you need to get your personal finances in order before investing in real estate.
    Photo by Towfiqu barbhuiya on Unsplash

    Why bother with real estate if any profits are just going to disappear?

    Let’s focus on that last point for a minute.

    What sense does it make to invest if you’ve never proven to yourself that you can use those investment gains responsibly?

    I never want to see people take on the challenge of investing in real estate just to have any profits disappear because they don’t have a strong personal finance foundation in place.

    Imagine someone does the work to find and sustain a good rental property that generates $1,000 per month in cash flow.

    It’s not easy to earn that much. It takes time and effort, not to mention the risk involved.

    If that same person blows the $1,000 he earned on things he doesn’t care about, what was the point?

    Why take on the risk and do the work if the money will all be gone by the end of the month?

    Unfortunately, this is how many people go through life. They work hard, make good money, and then have nothing to show for it.

    I don’t want that to be your fate. I want you to have a plan for your money before you earn it.

    That means sticking to a budget that consistently moves you closer to living freely on your terms.

    Most of us don’t know where our next dollar is going.

    The reason most people never get ahead with their finances is because they don’t have a plan for where their next dollar is going.

    Their income hits their checking account, they spend it on this or that, and pretty soon that money has disappeared. They haven’t used the money to advance any of their priorities. It’s just gone.

    To me, this is one of the most important money mistakes that we need to fix right away. We definitely need to fix it before we take a chance on investing in real estate.

    If not, you’ll just be making the same mistakes, just with more money to lose.

    Having a plan for our money, before we earn it, is essential if we want to reach our goals. With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.

    How do you create a plan for your money before you earn it?

    You need to have a budget.

    If you don’t currently have a budget that results in excess money at the end of each month, I encourage you to start there before thinking bout real estate.

    How to create a Budget After Thinking.

    The key to budgeting is to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.

    Your Later Money is what you’ll eventually use to accelerate your journey to financial freedom by investing in stocks or buying real estate.

    1. Now Money

    Now Money is what you need to pay for basic life expenses.

    These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance.

    These are expenses that you can’t avoid and should be relatively fixed each month.

    2. Life Money

    Life Money is what you are going to spend every month on things and experiences in life that you love.

    This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy. 

    We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting. The key is to think and talk so you are spending this money consistently on things that matter to you.

    3. Later Money

    Later Money is what you are saving, investing, or using to pay off debt.

    This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.

    This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house. 

    Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.

    Later Money is the key category that fuels your ultimate life goals, like financial independence. The more you fuel this category, the faster you can reach your goals.

    black smartphone calculator showing the number 0 indicating how to budget with two simples numbers before investing in real estate.
    Photo by Kelly Sikkema on Unsplash

    When you have strong fundamentals in place, money becomes fun.

    Being good with money doesn’t have to be stressful. Once you have the fundamentals in place, you’ll start to see how each dollar you earn gets you one step closer to financial freedom.

    Before you think about investing in real estate, make sure that your personal finances are in order.

    Owning rental properties means running a business. When the money comes in, you want to make sure it doesn’t go right out.

    Otherwise, the effort, stress, and risk of owning real estate is not worth it. Any dollar you earn is likely to disappear as quickly as it comes in.

    To prevent that from happening, establish good money habits before you buy real estate.

    In the end, you’ll be so happy that you did.

    For any real estate investors out there, did you jump in before establishing strong personal money habits first?

    What advice would you have for beginners thinking about investing in real estate?

    Let us know in the comments below.

  • Why do You Really Want to Own Rental Properties?

    Why do You Really Want to Own Rental Properties?

    Before you start doing something, figure out why you’re doing it.

    Someone smart probably said that at some point, right?

    We’ve spent a lot of time recently talking about the main reasons why I invest in rental properties. We’ve also talked about the work involved with owning rental properties.

    I’m a big believer in the power of real estate. I’ve also come to appreciate just how much work is involved in owning rental properties.

    The reason I’ve spent so much time writing about the benefits and the work involved is to make sure you know exactly what you’re getting yourself into.

    Once you fully understand and appreciate the benefits and the work involved, you’re ready for the next step:

    Think and talk about why you want to own rental properties.

    @thinkandtalkmoney

    No city fines this time! #thinkandtalkmoney #landlord #landlordtips #realestateinvesting

    ♬ original sound – Thinkandtalkmoney

    Depending on why you want to own rental properties, your strategy may be different than mine or someone else’s strategy.

    The key is to figure out your “Why” before making costly mistakes, in terms of both money and time, that don’t help advance your goals.

    Don’t skip this crucial step and jump right to analyzing deals.

    The last thing you want to do is take on such a big commitment without truly knowing why you’re doing it.

    To help you start thinking about a strategy, let’s review the benefits and also the work involved in owning rental properties.

    You can read much more in my series on 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.

    Blue and orange apartment symbolizing that you need to know your strategy before buying rental property
    Photo by Brandon Griggs on Unsplash

    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.

    Do not own rental properties if you want passive income.

    Now that you know the benefits, let’s highlight just how much work is involved in owning rental properties.

    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 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.

    In the end, if you are willing to put in the effort, owning rental properties will accelerate your journey to financial freedom.

    Do you still want to own rental properties after knowing the benefits and the work involved?

    Now, you know the main benefits and the work involved with owning rental properties.

    Like I said, owning rental properties is not for everyone. It takes time and effort to learn the basics.

    Then, it takes more time and effort to do your research and develop a strategy.

    At some point, you’ll need to take a chance and make a purchase. That means putting your hard-earned dollars at risk.

    None of this will be easy.

    But, it sure is a lot of fun.

    And, there is a lot of upside.

    If you still want in, I’m going to help you get started.

    for rent sign in window reflecting that all rental property investors need other know their why before they start buying.
    Photo by Aaron Sousa on Unsplash

    Ask yourself: what are my main goals in owning rental properties?

    Before you start analyzing deals, you need to think long and hard about what your goals are.

    Depending on what your’e trying to accomplish, your strategy is going to be different.

    For example, are you looking to move to an expensive neighborhood and just want to offset your ownership costs?

    You may benefit from owning a home with a coach house, granny flat, or garden unit. You can then live in the primary unit and rent out the second unit to reduce your monthly costs.

    Or, your goals might be to leave full-time employment and use rental property cash flow to fund your life. In that case, you’ll need a property that generates significant cash flow, possibly at the expense of personal comfort or long-term gains.

    On the other hand, you may love your job and have no plans of leaving anytime soon. You’re not concerned about present day cash-flow. Instead, you’re looking for long-term gains through appreciation, debt pay-down, and tax benefits.

    In this scenario, you may target markets that have shown strong growth but don’t necessarily cash flow.

    These are just a few possible considerations. One of the things I love most about investing in real estate is how many options there are. It’s up to you to decide what options are most attractive for your goals.

    This is why the first step is to think and talk about why you want to own rental properties.

    Don’t ignore this first step. Spend some serious time thinking about what you’re trying to accomplish.

    Because different properties may offer different benefits, you need to commit to a strategy before you start worrying about how to analyze specific deals.

    Too many beginner investors skip this step and realize much too late that a property they bought doesn’t help achieve their goals.

    My goal in owning rental properties is to accelerate my journey to financial freedom.

    My wife and I invest in rental properties in Chicago and Colorado to accelerate our journey to financial freedom.

    In order to be truly financially free, we need cash flow to cover our present day expenses. So, we’ve targeted properties in Chicago that generate strong monthly cash flow.

    Don’t get me wrong, we certainly hope to benefit from appreciation, debt pay-down and tax advantages. That’s why we’ve chosen to invest in neighborhoods that we think are only getting better.

    However, we view those long-term gains as more of a bonus. Our focus with our Chicago properties is on present day cash flow.

    On the other hand, our Colorado property is a long-term play. It does not generate positive cash flow. That said, we use the rental income to help offset our ownership costs.

    We are planning to keep our Colorado condo in our family for decades to come. Offsetting the ownership costs with rental income will help us accomplish that goal.

    At the same time, we are hoping that our Colorado condo appreciates in value, making it a solid long-term investment. So, even though it does not generate cash flow for us, it still fits into our long-term plans for financial freedom.

    One key point: just because my wife and I invest for cash flow doesn’t mean we are planning on leaving full-time employment.

    I am a big proponent of all lawyers and professionals having multiple streams of income. I refer to these various income streams as Parachute Money.

    Because my wife and I are earning steady paychecks, we’ve been able to use our cash flow for other investments. We have multiple income streams and are putting all those income streams to work. That’s one reason we’ve been able to scale our portfolio so quickly.

    What are your goals in owning rental property?

    You now know the benefits, the work involved, and some different strategies to consider regarding rental properties.

    Now, it’s time to ask yourself why you want to own rental properties.

    Once you figure out the “why,” you can then move onto the “how.”

    So, if you’re considering owning rental properties, what is your why?

    What goals are you trying to accomplish?

    Let us know in the comments below.

  • Do Not Invest in Real Estate if You Want Passive Income

    Do Not Invest in Real Estate if You Want Passive Income

    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?

    @thinkandtalkmoney

    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. #thinkandtalkmoney #realestateinvesting #realestateinvestor #passiveincome #financialfreedom

    ♬ original sound – Thinkandtalkmoney

    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:

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    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.

    person in black pants and white and black sneakers standing on brown wooden floors about to do repairs as a landlord because owning rental properties is not passive income.
    Photo by Bernie Almanzar on Unsplash

    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.

    red and blue repair neon light signage indicating that owning rental properties requires repairs and is not a source of passive income.
    Photo by Jon Tyson on Unsplash

    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.

  • Invest in Real Estate for Massive Tax Benefits

    Invest in Real Estate for Massive Tax Benefits

    When was the last time you took a look at your actual pay statement?

    Most of us working W-2 jobs have direct deposit, meaning our paychecks are automatically deposited into our bank accounts. On pay day, all we have to do is wake up, open our banking app, and confirm we got paid.

    When we do this, all we see is our net pay, or take-home pay. Our net pay is what we earn after all deductions are subtracted from our gross pay.

    Deductions may include voluntary contributions, like to our 401(k) and HSA, as well as other benefits, like health insurance.

    That’s all nice so far.

    Not so nice is that our paychecks are further reduced by mandatory tax withholdings.

    For high earning lawyers and professionals, taxes can easily reduce our W-2 income by 25%-40%.

    This is not groundbreaking news to anyone, right?

    As employees, we are accustomed to having significant taxes withheld from our paychecks.

    We’ve become so accustomed to paying taxes as W-2 employees that none of this should surprise us. Taxes are just part of the bargain when you’re an employee.

    Well, what if I told you that automatically paying taxes every month does not have to be part of the bargain?

    In fact, I know of a way to make money where taxes can be reduced or deferred for a long time, if not eliminated altogether.

    And, that means you get to keep and benefit from more of your hard-earned money each month.

    This leads us to the fourth main reason I invest in real estate:

    Real estate offers massive tax benefits.

    I earn income through W-2 employment and rental properties.

    As a W-2 employee and a real estate investor, I know firsthand that not all income is created equal.

    My W-2 income is heavily taxed every month.

    My rental property income is not.

    Today, we’ll introduce some of the main reasons why real estate investors pay less in taxes than W-2 employees.

    Before we talk about these tax benefits, let’s review the first three reasons why I invest in real estate. Each of these reasons has accelerated my journey to financial freedom.

    Note: I am not an accountant or tax professional, so please be sure to consult with an expert for tax advice for your personal situation.

    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.

    Modern kitchen in a rental property, which is easier to pay for because of the tax advantages of investing in real estate.
    Photo by Jason Briscoe on Unsplash

    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.

    Now that we’ve reviewed how cash flow and appreciation work together to generate long-term wealth, we can look at the additional benefits of debt pay-down.

    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. 

    On top of monthly cash flow, appreciation, and debt pay-down, the tax benefits offered to real estate investors is another way to generate wealth through real estate over the long run.

    Let’s take a look at some of these massive tax benefits.

    What are the primary tax benefits to investing in real estate?

    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.

    Sign, Harlingen, Texas. 1939, but if you have real estate, you may not pay any taxes at all on your cash flow. Photographer Lee Russell
    Photo by The New York Public Library on Unsplash

    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.

    Would you rather have rental income or W-2 income?

    This post is not meant to be a primer on income taxes, but we can use a very basic tax bracket calculator to highlight the distinction between rental income and W-2 income.

    I currently receive both types of income so readily appreciate the difference in how each form of income is taxed.

    Let’s say you live in Illinois and are a high-earning lawyer or professional making a gross annual income of $250,000. Based on 2024’s federal tax rates, you will owe $53,015 in federal income tax. That’s 21% of your income.

    an example of how much you'll pay in taxes if you earn $250,000 as a W-2 employee.
    Source: taxact.com

    Illinois is one of the 42 states that also levies a state income tax. Illinois levies a flat state income tax of 4.95%. For our example, that means an additional $12,375 in taxes each year.

    In total, a W-2 employee earning $250,000 in Illinois pays $65,390, or nearly 26%, in income taxes each year.

    Again, this is not meant to be a tax primer. And yes, most W-2 employees take the standard deduction, meaning they’ll get a small refund when they file their tax returns.

    Still, there’s no getting around the reality that when you’re a W-2 employee, you have limited options to reduce your taxable income.

    In the end, you will pay a significant percentage of your income to the government every year.

    On the other hand, real estate investors have a number of legal tax deductions at their deposal.

    That means a real estate investor earning $250,000 in rental income likely pays very little, or even nothing, in income taxes.

    How is that possible?

    Let’s find out.

    How is it that real estate investors pay so little in income taxes?

    The federal government has long encouraged investment in real estate. People need places to live, work, and socialize. The government long ago decided to reward investors who take on the risk of providing these opportunities.

    The key way the government incentivizes real estate investors is through tax deductions.

    To accomplish its goal, the government allows real estate investors to deduct certain rental property expenses from their income.

    black platform bed wit white mattress inside bedroom of rental apartment where the landlord is getting massive tax benefits.
    Photo by Sonnie Hiles on Unsplash

    As mentioned above, common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

    When properly tracked and reported on your tax return, these expenses can oftentimes negate all the rental income you earned.

    For today’s purposes, I’ll highlight one key deduction that shows just how much the government wants to encourage real estate investment:

    Depreciation.

    What is Depreciation?

    Depreciation is an accounting method that allows real estate investors to deduct some of the cost of owning a property over time.

    This accounting process is not a trick and is completely legal.

    Calculating your property’s depreciation can get complicated and is best left to the tax professionals.

    In general terms, if you own residential rental property and use standard depreciation like me, you can deduct the cost of owning that property over 27.5 years.

    Each year, you can then reduce your rental income by that annual depreciation.

    Here’s an example to help illustrate how depreciation works.

    Let’s say you buy a rental property for $500,000, and the closing costs are $10,000. The property’s in excellent shape so no capital improvements are needed.

    That means your total initial cost for this rental property is $510,000.

    When you buy a rental property, you are actually buying the land and the building. Your city, county or town’s assessor typically attaches a value to each the land and the building.

    For depreciation purposes, only the value of the building is depreciable. The land is not.

    In our example, let’s say the land was valued at $110,000. You are not allowed to depreciate the value of the land.

    So, your depreciable basis is the initial cost of the property less the land value:

    Initial Cost – Land Value = Depreciable Basis

    $510,000-$110,000=$400,000

    For residential rental properties, you can spread out that depreciable basis over 27.5 years to figure out the annual depreciation.

    Depreciable Basis / 27.5 = Annual Depreciation

    $400,000 / 27.5 =$14,545.45

    What this means is that you can deduct $14,545.45 from your rental income each year.

    Combined with the other available deductions, you can see why real estate investors end up paying very little, or nothing at all, in rental income taxes each year.

    Note: If you sell your rental property, you are responsible for paying depreciation recapture tax, which is a topic for another day. To keep it simple, depreciation recapture is a non-factor for this conversation for many reasons. The most important reason for that is because you have to pay this tax even if you never claimed depreciation on your tax return.

    Your tax professional will help ensure you get all the tax benefits for owning rental properties.

    Fully understanding taxes is not easy. That’s why we have licensed professionals to help us.

    A concept like depreciation can be very complicated. Rest assured that your tax professional will help you benefit as a real estate investor from all the available tax breaks.

    The point of today’s post is to introduce you to the definitive truth that the tax code favors real estate investors.

    While we barely scratched the service today, hopefully you can start to see why it is so advantageous from a tax perspective to own rental properties.

    coffee mug near open folder with tax withholding paper reflecting the massive tax benefits of investing in real estate.
    Photo by Kelly Sikkema on Unsplash

    I personally earn rental income and W-2 income.

    When you legally deduct your rental property expenses, it’s likely that your taxable rental income for the year will be reduced to nothing.

    Compare this reality to that of a high-earning W-2 employee, who regularly pays between 25% and 40% in income taxes each year.

    The W-2 employee needs to earn significantly more money to take home as much as the rental property investor.

    I personally earn rental income and W-2 income.

    One source of income hits my bank account in full on the first of every month. I never worry about taxes.

    The other source of income gets drastically reduced by taxes before I ever see a dime.

    Which type of income do you think I prefer earning?

    How about you?

  • Invest in Real Estate and Other People Pay Your Debt

    Invest in Real Estate and Other People Pay Your Debt

    Imagine that you have the chance to own something that might be worth a lot of money down the road.

    To buy this thing, you will need to pay 25% of the purchase price. The other 75% of the price will be paid by someone else.

    Your job is to take care of that thing and keep it for a long time. It won’t be easy, but if you can handle it, you’ll wake up years from now owning something outright that is very valuable.

    So far, this sounds pretty good, right?

    Of course, there’s a catch. That person paying for 75% of the item will want to be paid back. He’ll want to earn interest, too.

    You might be thinking that this opportunity doesn’t sound so promising anymore. Having to pay off that debt might be enough to convince you not to move forward with buying this thing.

    You’re smart to be thinking about the debt. I could understand if the prospect of paying back a debt like this didn’t appeal to you. Who really wants to use their own hard-earned money to pay off debt anyways?

    Fair enough.

    But, what if I told you that other people are going to pay back that 75% (plus interest) on your behalf?

    Even more, while those other people are paying back the debt, you still get to benefit from owning the item.

    Does that change how you’re viewing this opportunity?

    Maybe now you’re thinking that this is too good to be true?

    Nope.

    This is exactly how real estate investors generate long-term wealth. They buy a property using a loan and then pay back that loan using other people’s money.

    This example leads us to the next main reason I invest in real estate:

    Other people pay off my debt.

    When you acquire the right rental properties, your tenants will pay monthly rent and that rent can be used to pay off your loan.

    That means you can pay off that loan without using any of your own money.

    As your loan balance shrinks, your net worth increases. As your net worth increases, you are creating wealth for you and your family.

    Along the way, you can reap the benefits of monthly cash flow and appreciation. That means your net worth increases even more.

    That’s a powerful combination to generate long-term wealth.

    If this concept sounds like something you may be interested in, read on.

    Before we talk more about debt pay-down, let’s review two of the other main reasons I invest in real estate.

    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.

    One of the hottest destinations in Spain is Costa Blanca, these luxury homes are situated in Villamartin, Campoamor, Torrevieja, Orihuela, located near to the coast, golf course, and shopping center, an example of other people paying my debt through rent.
    Photo by Frames For Your Heart on Unsplash

    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.

    Now that we’ve reviewed how cash flow and appreciation work together to generate long-term wealth, we can look at the additional benefits of debt pay-down.

    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.

    Each time I make a mortgage payment, part of the payment goes to interest on the loan and part of the payment goes toward the principal. This concept is known as amortization.

    By the way, this is how real estate investors use Good Debt, also know as leverage, to generate wealth.

    You may be totally against debt of all kind. That’s OK. Debt certainly carries risk. I’m not here to convince you that debt is a good thing or a bad thing. I’m just showing you how it works.

    For more on the difference between good debt and bad debt, check out my post here.

    What is loan amortization?

    Amortization is the process of paying back a loan over time in predetermined installments. While your payment amount remains the same, the composition of that payment changes over time.

    In the early years of paying off a mortgage, the vast majority of your payment goes to the interest. With each additional payment, more of the money goes towards the principal.

    When you take out a mortgage, your lender will give you an amortization table that shows you exactly how much of your monthly payment goes towards interest and principal for the duration of the loan.

    For example, if you take out a 30-year mortgage, you’ll receive a chart that shows 360 payments (12 monthly payments for 30 years). You can then look at any month in that 30-year period to see how much of your payment goes to interest vs. principal in that month.

    We hung that art piece by Tekuma artist Lulu Zheng, and I particularly loved how Lulu combines architecture and organic forms. Even if it is in the background, her 3D elephant brings the focus of the viewer towards her work, representing how renters can make a home feel like their own while they pay off my real estate debt.
    Photo by Naomi Hébert on Unsplash

    If you’re so inclined, you can also use an online calculator, like this one at calculator.net, to create an amortization chart for any loan you have.

    I’ll admit, looking at the amortization chart is the least fun part of any real estate closing.

    Seeing debt payments as far out as 30 years is a bit scary. It’s hard not to think of all the things that can go wrong during such a long time period. That’s why I prefer to think of amortization in general terms instead of specifics.

    Generally speaking, I know that some of my monthly payment goes to interest and some goes to principal. The longer I pay back the loan, the more of my payment goes to principal. That’s good enough for me.

    With a fixed-rate loan, your monthly payment remains the same.

    When you have a fixed-rate mortgage, your payment remains the same for the duration of the loan.

    At the same time, because of inflation, rents tend to go up over the long run. Rents may also go up if market conditions improve or if you have forced appreciation through enhancements to your property.

    When your rental income goes up, and your debt obligation remains constant, that means more cash flow for you.

    For example, say your monthly mortgage payment is $2,500 each month for the next 30 years. And, let’s say you currently earn $3,000 in monthly rent payments.

    Over time, your rental income should gradually increase. Some years in the future, you may be earning $4,000 or $5,000 per month in rental income. All the while, your monthly mortgage payment remains $2,500.

    You can use that extra income, after covering all other expenses, to pay for your immediate life expenses, pay off your loan faster, or invest in other assets.

    It’s for these reasons that having a fixed debt payment over a long time horizon is one of the biggest advantages to investing in real estate.

    Think of it this way. Just like with your personal Budget After Thinking, you can make significant strides towards financial freedom when your income increases and your expenses remain fixed.

    What do you think of investing in real estate so other people can pay off your debt?

    Now, you know three of my main reasons for investing in real estate: cash flow, appreciation, and debt pay-down.

    Regarding debt pay-down, each month my tenants pay rent, I can use that income to shrink my loan balance.

    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.

    So, on top of monthly cash flow and appreciation, debt pay-down is another way to generate wealth through real estate over the long run.

    That’s three ways to make money off of a single investment.

    Not bad, huh?

    If you’re a real estate investor, let us know how you’ve used debt to increase your net worth.

  • Invest in Real Estate Because Cash Flow is King

    Invest in Real Estate Because Cash Flow is King

    You may be wondering whether it’s better to invest in real estate or the stock market.

    It’s a valid question. We all have limited dollars (some more than others) and need to decide what to do with those dollars.

    The debate between investing in real estate or stocks is a good one. There’s no doubt that both asset classes can provide significant long-term growth.

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    There are also advantages and disadvantages to both types of investments. Advocates on either side of the debate can be very passionate about their preferred asset class.

    I personally invest in both asset classes. I have 10 rental apartments in Chicago and a rental ski condo in Colorado. In addition, I invest in the stock market primarily through index funds.

    Both asset classes play a key role in my journey to financial freedom. From my perspective, you don’t have to choose one asset class over the other. You can invest in real estate and own stocks.

    We’ve spent a lot of time in the blog already talking about the significant long-term upside of investing in the stock market. If you need a refresher, check out my post on investing early and often to benefit from the magic of compound interest.

    Today, I want to discuss one of the main reasons to invest in real estate. The reason comes down to a simple term:

    Cash flow.

    When investing in real estate, cash flow is the money left over each month after paying all your bills.

    There’s an old saying, “Cash is king.”

    For me, “Cash flow is king.”

    My goal is to use real estate to accelerate my journey to financial freedom. To that end, I invest in real estate primarily for the cash flow.

    Let’s dive in.

    Stocks and real estate will each provide incredible long-term benefit.

    Both stocks and real estate can provide significant long-term upside. Besides that upside, I invest in real estate for the immediate benefits of cash flow.

    In terms of your Budget After Thinking, your Later Money is for future expenses. Your Now Money and Life Money are considered immediate life expenses.

    Let’s talk about the Later Money category for just a moment. We can hopefully agree that both the stock market and real estate investments can generate incredible long-term wealth.

    The S&P 500 has historically provided an average annual return of 10%. While not guaranteed to continue in the future, 10% average annual returns represents a powerful wealth generator.

    With real estate, the long-term prospects can be harder to sum up with one simple number. There are a lot of variables at play, not least of which are the type of real estate and the geographic market.

    For example, I primarily invest in small multi-family properties in Chicago. According to Redfin, residential home prices in Chicago were up 9.1% compared to last year.

    Certain neighborhoods in Chicago have fared even better. In the neighborhood I invest in, prices are up 11.1% since last year.

    Those are nice short-term trends.

    On the other hand, in the past 25 years, home prices in Chicago have only doubled, which actually lags the national average. That’s not so nice.

    By the way, you can find data like this for most markets across the country so you can do your own homework on your market.

    So, what’s the takeaway?

    For me, it’s quite simple:

    If you hold real estate for long enough (think decades, not years), it will go up in value.

    Given enough time, like the stock market, real estate always goes up.

    How much your real estate will increase in value is hard to predict.

    My expected long-term returns in Chicago are different from somebody who invests in condos in San Francisco. Likewise, my Chicago rentals are different from my Colorado rental ski condo.

    I don’t expect my Chicago properties to increase in value at a rate of 10% over the long-term. I certainly hope the value of my properties beat the historical average in Chicago, but I’m not expecting that either.

    The point is, whatever happens long-term, I’m OK with it. The reason I invest in Chicago rental properties is not really about the long-term upside.

    It’s about the cash flow.

    For me, cash flow is king.

    Cash flow is king because it can cover present day expenses.

    To be truly financially free, you need to cover immediate life expenses at the same time you are saving for future life expenses.

    My definition of being financially free means not being dependent on the income from a primary job to cover your life expenses.

    My goal is to be truly financially free. That means I need money to pay for my life now, not just decades from now.

    African lion photography by Bisakha Datta symbolizing that cash flow is king when it comes to financial freedom.
    Photo by Bisakha Datta on Unsplash

    We just talked about how the stock market and real estate can both help with the future life expenses.

    For me, the primary benefit of investing in real estate is to help with those present day, immediate expenses.

    In terms of your Budget After Thinking, that means helping with your Now Money and Life Money.

    This is where cash flow comes in.

    I can use the cash flow from my rental properties to help cover my present day expenses. By having cash flow available in this way, I have accelerated my journey to financial freedom.

    In fact, I’ve been hard-pressed to find any other asset class that provides as many benefits in the here-and-now, while also providing benefits in the future.

    Let’s explore that point next.

    I prefer cash flow from real estate over stock dividends for my current expenses.

    Don’t get me wrong, you can certainly reach financial freedom by investing in the stock market. As we just talked about, the stock market provides significant long-term upside.

    Plus, you can certainly cover your current expenses with dividends from your stock investments.

    However, I think cash flow from real estate is a better option.

    Here’s why.

    In order to fund your current life with your stock investments, you either need to withdraw some of your earnings or even sell some of your stocks.

    When your stock portfolio is growing, you can leave your principle untouched and live off of the earnings. That’s pretty nice.

    But, what happens when the market drops? You still have bills to pay and a life to fund. To cover those expenses, you may need to sell some of your stock assets.

    Selling assets is not a great way to sustain long-term wealth.

    With real estate, you can live off of the cash flow without having to sell the asset.

    While your property may go through periods where it decreases in value, if you keep it long-term, the asset will increase in value. During that time frame, you can use the cash flow to fund your life.

    Let’s explore this concept a bit further with an example using the popular 4% Rule.

    What’s better for monthly expenses: cash flow from real estate or dividends from stocks?

    Let’s say you just received a windfall of $250,000. Pretend it’s a bonus from work or an inheritance from a distant relative.

    Your goal is to achieve financial freedom as soon as possible so you are not dependent on your W-2 job.

    You are considering two investment options.

    Option 1: You invest the $250,000 into a total stock market index fund, such as Vanguard’s popular offering (VTSAX).

    You’ve done your homework and know that based on the 4% Rule, you can safely withdraw 4% of your money in the first year and then 4% plus an adjustment for inflation in subsequent years. If you do so, your money should last 30 years.

    That means you can safely withdraw $10,000 in the first year year, and a bit more each year after that. For simplicity, let’s just look at the first year when you can safely withdraw $833.33 per month ($10,000 / 12 months = $833.33).

    Remember, your goal is to leave your primary job. With this investment, you can assume you’ll have $833.33 per month available to cover your monthly expenses. Not too bad.

    One important note: the 4% rule contemplates that your original investment should fund your lifestyle for 30 years. Importantly, there’s a chance your portfolio may be completely depleted after 30 years.

    There’s also a chance your portfolio may be worth more in 30 years than when you started withdrawing.

    Your results in large part depend on the percentage of stocks you own in your portfolio. If you are interested, you can read more about the 4% Rule and successful withdrawal rates here.

    One of keys to remember is that while the market does not always go up every year, you will still be making withdrawals every year.

    There may be a year where the market drops by 5% on top of the withdrawals you made that year. When that happens, your account balance drops. If you are not flexible in your withdrawal rate, this could lead to problems.

    True, when the market goes up, your account balance goes up. The 4% Rule attempts to factors in these up-and-down cycles over a 30 year period.

    However, when you are making constant withdrawals over a long enough period, there’s a chance that your account balance will eventually drop to zero.

    Keep this in mind as we consider our next option.

    Option 2: You use the $250,000 for a down payment on a rental property valued at $1 million.

    We will soon learn how to evaluate rental properties. Countless books have been written on the broad topic, and it’s beyond the scope of this post.

    Humor me for now since this is only a hypothetical scenario.

    Without getting into specifics, I am willing to bet that any decent real estate investor could generate more than $833.33 per month from a $1 million property.

    Personally, if I had $250,000 to invest in Chicago, I would not settle for anything less than $2,000 per month in cash flow. And, that would be the bare minimum for me to even tour a property.

    With an initial investment of $250,000, my focus would be on finding a rental property with at least $3,000 in monthly cash flow.

    For now, you’ll just have to trust that cash flow like that is possible with rental properties. I’ll soon show you how to do the analysis and manage your properties to target returns like this.

    Photo from Zach Angelo created for his church symbolizing that cash flow is king when it comes to financial freedom.
    Photo by Megan Watson on Unsplash

    To recap, with the same $250,000 investment, you should be able to earn more monthly cash flow in real estate than dividends from stocks.

    It gets even better.

    If you hold your property long-term, your monthly cash flow should increase over time. Over those 30 years, inflation will naturally cause your rental income to increase.

    At the same time, if you have a fixed rate mortgage for 30 years, that major expense stays constant. The difference between your increased rental income and constant mortgage payment results in more cash flow.

    So, if you are hoping to sustain financial freedom without a primary job, which investment gets you closer to covering your monthly expenses?

    Investing in real estate offers so much more than just cash flow.

    Don’t stop reading yet.

    On top of the monthly cash flow, real estate provides so much more.

    Here’s a sneak peak continuing our prior example:

    After 30 years, you will own an asset without any debt. In our example, even without any appreciation, you would own a $1 million property debt-free. And, that debt was paid off entirely by your tenants.

    Add in appreciation, another major reason to invest in real estate, and your property will likely be worth $2-$3 million debt-free after 30 years.

    Compare that to the example with stocks using the 4% Rule. After 30 years of depleting your investment account, your investments may be gone.

    To put a bow on this point:

    With stocks, you can earn $833 in monthly dividends and possibly have no money left after 30 years.

    With real estate, you should reasonably earn $2,000-$3,000 per month (improving over time), and after 30 years will own an asset worth $2 million-$3 million, debt free.

    When you look at it this way, the choice is really not that hard, is it?

    On your journey to financial freedom, are you convinced that cash flow is king?

    I’m not saying it’s bad to invest in stocks or you should only invest in real estate. I personally invest in stocks and real estate.

    I see a place for both asset classes in my future.

    If you haven’t previously considered investing in real estate, maybe you’ll now think about how that monthly cash flow can fit into your overall investment portfolio.

    If you’re striving for financial freedom, are you convinced that rental property cash flow can accelerate your journey?

    Let us know in the comments below.

  • Happy that I Delayed Financial Independence

    Happy that I Delayed Financial Independence

    I’m further away from financial independence today than I was five years ago.

    You know what’s funny?

    I couldn’t be happier about where I am today.

    Let me explain.

    In 2020, my wife and I had very minimal expenses.

    At the start of 2020, my wife and I were both working as lawyers in Chicago. We lived in an apartment in a 4-flat that we had purchased in 2018. We had no kids at the start of the year, but were about to welcome our first.

    This was a good apartment in a popular part of town. It had 3 bedrooms and 2.5 bathrooms. That was plenty of space for my wife and I, and eventually the two babies we brought home there.

    We purchased this 4-flat from a real estate investor who had done a decent job on the renovation. It had in-unit washer/dryer, modern finishes, and plenty of storage.

    We had a small outdoor patio with enough room for a grill and little table. We also had a garage parking space but ended up parking our 20-year-old car on the street most days.

    When we purchased the building, it was the most expensive 4-flat that had ever been sold in that part of town. It was a bit of a risk to set the high-water mark in the area.

    In the end, the risk was more than worth it.

    Even though the building was expensive for the area, this was not a fancy apartment. This part of town was still up-and-coming. Some people probably thought it was not a nice part of town.

    I doubt many people came over and thought, “Wow, look at this amazing apartment!”

    The more likely reaction was probably something like, “What the heck are they doing?”

    To be fair, I asked myself that question plenty of times.

    So, what were we doing?

    We were paying ourselves to live there.

    Say that again?

    My wife and I paid ourselves to live in that apartment.

    We lived for free. And made a profit at the same time.

    See, the rental income from the other three units covered the entire mortgage plus all expenses for the property.

    But, that’s not all. On top of covering all the expenses, the rental units generated a profit of $1,000 per month on average.

    So, not only did we spend zero dollars each month on housing, we profited $1,000 per month.

    Looking back, getting paid to live in a decent apartment was maybe the best decision we ever made.

    Landlord working outside the office checking his balance and earnings. Getting paid concept. Internet money income. Showing the power of house hacking even if it means delaying financial independence.

    What happens to your finances when you live for free?

    Let’s take a look at how living for free can be a major advantage on your way to financial freedom.

    The common wisdom is for people to spend no more than 30% of their gross income on housing. Regardless of how much you make, that usually means thousands of dollars.

    Because our tenants were paying our living expenses for us, we did not have that expense for the five years we lived in that apartment.

    In other words, we didn’t have to worry about budgeting for housing.

    We also drove a nearly 20-year-old car and could walk to the “L” (Chicago’s subway). We lived in a neighborhood with plenty of nearby restaurants and shops. That meant our transportation costs were next to nothing.

    Because we weren’t paying for housing and had very minimal transportation costs, we could supercharge our savings.

    How much were we able to save?

    Let’s take a look.

    Between 2018 and 2023, my wife and I acquired three buildings and ten apartments in that same neighborhood. We’re very familiar with market rents in the area.

    We rent our apartments for anywhere from $2,300 to $3,600 per month. Our usual tenants are professionals like engineers, lawyers, doctors, consultants, and pilots.

    The unit we were living in from 2018 to 2022 was one of our larger units. At the time, it would have rented for $3,500 per month on average. That equals $42,000 per year to rent that apartment.

    Keep in mind, if someone was paying rent to live there, that would be $42,000 of after-tax money.

    Since we owned the building, we lived there for free. We could save that $42,000 we would have otherwise paid in rent. Instead of spending that savings on things we didn’t need, we were able to save that money for our next real estate investment.

    Plus, we earned $1,000 on average per month while we lived there. That’s an additional $12,000 per year in profit.

    We lived in that unit for almost five years.

    Add it all up and we saved $270,000 by living in that apartment for five years.

    • $42,000 saved rent x 5 years =$210,000.
    • $12,000 profits x 5 years = $60,000.
    • Total savings = $270,000

    We used that $270,000 for a downpayment on a rental condo in Colorado ski country.

    It took five years of living in a decent, but not-awesome, apartment to have a ski condo that will hopefully be in our family for decades.

    Choosing to live in our 4-flat to save $270,000 over five years was one of the best financial decisions we’ve ever made.

    Snowboarders breath on a cold day illustrating the power of financial independence earned through house hacking.
    Photo by Alain Wong on Unsplash

    I highly recommend you consider house hacking if you’d like to start investing in real estate.

    Many of you are familiar with the strategy of living in a building (or home) you own while tenants (or roommates) pay for it. Brandon Turner, of BiggerPockets fame, popularized the concept he dubbed “House Hacking”.

    You can read all about house hacking on BiggerPockets here.

    For even more information on house hacking, Craig Curelop wrote a book for BiggerPockets called The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom.

    Without a doubt, there is no better strategy for entry level real estate investors than house hacking. I gave you a glimpse of the financial upside earlier in this post.

    Besides the financial upside, it’s like landlording with training wheels. Since you live on site, you can more easily learn how to manage a rental property, including responding to tenants and handling routine maintenance.

    The naysayers will say something like, “I don’t want to live with my tenants. They’re going to stress me out. I don’t want to be bothered at 2 a.m.”

    Ignore them.

    My wife and I lived with our tenants for five years at this property and two more years at a subsequent property. We did this while working full-time jobs as lawyers and raising two kids.

    Because we didn’t listen to the naysayers, we now have four income-generating properties and our “forever home” just outside Chicago.

    Even though we’re no longer living for free, the income from our rental properties is enough to cover the expenses of our home.

    So, why am I further away from financial independence today?

    I’m further away from financial independence today because my expenses have gone up since 2020. I’ve already alluded to those increased expenses throughout the post.

    In 2020, we had our first child. Now, we have three children.

    Also, after seven years of house hacking, we decided it was time to purchase a long-term home for our growing family just outside the city in a terrific area.

    We also finally traded in our 21-year-old car for our first new car ever.

    How’s this for easy math:

    Three Children + Nice House + New Car = Further Away from Financial Independence

    While that combination means I’m further away from reaching financial independence, I now have everything that I could possibly ever want.

    That’s why I couldn’t be happier with where I’m at today.

    My end game is finally in sight. Five years ago, I didn’t know where I’d be living or what car I’d be driving or what my family situation might be.

    Now, the picture is clear.

    I can calculate with reasonable certainty how much money I need to be truly financially independent. I can use that number as a target and make every financial decision with that target in mind.

    That’s why in 2025, I’m focused on paying down HELOC debt. Each time I make a debt payment, I move closer to financial independence.

    Besides, my goal is FIPE not FIRE.

    My goal is to reach FIPE not FIRE.

    FIPE means Financial Independence, Pivot Early.

    I have no intentions of retiring any time soon. Retiring early is not, and has never been, my goal.

    My goal is to become financially independent to create as many options as possible to protect myself and my family. I want to be financially independent so I can pivot no matter what life throws at me.

    If my goal was to retire early, I may have skipped the single family home in a great neighborhood. I could have continued house hacking, minimized my expenses, and lived off of the rest of the rental income.

    But, I want more for me and my family. I don’t want to just survive.

    Have you delayed financial independence to craft the life you really want?

    My life has certainly changed in the past five years, but all that change has been for the better.

    That meant house hacking at first to keep expenses as low as possible. Now it means enjoying the wealth I created by making those earlier sacrifices.

    In order to have the life I want, I needed to temporarily move further away from financial independence.

    Still, I’m confident that I’ve taken the right steps to not just reach financial independence, but to reach it while living the life I want.

    The tradeoff is that it will take me longer to be truly financially independent. I’m perfectly happy with that.

    Financial independence has never been more clearly in sight. It’s just delayed a little bit.

    • Is your goal to reach FIPE and pivot as quickly as possible?
    • Or, are you OK with delaying FIPE temporarily for the life you truly want?

    Let us know in the comments below.

  • How to Use HELOC to Buy Investment Property

    How to Use HELOC to Buy Investment Property

    Have you ever wondered how successful real estate investors seem to acquire properties so quickly? The answer is usually related to “OPM”, or Other People’s Money. In today’s post, we’ll discuss how I’ve used a common form of OPM, a Home Equity Line of Credit or HELOC to buy investment property.

    The best part is that you can use and repeat this strategy to acquire multiple properties. On three separate occasions, my wife and I successfully used a HELOC to buy investment property.

    Besides acquiring properties, as a real estate investor, you can also use a HELOC to update a property. My wife and I have done both. We’ve used HELOCs to help with the initial downpayment to acquire properties. We’ve also used HELOCs to improve properties after we’ve purchased them to increase its value.

    Read on to learn what a HELOC is and how to use a HELOC to buy investment property.

    What is a HELOC?

    A Home Equity Line of Credit (HELOC) allows you to borrow money, in the form of a loan, against the equity in your home. Equity is the value of your home less what you owe on a mortgage.

    Think of a HELOC as a second mortgage on your property that works like a credit card. That means you will be charged interest when you use your HELOC funds.

    Just like with a primary mortgage, when you open a HELOC, the bank is protected by the equity in your home.

    Just like a credit card, you can choose when and how to use a HELOC. And, you can use your HELOC over and over again, as long as you pay down the balance. Use it, pay it off, use it again. This is what my wife and I have done.

    Of course, this is one of the best parts about HELOCs. Whether you want to use a HELOC to buy an investment property, or for any other purpose, you can tap the funds repeatedly and don’t get charged any interest until you use them.

    This point is worth repeating. You can open a HELOC and not use it right away. You won’t be charged interest while you wait for an opportunity to present itself.

    That opportunity might be using your HELOC to buy investment property.

    Or, it might mean using your HELOC to renovate your home or buy a car. This is what my wife and I did recently. When we bought a new car last year, we decided to use our HELOC funds instead of taking out a new auto loan.

    Extract equity or obtain funds from your property using a home equity loan or a HELOC to buy investment property.

    Keep in mind that when you decide to use your HELOC, you will be charged interest until you pay it back, just like a credit card. This is a major consideration to keep in mind if you’re thinking about using a HELOC to buy an investment property.

    To recap, a HELOC is really just a form of credit card, available to you for a set period of time, secured by the equity in your home.

    You can use those HELOC funds for any purpose. You can choose to use your HELOC to buy investment property, renovate your home, buy a car, or for pretty much any other purpose.

    What to know about paying off a HELOC.

    If this all sounds too good to be true, don’t forget that you do have to pay off your HELOC, with interest. Just like any other debt, whether it’s Good Debt or Bad Debt, a HELOC needs to be paid off.

    HELOCs are generally broken out into two phases, the “draw period” and the “repayment period.”

    The first phase is known as the borrowing period, or draw period. You can continue to use your HELOC funds for the duration of the draw period. Most HELOCs have a draw period of 10 years.

    During the draw period, your loan balance will accrue interest. Generally, you are required to make minimum payments during the draw period.

    These payments are usually referred to as “interest only” payments. This means you must pay the interest accrued during the previous month, but you don’t have to pay down the principle owed.

    At the close of the draw period, the repayment period begins. During the repayment period, you can no longer borrow from your HELOC.

    The repayment period typically lasts 10 or 20 years. Your lender will set a schedule for monthly payments to pay off the balance in full, similar to a mortgage.

    Four advantages to using a HELOC to buy investment property.

    Here are the four main reasons why I’ve used a HELOC to buy investment property. These same advantages apply to any other major purchase.

    1. You can use a HELOC as you would use cash, including for a downpayment.

    Once your HELOC is open, you can use the funds as you would cash. All you need to do is link your HELOC account to your primary checking account. You can make transfers into your checking account, as needed, up to your full HELOC credit limit.

    With a HELOC, once the transfer hits your checking account, you can spend that money just as you would any other money.

    This is a huge advantage if you want to use a HELOC to buy investment property.

    That’s because lenders heavily scrutinize where you are getting the funds you plan to use to close on a property. HELOC funds are almost always allowed to be used for a downpayment.

    On the other hand, cash advances from credit cards are typically not allowed for a downpayment on a conventional loans.

    2. HELOCs charge lower interest rates.

    The interest rate charged on HELOCs will typically be lower than the interest rate charged by credit cards and other personal loans.

    Interest rates on HELOCs are similar to prevailing mortgage rates, but typically charge about 1-2% more. This is to compensate the HELOC lender for the added risk of being the second mortgage on a property.

    According to Bankrate, here are the current average interest rates:

    As you can see, if you need to borrow money for any reason, using a HELOC usually gives you the best rate. This is a major reason why people generally use HELOCs.

    It’s also the primary reason why I have used a HELOC to buy investment property.

    Keep in mind that HELOCs generally charge a variable interest rate that may change monthly depending on market conditions outside your control. This is again to protect the HELOC lender, and is a factor to consider before you use your HELOC funds.

    In fact, this is one of the key risks with using HELOCs. You may apply for a HELOC when interest rates are low, but that can change. You may be faced with a significantly higher rate when you pay off the balance.

    From a real estate investor’s perspective, a higher interest rate may end up eating into all of your cashflow. Before using a HELOC to buy investment property, make sure the cashflow on the property can cover the higher loan payments.

    3. You only pay interest on HELOCs during the draw period.

    As discussed above, you typically only have to pay the interest on a HELOC during the draw period. That means your monthly payment is lower. As long as you make the minimum payment, the overall balance will not grow month to month.

    Then, during the repayment period, you have 10 to 20 years to pay off the balance. This lengthy period helps spread out the balance over time, which keeps the required payment lower each month. This long payoff period is extremely beneficial when paying off larger purchases, such as a home renovation.

    This is also another key reason why a real estate investor would use a HELOC to buy investment property.

    Spreading out the payments over the long term, and only paying interest during the draw period, means more monthly cashflow. Some real estate investors think differently, but to me, cashflow is king.

    4. You may have access to a larger sum with a HELOC.

    Because a HELOC is secured by the equity in your home, it’s likely you will be eligible for a larger sum than a typical credit card or other personal loan.

    While credit cards also allow cash advances, they are typically capped at a relatively low amount and come with higher interest rates.

    A larger available balance comes in handy when you want to use a HELOC to buy investment property.

    For conventional loans, you’ll typically need 20-25% of the purchase price as a downpayment. That is a lot of money to come up with on your own, even if you are great at fueling your savings.

    The same is true for funding any other major purchase. For example, just the other day, I spoke to a friend who opened up 12 different credit cards to launch his software business.

    If he had access to a HELOC, he would not have needed 12 separate credit accounts. The HELOC would have provided him enough funding.

    How I’ve used HELOCs to scale my real estate portfolio.

    Using HELOCs can be an effective way to scale your real estate portfolio.

    As mentioned above, you can use your HELOC for a downpayment on another investment property.

    This is one of the ways my wife and I scaled our real estate portfolio. We primarily invest in an area of Chicago where properties can get expensive. The same can be said about our vacation rental in Colorado.

    Coming up with a full downpayment in these markets on our own would take years of savings. We’ve made the choice to take on additional debt and added risk to scale more quickly.

    We purchased our first investment property in 2018. After making some improvements and paying down the mortgage, we applied for a HELOC in 2020. We then used those HELOC funds to help with the downpayment for our Colorado ski rental in 2021.

    After a couple years of unexpected appreciation on our ski rental, we took out a HELOC on that property in 2022.

    We then used that HELOC to help purchase a third rental property in Chicago in 2022 and our primary home in 2024.

    As you can see, we’ve used our equity gains in our earlier properties to take out HELOCs to help acquire additional properties.

    Along the way, we have worked on paying down the balances of each of those HELOCs. This way, we reduced our debt and increased our net worth. We can also now repeat the process and again use a HELOC to buy investment property.

    Besides a downpayment, real estate investors can use HELOC funds to make improvements to their properties.

    Real estate investors also use HELOC funds for improvements to their properties. These improvements can lead to equity gains through appreciation and also more monthly cashflow.

    We’ve used HELOCs in this way on multiple occasions. For example, we used our HELOC to install washers and dryers into three of our apartments.

    We then paid off the HELOC balance with the increased rental income generated by those three improved apartments.

    Don’t ignore the biggest risk of using a HELOC to buy investment property.

    With all the advantages of HELOCs, there is one major risk that cannot be ignored. This single risk is so important that is should outweigh all of the advantages for most people.

    HELOC equals debt.

    Like with all debt, if you abuse the privilege, you are going to get yourself in trouble.

    This is why Dave Ramsay is adamant that debt should not be used as a tool to build wealth.

    In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.

    If you decide to tap your HELOC funds, remember that the loan is tied to the equity in your home. If you fail to comply with the loan terms, your home is at stake.

    That’s a huge risk.

    Before you consider using a HELOC, be sure to have a plan in place for paying back the loan. This is where your Budget After Thinking can really help.

    I would not use a HELOC as a beginner investor.

    While there are upsides to using HELOCs, it is a potentially risky strategy that I would not feel comfortable with as a beginner investor.

    I say that for good reason.

    When you hear HELOC, you should immediately think about debt. For many of us, debt is problematic and leads to negative emotions.

    I’ve experienced these negative emotions associated with debt. I only got comfortable with taking on debt as I learned to trust myself again with the responsibility.

    While I’ve used HELOCs to scale my real estate portfolio, my primary money goal this year is to pay down these HELOCs. I’m tired of having those debt balances hanging over my head.

    If you have proven to yourself that you can responsibly handle debt, using a HELOC may be a worthwhile strategy.

    By responsible with debt, I mean:

    If you have satisfied all of the above, you can then make an informed decision about using debt to scale your real estate portfolio.

    How do you apply for a HELOC?

    Applying for a HELOC is just like applying for a mortgage. The bank will review your finances and determine if it will lend you money against the equity in your home.

    HELOC – Home with a Dollar Sign and Line Graph Symbolizing Borrowing Against Home Equity, which illustrates that using a HELOC to buy investment property can be a useful strategy to scale your real estate portfolio.

    If you’ve ever applied for a mortgage, you know this is not a fun process.

    The key to qualifying for a HELOC is that your home equity needs to have grown in value, either by paying down your primary mortgage or through appreciation.

    Let’s look at an example of using a HELOC to buy investment property.

    Note, you’ll never have to do this math yourself. This is for illustration purposes in case you want to estimate the amount you may be eligible for before you start the application process.

    For easy math, we’ll make some assumptions in this example. Always confer with your mortgage broker or lender for precise calculations.

    In this example, let’s say you bought a home five years ago for $500,000.

    • You put 20% down ($100,000) when you bought the home, so your original mortgage was for $400,000. This means your equity in the home when you bought it was $100,000.
    • For the past five years, you’ve paid down the principle on your mortgage every month. For easy math, let’s assume your remaining mortgage is now $350,000. Because you paid down $50,000 of the mortgage, your equity has increased by $50,000.
    • Not only have you been paying down the mortgage for five years, your home has also appreciated in value and is now worth $600,000. That’s another $100,000 in equity you now have in your home.

    Add it all up and you started with $100,000 in equity (your original downpayment) and now have $250,000 in equity.

    This is because you have paid the mortgage down every month and your home has appreciated in value.

    In this scenario, you may be eligible for a HELOC to buy an investment property.

    How do lenders calculate the amount of your HELOC?

    Each bank may have different standards for qualification and how much they will lend you. Generally, banks will use a metric called Loan-to-value ratio to calculate the amount of your HELOC.

    What is Loan-to-value ratio?

    Loan-to-value ratio is a complicated name for an easy math formula:

    LTVratio = Mortgage amount / Property value.

    In our scenario, your current mortgage amount is $350,000. Your property value is $600,000.

    So, your LTVratio is .5833 ($350,000 / $600,000). In terms of percentage, that’s approximately 58%.

    A typical HELOC lender will allow you to borrow up to a combined LTVratio of 70%.

    That means your existing mortgage plus the HELOC can only add up to 70% of the value of your home.

    The bank does this to protect itself by requiring you to maintain 30% equity in your home.

    To carry out our example, using a combined LTVratio of 70%, you may be eligible for a HELOC of $70,000:

    • Value of home = $600,000.
    • First mortgage = $350,000 (approx. 58%)
    • HELOC = $70,000 (approx. 12% of value of home)
    • Combined mortgage + HELOC= $420,000 (70% of home’s value).
    • Remaining equity in home = $180,000 (30% of home’s value).

    Again, you don’t need to do this math yourself, but it’s helpful if you want to understand what size HELOC you may be eligible for before starting the process with lenders.

    Have you used a HELOC to buy investment property?

    Using a HELOC to buy investment property can be an effective strategy. My wife and I have effectively used this strategy multiple times.

    Before you decide to use a HELOC, be sure to understand the risks associated with taking on additional debt.

    • Have you used a HELOC to buy investment property before?
    • What about using a HELOC for any other purpose?

    Tell us about your experience in the comments below.