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.
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.
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.
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.
Leave a Reply