Learning how to make millions with rental properties is easy. It’s the implementation of what you learn that makes the difference.
Team up with an experienced real estate agent who knows the ins and outs of real estate investing as explained in this recent post. Here
First, you buy a house or a duplex or an apartment building. Then apply the following fundamentals about owning rentals.
Wealth Production from Rentals
Four things that produce wealth from rentals include:
Over time real estate tends to rise in value. Yes, sudden downturns in the real estate market sometimes occur like in 2008. But, prices tend to climb over time.
The key is to hold onto the properties long enough to see appreciation in value. What makes holding on to the properties easier is cash flow.
Every month you should make extra money from your rents minus your expenses. These profits (called cash flow) keep you from going into debt especially when emergency funds needed to avoid calamities.
The money left in your pocket after all paid expenses become your cash flow.
A big key for making money in rentals is to use the tax laws to legally take deductions and pay fewer taxes.
If you make $90,000 from rentals while your friend makes $90,000 from a job, you probably keep a lot more money than your friend. That’s because you take advantage of tax laws favoring investors over wage earners.
However, this post focuses on the other three wealth producers. That’s because explaining lax laws, deductions, depreciation, and benefits requires an entire blog post. Recently, we posted a summary of the best tax deductions for rental investors in 2019. Here
Paying Down Your Loan
Most of the time, (unless you are already a multi-millionaire) you take out a bank loan to buy investment real estate. Making payments to the bank every month gradually reduces the loan principal.
Eventually, your $250,000 loan gets reduced over time until you owe nothing. Even if you still owe, what’s paid off the loan increases your equity.
How These Four Wealth Producers Make You a Millionaire
Now that you learned the basics of the four money producers, it’s time to learn how they work to make you wealthy.
You buy your first rental house by putting down 25% or you discover creative ways to finance it with a lower down payment (or no money down). Read one of our recent posts about this. Here
Let’s say your first house costs $200,000 with a 20% down payment. Thus, your loan amounts to $160,000. Let’s also say you make $400 cash flow per month from the house.
$400 x 12 = $4,800 per year
After the first year, you made $4,800. But, you also need to look at the other three producers. In your first year, the loan balance dropped from $160,000 to something like $157,000. Also, assume a 3% average appreciation raises the value of your house to $206,000.
Thus, you earned $4,800 in cash flow plus $3,000 loan pay down and $6,000 in appreciation. Ignoring the tax benefits, for now, you made $13,800 your first year.
Certainly not a millionaire yet. But, this process speeds up over time. You pay off more from your loan balance, the value goes up more and possibly your cash flow too as you raise your rent.
Staying with the 3% appreciation, in 10 years you could end up with a house worth around $260,000 and owe about $120,000. So, your equity (the difference between what you owe and the value of the house) is around $140,000. Add in your cash flow over 10 years of $48,000. Your net profit becomes $188,000.
Sure, only $188,000 after 10 years looks like it may take a long time to become a millionaire.
Remember, this is only one deal. Add more deals to the pot to lessen the number of years to reach a million.
Also, your tax savings not even considered in the above example!
Buy More Rentals to Make More Money Faster
Use your cash flow as down payments to buy more rentals. Don’t settle for just $200,000 single-family houses. Buy duplexes, triplexes, and even apartment buildings.
These principals apply every year as you pay down your loans a little while your rentals increase in value. Your cash flow increases along with your net worth so you get wealthier.
Due to the complexity of real estate taxes and how they change over the years, we didn’t include the accumulated wealth using tax deductions and other tax saving techniques. For instance, read these recent posts about:
Creative Financing Reduces Down Payments
Maybe your first rental house required a traditional bank loan with a 20% down payment. But, more creative strategies exist as explained in two recent posts:
In essence, finding good deals and figuring out how to finance them creatively to reduce your down payment cuts down the time to become a millionaire.
How to Find Good Deals
Learning how to analyze deals results in making deals with greater profits.
Also, read these helpful blog posts we recently published to learn more about:
What to do if the Market Drops
This is why cash-flowing rentals make sense. If the market drops, your cash flow should keep you afloat until the real estate market rebounds. History proves that it always does. Read about it. Here
Avoid Making Real Estate Investment Mistakes
A bonus includes posts published here advising investors on how to avoid making mistakes.
Follow these tips to make more money with your rental properties like:
- “What Threatens Real Estate Investment the Most?” Here
- “Biggest Landlord Mistakes”. Here
- “Why Real Estate Investors Fail”. Here
- “Rental Investors Share Secrets”. Here
- “Landlord Mistakes Limits Profits”. Here
- “Property Tips for Rental Owners”. Here
- “How to Raise Rents”. Here
Hire a Property Management Company
While heading towards your first million learn about the “Advantages of Using a Property Management Company” we recently posted. Here
The advantages include:
- Getting higher quality tenants;
- Preventing potential problems with tenants;
- Avoiding legal problems;
- Fewer vacancy periods;
- Longer term tenants;
- Rent collection efficiency;
- Handling evictions;
- Lower maintenance and repair costs;
- Adding value to your rental properties;
- Personal advantages; and
- Tax savings.
Steven Rich, MBA – Guest Blogger
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