Many, I dare say most, of the millionaires in America, have achieved their wealth through owning rental real estate. However, you never see them on TV. Why is that? Because owning rental real estate is not sexy or exciting. That wasn’t a typo.
Turn on HGTV or any number of those shows and you’ll see people flipping homes and selling for much higher than their purchase price. They don’t show most of the details and it leads the tv audience to believe that it is just that simple.
The problem with flipping homes is that you are only as good as your last sale. No sales mean no income. A home flipper is at the mercy of the local market. I’ve seen firsthand a market drastically change in a 2 month period.
I don’t recommend flipping homes for a long period or as your primary source of income.
Enter the king of real estate and passive income…Rental Real Estate!!!
There are 4 main reasons why owning rentals is your absolute best investment in real estate.
***Passive Income***
Passive income is the most important part of owning real estate. Each month our tenants pay us through our payment software. We then take that payment and pay the mortgage for the property that they are occupying. We typically receive about $350 more in rent than we pay in mortgage payments.
Each of our homes averages $350 of passive income every single month. That takes almost no effort from us yet the payments continue to come in. Mathematically, if you own 10 rentals, that would be a passive income of $3,500 per month or $42,000 per year. That isn’t enough for retirement, but if your total expenses are less than $42,000 a year, you can now quit your JOB and work for yourself to grow and buy more rentals.
***Mortgage Pay Down***
As I stated previously, our tenants are paying us and we are paying the mortgage with their money. Essentially, they are paying down our mortgages on our assets. That is beautiful.
***Asset Appreciation***
Over time, usually, home values tend to appreciate or rise. Example: We buy a home for $200,000. In 5 years, at a 3% per year appreciation, the home would be worth $231,854. Mind you, for the entire 5 years our tenant has been paying down the mortgage.
The mortgage would be paid down to $185,000 which would give us over $46,000 in equity! Oh yeah, and we’ve received a passive rental income of $350 a month for 60 months totaling $21,000.
***Depreciation and Tax Write-offs***
Tell your CPA that you are going to be buying rentals and watch her face light up. One big tax break that a landlord will receive is “Depreciation” of the asset. The government automatically gives you a tax write-off just for owning real estate. Talk to your CPA more about real estate tax write-offs. Long story short, you will keep more of the money you make instead of paying it to the government who didn’t help you buy any of the homes that you have bought.
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