Real estate can be a great investment if you take the time to learn about the process and the best ways to make big profits. However, most people who are interested in buying rental property or real estate as an investment never do so. People who don’t take the time to learn about investing in rental property are missing out on a great opportunity. I have 11 rental properties that bring in about $5,000 a month after all my expenses, including mortgage payments.
One thing I would do differently is to invest in real estate much earlier. I bought my first rental property when I was 31 and now I’m 35. The great thing about renting out is that the longer you own it, the more profitable it becomes as an investment. In addition, when you are young, you have more flexibility in life, fewer obligations, and you can take more risks. If you delay too long to start investing, family, work, and life make it difficult to explore and buy rental property.
Why rental property is a great investment
I like comparing rental property to the stock market because the stock market is an investment vehicle that we are all taught to use. Whether it’s individual stocks, mutual funds, index funds, or REITs, we’re told that the best way to save and invest is to invest in the market. The problem with investing in the stock market is that we depend solely on the growth in the value of shares. Retirement calculators are based on the stock market. They make us guess when we will die in order to determine how much we should save. We will run out of money if we live too long, or save too much money if we die too soon.
Some people invest in real estate to increase its value, but smart investors invest for cash flow.
Cash flow and real estate investment
Cash flow is the money you receive from renting a property each month after paying all expenses. The great thing about cash flow is that it increases over time without eating away at your core investment. It’s like a stock whose dividends are so high that you never have to worry about the stock’s value going up to make a big profit.
Cash flow will also increase over time because rent will rise with inflation while your mortgage payments stay the same. Eventually, you will pay off your loan and your cash flow will increase significantly.
When renting, I see 20% cash back, which is not always easy to do, but is possible depending on your location and the amount of money you have to invest. These earnings do not include rental tax credits, interest payments and possible appraisals that increase your ROI. Here is a great article on how to calculate cash flow correctly.
One of the ways to make money from property rentals is to invest through websites such as Roof. Roof is an online real estate investment marketplace that charges half the fees of traditional agents. The site makes it incredibly easy to filter and search for properties in your price range.
Buying rental property with a small down payment is easier when you’re younger
Most banks require the investor to pay at least 20% in advance when renting real estate.
For most people, this is a lot of money, especially when you consider that the property may need repairs, you need to pay closing costs, and you want to have money in reserve in case something goes wrong. A convenient purchase of a rental property can easily require 30% or more of the purchase price in cash.
If you are buying a house as a tenant, you can choose not to invest in certain loans (USDA, VA) and almost certainly buy a house with a 5% down payment. You cannot immediately rent out the house you buy as an owner, but you can rent it out after you have lived in the house for a certain amount of time (usually one year).
There are some things to know about buying an apartment building that you plan to live in. Most lenders require the owner to live in the home for 12 months to satisfy the owner’s placement requirement. This means that you can buy a rental property as an owner, live there for 12 months, and then rent out the house. If you’re ambitious, you can keep repeating this process every year, although you’ll likely only be able to use the “no money” option once.
You can also buy an apartment building with one to four apartments and live in one of the apartments to qualify as an owner. After you have lived in the apartment for 12 months, you can rent out the entire building and repeat the process.
When you’re younger, it’s much easier to move into a house you want to rent out. When you have a family, it’s hard to convince your spouse and kids that you need to move every year and live in a house that may not be up to their standards.
You can invest in real estate without buying real estate
One of the easiest ways to enter the real estate market is to become an investor. Today, there are many platforms that crowdsource the investment process. These platforms select a group of properties verified by experts and investors contribute to the collective pool, with each investor receiving a share of the reward.
You do not need to be an accredited investor with fundraising, and you can start investing in real estate with as little as $10. Fundraising lends money to commercial property buyers and then pools those loans by offering them as investments through its platform.
CrowdStreet has two main options for real estate investors: choose and manage your own portfolio or let their team of real estate investment experts do all the work for you. In any case, you join other investors in financing commercial real estate projects, each of which is carefully checked by market experts. The minimum investment requirements vary from one project to another, but you can choose the options that best suit your finances.
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This is evidence of a partnership with Fundrise. We earn commission from affiliate links on MoneyUnder30. All opinions are our own.
It takes time to get a good rental property deal that brings in cash flow.
It is not easy to find a rental property that will generate the income that I receive, but I am not deviant either. Many investors earn higher returns than I do, but they have spent a lot of time and effort researching their market, researching real estate, and researching properties for rent. The older you get, the less time you have for work, family, and new hobbies. The older you get (unless you reach retirement age), the less time you have to study real estate, your market, and how to make money in this business.
I also renovate and resell about 10-15 houses each year, so I specialize in getting good real estate deals. I buy most of my deals on the MLS, even though prices are rising and there is a lot of competition.
Here are some tips on how to get great deals:
- I am a real estate agent who helps me get good deals and allows me to act very quickly. I’m not saying that all investors should be agents, but it definitely helps!
- If you are not an agent, spend a lot of time looking for a great agent who will act quickly for you and find deals for you.
- Take the time to research your market prices and rental rates so you know what a good deal is.
- Don’t rely solely on a real estate agent to find you good deals. Many agents are not investors and will not know what you are looking for.
- Join the real estate investor club in your area to meet other investors and find out what and how they buy.
Risks associated with buying real estate for rent
There are definitely some risks and work involved in owning a rental property. The biggest mistake I see investors make is buying for value with negative cash flow. It’s great if my houses go up, but I love cash flow. With cash flow, I have money in my pocket that I can use to buy more property, invest somewhere else, or spend on something fun. If you have a negative cash flow, there is a good chance that things will end badly for the investor.
The problem with negative cash flow is that most investors underestimate the money they will have to spend on rental property. There is also no guarantee that prices will rise or when they will rise. Given enough time, real estate is likely to rise in price, but it could also fall in value before that happens. How long can you deposit money into real estate every month? Eventually, people run out of money and are forced to sell, sometimes for less than they bought the property. If you have positive cash flow, you won’t have to sell and you won’t want to sell because it puts money in your pocket.
Another issue that people forget about is maintenance. You must plan monthly maintenance costs. I estimate that 10% to 20% of my monthly rent will go toward maintenance, depending on the age and condition of the property. If you don’t account for maintenance, you may not make money on rent.
When renting, my average mortgage payments are $400 to $600 including taxes and insurance, and my rent ranges from $1,100 to $1,500 per month. After taking into account possible service and vacancies, my cash flow is about $500 per month.
It also takes time to manage a rental property. You will need to find tenants, sign a lease, properly account for expenses and income, and make sure everyone pays on time. You can also hire a property manager to do all this for you for around 8-10% of your monthly rent, but you should also budget for these costs.
Conclusion
Renting a property can be a great investment that allows you to retire early. This No get rich quick scheme and it’s No easy to do. Real estate investments take time, flexibility and ambition to make them work well. The sooner you start, the easier it will be and the better you will be in later life.