Rental properties are a great investment if they are bought below market value and have great cash flow. How much money can you actually make from rental properties? I am making over $60,000 a year from the cash flow on my rental properties and I bought my first rental in December of 2010. I have 11 rental properties now and I plan to buy 100 by the year 2023.
I did not decide to invest in rentals without doing my homework. When I was finally able to start saving money in 2008 from my real estate business, I wanted to grow it as fast as possible. After exploring many investment opportunities, everything I read and researched pointed me to rental properties being the best investment. I have to say I am very happy I chose to invest in rental properties as not only are they brining in over $60,000 a year, but they have appreciated in value and increased my net worth significantly. I detail how I have been able to achieve these returns in my complete guide to investing in long-term rentals. In this article I will detail how much money you can make from rental properties over ten years.
Why I want to make a lot of money off rental properties
When I was younger, I kept telling myself I did not need the finer things in life, that I was happy with whatever I had and could afford. I told myself I didn’t need more expensive things, because I didn’t believe I could ever afford the things I really wanted. In the last couple of years I have completely changed my thinking process. I now believe I can achieve and acquire whatever I want and I was doing myself a disservice by masking my true desires. I also realized that it feels really good to be able to help others and give to charity. The more money you have, the more you can give to charity and help others. If you have passive income coming in from rental properties then you will also have more time to dedicate towards helping others as well.
One of my passions is automobiles; I love classic and exotic cars. I purchased a 1986 Porsche 928 a few years ago and absolutely love that car. The 928 was the most expensive car Porsche made when it was built, but I was able to purchase the car for only $6,000. I think the 928 is one of the all time bargains for classic/exotic cars, unfortunately not all classic/exotic cars are bargains. My all time favorite car is a Lamborghini Muira, which was built in the late 60′s and early 70′s. The Muira was the predecessor to the famous Lamborghini Countach, which is also one of my all time favorite cars. A Countach will run at least $300,000, in today’s market and a Muira is somewhere in the $800,000 range if not more. Not only are these cars extremely expensive to purchase, but maintaining them will cost 10′s of thousands of dollars a year. It is not easy to maintain or find someone who knows how to maintain a Lamborghini.
Long-term rental properties are a great investment
I knew if I ever wanted to be able to afford a Countach or a Muira, I would have to make a lot more money or get very high returns on the money I was investing. I have been able to do both in the last few years and a lot of that increase has been from my decision to start investing in long-term rental properties. I have purchased 10 rental properties so far and I am making over 20% cash on cash returns on all of them. I am making over $500 a month cash flow on each of those properties. In fact I am making over $5,000 from my rental properties every month. That is $60,000 a year in income from my rental properties, with very little management or time required.
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Long-term goals are very important to my success
I know $60,000 a year is not enough extra income to justify purchasing a Lamborghini car, but I just started investing in December of 2010. I plan to keep purchasing rental properties for at least the next ten years. My super aggressive goal is to own 100 rental properties by 2023. I have no idea how I will accomplish this goal given my current income and buying pace, but I also have no idea what exciting and lucrative opportunities may present themselves in the future. For the purpose of this article, I am going to assume I will buy three houses a year for ten years to show the income potential of long-term rentals. With this strategy I could easily afford the Countach and possibly the Muira with enough saving and planning. If you can’t afford to buy 3 rental properties a year, then check out this article where I detail how much you can make buying one rental property a year.
Update: My goal changed from buying a Countach to a Lamborghini Diablo due to many reasons. I actually purchased a 1999 Lamborghini Diablo in June of 2014 and you can read all about it here.
What is the cost of a rental property
I go over the exact cost of a rental property here, but lets assume it costs $30,000 to purchase and repair one rental. You can buy your first rental for much less money using strategies listed here. You don’t have to invest $90,000 a year to buy three rentals a year, because you can begin refinancing rental properties after you own them a year and taking cash out to invest in more rentals. I also use the snowball method to pay off my loans, meaning I take all extra cash flow and use it to pay down one mortgage at a time. I usually buy my properties for about $100,000, with less than 4% interest rate and 20% down. That leaves a payment of $381 for principal and interest. Given these variables, here is a ten-year projection for the income potential of buying three houses a year each with $500 a month cash flow.
Ten year projection for rental property income
Here is a chart showing the cash flow, houses paid off, extra cash flow from paying off mortgages, money paid towards mortgage reduction and total income for ten years.
Cash Flow = profit for each year
PO = How many properties are paid off
ECF = Extra cash flow from paid off properties
MRCF = Mortgage reduction amount from cash flow
INC = total income
Cash flow PO ECF MRCF INC
1. $18,000 0 0 $18,000 $18,000
2 $36,000 0 0 $54,000 $36,000
3. $54,000 1 $4,572 $112,572 $58,572
4. $72,000 2 $9,144 $189,144 $81,144
5. $90,000 3 $13,716 $292,860 $103,716
6. $108,000 5 $22,860 $423,720 $130,860
7. $126,000 7 $32,004 $581,724 $158,004
8. $144,000 9 $41,148 $766,872 $185,148
9. $162,000 12 $54,840 $983,712 $216,840
10. $180,000 15 $68,580 $1,232,292 $248,580
I hope the numbers make sense, I didn’t want to write a novel to explain every detail. Basically after ten years, you would have invested $900,000 to buy 30 properties (assuming you didn’t refinance or use other methods to put less money down). You would be making $248,580 a year, which turns out to be 27% on the $900,000 invested. You would also own 15 houses free and clear that would be worth 2.25 million dollars.
Additional benefits of rental properties
The really exciting thing is these numbers are not adjusted for any inflation, rent increases or appreciation to make the math simpler. My models for my rental properties show a higher income at the end of ten years, because I am making more than $500 a month cash flow per property and I am also planning on buying more than 30 houses in the next 10 years. If things go as planned I will have more than enough passive income to afford that Muira!
If you can’t afford to buy this many houses or don’t want to buy this many, you can still have a great passive income by buying one house a year. It can cost a lot of money to buy a rental property, but you can more than make up for the initial cost by how much money you can make on rental properties. If you are wondering how I can afford to spend so much money on rental properties, I am a real estate agent that also fix and flips houses. Both business have been a great source of income and capital for the rental properties.