Investing in real estate is a fantastic way to retire early or increase your income. There are many ways to invest in real estate, but person I think long-term rental properties are the best real estate investment. Long-term rental properties take little management, give great returns and produce cash flow for years and years into the future. Flipping, wholesaling and most types of real estate investing are more like a job than investing; take more time, more money and once you stop working, you stop making money. Rental properties have provided me with over 20 percent cash on cash returns and that does not even factor in account equity pay down and appreciation.
What types of real estate do I invest in?
I love rental properties, but that is not the only type of real estate I invest in. I own 11 rental properties, I also fix and flip 10-15 homes a year and I invest part of my IRA into a REIT. I also run a real estate team that sells 200 houses a year and invest a lot of money into that business. Each type of real estate investing has its advantages and disadvantages, but rental properties have been the best investment, because they don’t take as much time, they produce money every month whether I work or not and they have great tax advantages. Here are the basic pros and cons of the different types of real estate investments.
- Rental properties: long-term cash flow, great tax advantages, guard against inflation, high or low cash investment, relatively easy to finance.
- Fix and flips: great short-term profits, no tax advantages, more work than rentals, high cash investment, hard to finance.
- REITS: easy to invest in, low cash investment, no control, have to buy at market value.
- Wholesaling: low cash investment, a lot of work required, medium quick profit potential, must keep working to make money.
- Partnerships/JV: minimal time investment, minimal control, high risk, could have long-term cash flow.
What are your real estate investing goals?
Your choice of real estate investments will depend on what your goals are. If you want the easiest investment; flips, wholesaling and rentals are not the way to go. They all take time to learn, patience to find deals and a long-term plan. A REIT is easy to invest in but you have no control and have to pay market value like a stock.
If you want to make the most money possible in a short time flipping and wholesaling is your best investment. Both types of real estate investing take time to learn, but when you sell a flip or wholesale deal you get a large sum of money right away. The downside is you have to keep finding those deals to keep the money coming in.
If your goal is to produce long-term wealth, rental properties are the way to go. Long-term rentals won’t give you a huge pay-day right away, but they keep creating income month after month. Long-term rentals also have great tax advantages that could allow you to make money while actually claiming a loss on your taxes.
Why are rental properties such a great real estate investment?
I make about $6,000 each month from my rental properties after all expenses. That figure is going to keep coming in as long as I own the rental properties and will increase because I am paying off mortgages and rents will go up over time. I have my real estate team manage my properties and I spend very little time working for that money. My blog InvestFourMore focuses on rental properties, flips and real estate agents. Check out my complete guide to purchasing long-term rentals to see more details on the advantages of rentals, but below are the summarized advantages of rental properties.
Rental properties provide cash flow
Every month my rental properties conservatively bring in $6,000 a month in income. I bought my first rental property in December of 2010 and have since bought 10 more rentals. If you buy rental properties for the right price in an area with a high rent to value ratio, you will make money every month. I make $500 cash flow on each rental property I own, which I have bought from $80,000 to $135,000. My cash flow calculator is a great tool to help you determine the cash flow on rental properties.
My last rental property purchase was rental property number 11 and it rents for $1,400 a month. My cash flow is $506 a month after I figure the monthly expenses and mortgage payment, which includes taxes and insurance.
- Rent: $1,400
- Mortgage payment: -$544
- Monthly maintenance: -$210
- Monthly vacancies: -$140
- Cash flow $506
That $506 a month equals about a 20 percent cash on cash return on the cash I invested. I include quite a bit for maintenance and vacancies even though those costs rarely occur. When I do have a large repair bill it can make up for months of no repairs. In reality I am making much more than $506 a month, but I will have large repairs occur like replacing a roof that will make up for all the months with no repairs. I rarely have a vacancy in my market and my vacancy costs historically have been much less than 10 percent, but one nasty eviction could make up for that as well.
You can buy rental properties below market value
I buy my rental properties at least 20 percent below market value. There are not many investments that allow you to buy below market value; the stock market, mutual funds and REITS are all bought at market value. I can buy houses that are distressed or need work and get a great deal on them. After I have bought a house below market value and made repairs on it, the house is usually worth 30 to 40 percent more than I paid for. I bought rental property number 11 for just over $109,000 and I made about $12,000 in repairs to it. That house is worth at least $150,000 and probably more in today’s market.
Rental properties have great tax advantages
The IRS allows you to depreciate rental properties, which means the value of the structure of a rental property can be deducted from your taxes over 27.5 years. If a structure is worth $100,000 then $3,636 can be deducted from your taxable income every year. You can also deduct or depreciate expenses on rentals and pay a lower tax rate on the profit you make if you sell a rental property. If you sell a rental property you can also complete a 1031 exchange and pay no taxes on the profit. It is possible with enough depreciation to make money on your rental property every month, but actually have it show as a loss on your tax return.
Is is easier to finance rental properties
It is easier to get a loan on a rental than a flip, which is a huge advantage to rental properties. Leverage allows you to increase your returns and make more money off appreciation and higher rents. I use ARMs to finance my rental properties that are amortized over 30 years. I have to put 20 percent down, but my portfolio lender lets me get as many loans as I want. Because I put 20 percent down on my rental properties and they still have great cash flow, I can buy three times as many properties as I could with cash purchases. Buying more rental properties amplifies the other advantages like cash flow, equity pay down and the tax advantages.
Over time real estate will appreciate
I don’t invest for appreciation, but it is a great bonus. My rental properties increased my net worth by $600,000 due to appreciation, buying below market value and adding value through repairs. I think it is very hard to predict appreciation, but given enough time the real estate market has always increased. Because I use leverage to buy my rental properties, I see great returns when housing prices increase. I paid about $97,000 for my first rental property, which was a great deal. It is now worth close to $200,000 thanks to appreciation and making minor repairs. I spent about $30,000 in cash to buy that property, which means if I were to sell that property I would make about $75,000. That is a 250 percent increase in my investment over four years and I am not even considering the cash flow and equity pay down. This is an extreme case of appreciation and buying below market value, do not expect this to happen every time you buy a rental.
Your rents pay down your loan every month on rental properties
When you buy rental properties with leverage, not only can you make money every month, but you pay down the mortgage every month. I paid off my first rental earlier this year with cash flow from my other rental properties. The $506 I make every month does not take into account the principal I am paying down on my mortgage. Every year I will pay off about $1,500 of my loan and that amount will increase over time as my equity increases.
How fix and flipping fits into my real estate investing strategy
I think rental properties are the best real estate investment, but I still fix and flip homes. Fix and flipping may not be the best way to invest, but that does not mean it is not a good way to invest. I fix and flip 10-15 homes a year because it makes me a lot of money, but flipping is more of a job than an investment. As soon as I stop buying houses, repairing them and selling them, I stop making money. It also takes a lot of my money to complete a flip, because I cannot finance the entire cost of the property and I have to pay for the repairs. I average about $30,000 in profit on every flip and I use much of that money to buy more rental properties. Most of the flips I buy would not be good rental properties for me, so I am able to make money on the flips without sacrificing making money on rental properties. I explain how I decide whether to flip or hold as a rental here.
How wholesaling fits into my real estate investing strategy
I have never wholesaled a house, but that doesn’t mean it is a bad way to invest. I have met many wholesalers who do an amazing job and make a ton of money. Wholesaling is similar to flipping, but you sell houses quicker without repairing them. You have to continually buy houses to make money and it is more of a job than owning rentals as well. I am seriously thinking about doing more wholesaling and less flipping because of the smaller investment needed and quicker transactions.
How do I invest in REITs?
I invest a small part of my IRA into Real Estate Investment Trusts. REITs are made up of different forms of real estate holdings; usually commercial or residential rental properties. A REIT is managed by someone else and all you have to do is buy the REIT like a stock. I invest in REITs mostly for fun and have seen decent returns, but so has the entire stock market. I do not invest a lot of money into REITs because you cannot buy below market value, you have no control and I make much more money buying rental properties myself.
Investing into real estate as a JV partner
A JV partner invests money into real estate without doing any work or finding the real estate investment. I have seen JV partners in rental properties and fix and flips. A typical agreement is the JV partner gets 50 percent of the returns from the investment for providing the money and the other party gets 50 percent for doing all the work. I think a JV partnership can benefit both parties, but there is a lot of risk involved if the person doing the work does not know what they are doing or quit. If you have a great relationship with experienced investors it can work very well.
People also invest into real estate with private money. Private money is loaned to investors to buy flips, wholesale, or buy rental properties. The money has a higher interest rate than a mortgage from a bank, but the investor usually gets a steady return with less risk than the stock market.
Fix and flipping and wholesaling make investors a lot of money, but you have to keep buying properties and working for that money to keep coming in. JV investing takes less work and time, but you have no control over the investment and can be risky. Rental properties provide monthly cash flow, the money keeps coming in every month and you have complete control over the investment. I use flips to buy more rentals because I want that money I work so hard to make, making money for me. When you factor in cash flow, buying below market value, appreciation, tax advantages, and equity pay down, I am making much more than 20 percent on my money.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.