Rental properties have been an amazing investment for me, but it takes time to make money with them. I did not buy a bunch of rentals in my first year and make a ton of money that allowed me to retire. Of course, there are not many investments or businesses that will make you rich right away. Even the billionaires you see on television spent years or decades building their businesses to where they are today. Still, I know many people get frustrated and impatient with how long it can take to see a significant income from rentals. While it may not happen overnight, you can make a lot of money with rental properties, and if you buy them the right way, it may not even take that large of an investment. Some of the great advantages of real estate are the ability to finance the investment, the ability to take money out of the investment, and the cash flow that should come in as long as you own the properties. Of course, you cannot buy any property and hope it is a good rental. There are many things to consider such as the rent-to-value ratios, whether you are getting a good deal, the local market, the overall economy, and numerous other factors.
How did I buy my rental properties, and how much money did I make on them?
Some people say I got lucky because I bought many of my rental properties right after the housing market crash. In a sense, I did get lucky that I bought rentals right before housing prices skyrocketed in Colorado, but they still would have been an amazing investment even if the market had not shot up. I sometimes wish the market had not appreciated as much as it did because I could still buy good rentals! I stopped buying rentals for a couple of years in Colorado until I discovered that I could make money with commercial properties—not just residential. I bought 15 rental properties in Colorado from the end of 2010 to the middle of 2015. I also bought one turnkey rental in Cleveland. I bought four commercial properties in 2017 and one in 2018. You can see all of my rentals on the page below:
I bought most of my rentals from the MLS and made sure I got amazing deals on all of them. Not only did I want each of my rentals to make about $500 per month in cash flow after all expenses, but I also wanted to buy them cheap enough that I could have actually flipped them if I wanted to. I have flipped over 150 houses in my career, and I hate paying retail value for anything! While there were a lot more foreclosures available when I was buying rentals, most of them were not short sales or REOs. Most of my rentals I bought from $80,000 to $130,000, spent $15,000 to $20,000 fixing them up, and rented them out for $1,200 to $1,500 per month. The properties were usually worth at least $40,000 more than my all-in cost, including the repairs. The property taxes on my rentals were from $500 to $1,000 per year, which is very low compared to most states.
You can see the story of my first rental in the video below.
How have my rental properties performed over the years?
I bought my first rental property in 2010 and did not buy another for almost one year. I had to refinance my personal house to buy the rental, and it took me a while to save the cash for another one. It is tough to make a killing buying just one rental property. It has done very well for me, but I got lucky when our market increased as much as it did. I bought the house for around $96,000, spent a few thousand dollars fixing it up, and rented it out for $1,050 per month. Today, the house is worth close to $300,000 and rents out for $1,500 per month. Almost all of my properties have seen huge appreciation, but I was never counting on that when I bought them. I was counting on them producing consistent cash flow over years with the possibility of refinancing them later on to take cash out.
I bought all of my rentals (except the turnkey) below market value, which was a huge boost to my net worth even without the appreciation. If I take away the appreciation for the last 3 to 8 years, I increased my net worth by at least $600,000 from those 15 rentals based on making $40,000 in equity per deal I bought. When I actually calculate the appreciation, my net worth has increased by $1,957, 948. My houses are worth $3,450,000, and I bought them for $1,312,052. The really cool thing is that actual net-worth increase is only from 12 rentals. I actually sold three of my rentals a couple of years ago.
My net worth has increased even more with the commercial rentals I bought recently. I bought a 68,000-square-foot commercial property with a partner this year that was a smoking deal. We paid $2,100,000 for it, and I think it is worth $3,000,000 or more now. Plus, it makes us well over $6,000 per month with a mortgage in place! Yes, my numbers are factoring in a mortgage on all of my properties. Not only did I build an incredible amount of net worth from my rentals, but they also produce about $12,000 per month in income after expenses and property management.
$12,000 per month does not make you a millionaire (although the equity does), but it comes in virtually every month with very little if any work from me. As I said, rentals will not make you rich overnight, but they certainly can help you financially. Another question many of you may be asking is how much money did it take to buy all these properties?
How much money have I spent buying my rental properties?
It takes a lot of money to buy a rental property. Banks want to see at least 20% down on investment properties. On top of that, I would need to pay closing costs and repair the properties. However, that does not mean you need $35,000 to buy each rental property. One of the beautiful things about real estate is the ability to take money out of it tax free. I have refinanced a number of my rental properties after I fixed them up and rented them out. I have not figured out the exact amount of money I spent on them and the exact amount of money I got back through refinances. However, I can estimate what I have spent and gotten back over the years. In fact, I did a rather in-depth article on it a few years. ago.
I bought more rental properties since that article, but I have also refinanced more properties. In the end, I estimate that I have spent less than $100,000 on my rentals after factoring in the money I got back from refinancing them, and that includes that massive down payment on the commercial property I bought this year. If I factor in the money I made when I sold three of my rentals, I have not spent a dime on them and have gotten more money back than I spent on them. My cash flow does go down slightly when I refinance a property, but being able to buy more properties makes it well worth it. My cash flow is still at $500 per month or more on my properties because the rents have increased over the years just as much or more than my payments increased when I refinanced the properties.
It takes money to buy rentals, but you can get that money back if you buy rentals the right way. I refinanced some properties before our market took off and was able to take cash out because I got such a good deal on them. This strategy is often called BRRR (Buy, Repair, Rent, Refinance). I even did this with a commercial property.
Why are rentals such an amazing investment?
I have talked about my net worth and how much cash flow I make with my rentals, but that is not the only advantage. Rentals are an amazing retirement vehicle. With the stock market, you save your money, hope it grows fast, and then hope you don’t outlive your savings once you retire. With rentals, you know exactly how much monthly income you have coming in for the rest of your life. That income will increase as rents increase and as you pay down the mortgage.
Rental properties also have amazing tax advantages. Not only are most rental property expenses deductible including the interest on a mortgage, but the property can also be depreciated. That means you can actually show a loss on your taxes even though you are making money on a rental. What are the Tax Advantages of Rental Properties?
While you own the rental property, you are also paying down the mortgage. The cash flow should make you money after all the expenses. I mentioned that I make $12,000 per month on my rentals, but that does not include the balance on my loans that I am paying off or the tax advantages.
Where can you find great rentals to buy?
So far, I have talked a lot about my rentals, but what about other people trying to make money with rentals in today’s market? It can be tough, and one of the downsides of rental properties is that not every market works great for them. I don’t like to invest in rentals that do not make me money every month, which is why I stopped buying residential rentals in Colorado. There are still many markets where rentals are a great investment. I looked at Florida for rentals until I found commercial properties closer to me that made sense.
Here is a webinar I did a while back on how to buy out of state rentals.
How can the average person make a lot of money with rental properties?
As you can see, I have done very well with rental properties, but it is still hard for some people to imagine or dream of getting to where I am when they have no rentals. The first thing you must do is figure out how to buy one. Once you get the first one, the rest of this becomes much easier. As I said, I did not buy 10 rentals all at once. I bought in 2010, and it took me almost a year to buy another one. The next year I bought three more, then five, and so on. There are ways to buy rentals with less than 20 percent down as well. The key to making a lot of money with rentals is making sure you take the time to do it the right way. Here are some steps to consider for buying a great rental:
- One of the great advantages of real estate is the ability to finance it. You can get long-term loans with low rates on most real estate. Should You Pay Cash or Get a Loan on a Rental Property?
- You have to buy real estate below market value. I also flip houses and did 26 flips last year. Every house I buy I get an awesome deal on. You can buy a house that is worth $150,000 for $100,000. How to Find a Great Deal on an Investment Property.
- You have to buy rentals that make money. How to figure the cash flow on a rental property.
- When you rent the property, you should be able to refinance it, take money out, and repeat the process.
Is it easy? No, but there is no magic button that makes you rich in this world. If it were easy, everyone would do it, and there would not be an opportunity for the rest of us. If you want more information on buying, financing, renting, repairing, and managing rentals, you can check out my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.