Rental properties have been a great investment for me, and I have made a lot of money from them. I am making over $90,000 a year from the cash flow on my rental properties after buying my first rental property December of 2010. I have 16 rental properties and I plan to buy 100 rentals by the year 2023. You cannot buy just any property and turn it into a rental if you want to make a lot of money. You have to buy houses below market value with great cash flow to be a successful rental property owner. Not only do I make money every month from my rentals with minimal work, but my rentals have increased my net worth thanks to buying below market value and appreciation (I don’t like to count on appreciation, but it is a nice bonus). This is not just a hypothetical article, I have owned rentals for many years, kept track of their returns, and written many articles about what I have learned. In fact, I wrote an article here that details exactly what my returns were in one year.
When I was 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 (franchises, stocks, bonds, businesses, and more), everything I read and researched pointed to rental properties being the best investment. I have to say I am very happy I chose to invest in rental properties.
Why do I want a lot of money?
When I was younger, I told myself I did not need the finer things in life and that I was happy with whatever I could afford. I told myself I did not need more expensive things because I did not 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 that I can achieve and acquire whatever I want and that I was doing myself a disservice by masking my true desires. I also realized that it feels good to be able to help others and to 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, you will 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 I 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 Miura, which was built in the late 60s and early 70s. The Miura was the predecessor to the famous Lamborghini Countach, which is also one of my all-time favorite cars. A Countach runs for at least $300,000 in today’s market and a Miura is somewhere in the $800,000 range, if not more. Not only are these cars extremely expensive to purchase, but also maintaining them will cost thousands of dollars a year. It is not easy to maintain or find someone who knows how to maintain a Lamborghini.
Why are rentals a good investment?
I knew that if I were ever going to be able to afford a Countach or a Miura, 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 16 rental (20 now) properties and I am making over 15 percent cash-on-cash returns on all of them. In fact, I am making over $8,000 from my rental properties every month. That is $96,000 a year in income from my rental properties with very little management or time required.
It is not easy to find rental properties that provide that much cash flow; it takes me months to find great deals that make over $500 a month. My typical rental property costs between $80,000 and $130,000 and it rents for $1,200 to $1,500 a month. I put 20 percent down on the properties and finance the rest with my portfolio lender. I usually end up spending $25,000 to $35,000 in cash to buy each rental property. Cash flow is not the only benefit of rental properties. I slowly pay down the mortgage every month on my rentals, I have great tax advantages, and they will most likely appreciate. If you cannot find properties that cash flow well in your area, you may want to look into buying turnkey rental properties in different areas of the country.
I am able to save that much cash from each rental property because I make a very good living as a real estate agent as well as fix and flipping homes. I like to have nice cars and a nice house, but I always make sure I am saving and investing money first. There are ways to buy rental properties with little money down, but I think you will get further ahead in life by saving as much as possible and investing wisely.
Can I buy a Lamborghini with rentals?
I know $90,000 a year is not enough extra income to justify purchasing a Lamborghini, but that money will come in for the rest of my life. I plan to keep purchasing rental properties for at least the next ten years and 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 that 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 Miura, with enough saving and planning. If you cannot afford to buy three rental properties a year, check out this article where I detail how much you can make buying one rental property a year.
I have many long-term and short-term goals that I constantly tweak and review. Setting goals has been a huge part of my success and has helped me to focus on what is important and what I want out of life. This series of articles helps to describe my mindset and what I have done to become successful.
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 2014 and you can read all about it here.
How much do I need?
I go over the exact cost of a rental property here, but let us assume that it costs $30,000 to purchase and repair one rental. You do not have to invest $90,000 a year to buy three rentals a year because you can begin refinancing rental properties after you own them for a year and taking cash out to invest in more rentals. You can also save the cash flow from your rental properties to buy more rental properties. I usually buy my properties for about $100,000, with a four percent interest rate and 20 percent down, which leaves a payment of $381 for principal and interest. Those numbers combined with rents from $1,200 to $1,500 a month leave me with at least $500 a month in income from my rental properties.
How much should you make per month?
It is not easy to make $500 a month in cash flow from a single rental property. I detail how to figure cash flow here and I created a cash flow calculator to help people figure cash flow. Cash flow is not the rent minus the mortgage payment, you must consider many other factors. My rents range from $1,250 to $1,600 a month, and my mortgage payments range from $450 to $650 a month. I have to account for maintenance and vacancies on my rental properties, which leaves me with about $500 in profit each month. I buy my properties for $80,000 to $130,000 and usually make quite a few repairs before I rent them.
Making a lot of money with rental properties does not come from buying one property or even two, but from buying many properties. Here is a great article on the benefits of rental properties.
What are the long term returns?
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 did not want to write a novel to explain every detail. After ten years, you would have invested $900,000 to buy 30 properties (assuming you did not refinance or use other methods to put less money down). You would be making $248,580 a year, which turns out to be 27 percent on the $900,000 invested. You would also own 15 houses free and clear that would be worth 2.25 million dollars!
For more information on investing in rentals, check out my best-selling book: Build a Rental Property Empire: The nonsense book on finding deals, financing the right way, and managing wisely. The book comes as a paperback, audio book, or as an eBook.
Additional benefits of rental properties
The exciting thing is that to make the math simpler, these numbers were not adjusted for inflation, rent increases, or appreciation. 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 planning to buy more than 30 houses in the next ten years. If things go as planned, I will have more than enough passive income to afford that Miura!
If you cannot afford or do not want to buy this many houses, 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 with the 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 businesses have been a great source of income and capital for the rental properties.