Last Updated on February 17, 2022 by Mark Ferguson
I have been in the real estate business for many years. I have flipped houses, wholesale properties, been an agent, own my own brokerage, and I have bought single-family rentals, multifamily rentals, college rentals, and even commercial rentals. After almost 20 years in the real estate business, I can tell you that rental properties are the best investment for me. And that is after flipping more than 200 houses! You can make a lot of money in real estate, you can make a lot of money as an agent, wholesaler, and flipper. But rentals can create generational wealth and will keep paying you long after you buy the property and put the work into it. With the other real estate activities, you usually must keep working or do deal after deal to bring the money in. I have created millions of dollars of net worth with my rentals in a relatively short amount of time and with a relatively small amount of money!
Why rental properties are the best
It took me a while to invest in rental properties. I started in real estate right after college in 2002 but I did not buy my first rental until 2010. I had good timing buying right after the housing crash, but I am still buying today 10 years later in a much different market and still doing very well. Here are some of the main reasons rentals have been an awesome investment for me:
Rental properties can be bought below market value
Every time I buy a rental property I get a great deal. That means I buy a property that is worth $200,000 for $150,000 or $100,000 or even less. Sometimes those properties need work or they are vacant commercial properties that need tenants. It takes work to build equity with the properties, but it puts you ahead of the game from the very beginning when you get a great deal. With every rental I buy, I increase my net worth significantly and if I am inviting in value add commercial, I can increase my net worth by millions with one property.
Rental properties make money every month with cash flow
A good rental property will make money every month after paying all of the expenses including the mortgage. Even after assuming there will be maintenance and vacancies, you should have a profit. That profit will increase over time as rents rise with inflation and eventually loans are paid off. This is why rentals are an amazing retirement vehicle because you can build a steady monthly income that increases over time without eating into your savings.
Rental properties have amazing tax advantages
While you own the rentals it is possible to make money but actually show a loss on your taxes. This is not illegal or tricking the IRS, it is how the IRS set up the tax code. Through depreciation and all of the deductible expenses (interest, taxes, insurance, etc), you can make that money every month, but not pay taxes on it!
Rental properties will go up in value
I do not depend on my rental properties to go up in value to make my money but it is a nice bonus! Some of my rentals have tripled in value over the last 10 years which is not typical but it happens. Over time, real estate will rise with inflation (2 to 3%) or higher. That does not seem like a lot, but it becomes much more when you factor in leverage.
Rental properties are easy to leverage
Leverage means that you use financing. I get loans on my rentals and that increases the returns because I am buying more properties and have all of the above advantages on more properties. As I said leverage makes appreciation more valuable because while a $200,000 property increasing 5% in value increases the price by $10,000. If you put 20% down that would be a 25% return on your investment ($40,000 investment making $10,000).
Loan balances decrease with time
While you own the properties not only are you bringing in cash every month, but you are paying down the loans every month. This increases your returns greatly. While that money is not in your pocket tor usable, you can access it with a refinance and HELOC.
How much money have I made with my rental properties?
I bought 16 single-family rentals from 2010 to 2015 and they all did very well. I made millions from those rental properties through the advantages listed above and they brought in more than $7,000 a month in cash flow. The market changed in Colorado and it was tough to find great single-family rentals so I switched to commercial properties. I have since bought 17 commercial properties and bring in more than $15,000 a month in cash flow with the potential to bring in much more.
On one commercial property, we were able to create almost 2 million dollars in value in less than 2 years!
While I have been in an amazing market for appreciation my rentals would have done amazingly without that as well.
I have a free book on this site that goes over exactly how and why I bought my rentals: How I Made Millions with Rentals.
Why are rentals better than other investments?
I have done very well with flips and being an agent as well, but that’s earned income that seems to disappear as fast as it comes in! I have to keep buying houses or selling houses to make money with those two businesses. Wholesaling is another way to make money in real estate that is similar to flipping where you have to keep selling deals as well. With rentals, one deal can keep paying you for life.
There is one other type of real estate investment that may beat rentals at times and that is development. Some of the richest people in the world have been real estate developers, but there comes huge risk with developing, and in most cases, you still need to keep developing and selling properties to make money.
How can you start investing in rentals?
While investing in rentals can be an amazing way to get ahead in life it is not easy for everyone. It takes time, money, and persistence to buy good rentals. A lot of people want to invest but give up after they encounter a few obstacles. While it can seem difficult to start investing in real estate here are a few pointers:
- Look into house hacking where you buy a property to live in and rent out part of it.
- Look into buying a house to live in for a year and then turning it into a rental later on.
- Looking into refinancing a property you already own to get money to invest in other properties.
- Check out my book Build a Rental Property Empire which goes over how to invest in rentals.
- My article 101 rental property tips has a ton of advice and links to other articles as well.
Rental properties have been an amazing investment for me and while I do many things in real estate, they have been the best. It is easy to get distracted by the quick money, but having steady cash flow come in month after month and year after year is hard to beat!