Why Buy Rental Properties?

On today's podcast episode I talk about why you should buy rental properties. I explain why investing in real estate (specifically rentals) is such a great investment compared to other investments like stocks, bonds and mutual funds.

The first thing you need to understand about investing in real estate is the five main benefits which are:

1. Appreciation
2. Cash Flow
3. Amortization
3. Tax Deductions
4. Depreciation

APPRECIATION 

HUD has been keeping track of single family house prices since 1964. The typical house in 1985 was worth $85,000. Today it is $420,000. That is 5 times the initial price! 

To put that into perspective, imagine buying a house today at $420,000 and having it be worth 2.1 million dollars in 40 years (if you got one of those new 40 year mortgages). 

That's an example of long term appreciation in real estate. Do you know what the price of the Median Single Family Home in the U.S was in 1975? A New Single Family Home was just $39,000! That's appreciation. In 1963 it was just $18,000. But we don't need to go back that far. The year I started investing in real estate (2003) the median home price in the U.S was $161,500. It's now $420,000.

CASH FLOW

If a house today rents for $2,000 per month, and rents were raised at 5% per year what would the rent be 15 years from now? The answer is $4,157. If you kept that house for 30 years what would the rent be? The answer is $8,643 per month in rent. 

You may find it hard to believe that rent can double in 15 years and then double again 15 years after that. But that is exactly what happens. That is why you want to own rental properties. It's also why you want to own your own property and not rent.

When you own one rental property like this with a 15 year mortgage then after 15 years the mortgage is paid off and you own the property free and clear. That means all that rent goes into your pocket. But what if instead of owning 1 rental you owned 10? That is how you become a millionaire. That's how I did it and it' how you can do it too. This is the surest way that I know to create income for life and financial freedom.    

AMORTIZATION

Every month that you pay that mortgage payment, a certain portion is allocated to principal, and a certain portion is allocated to interest. I discussed on the podcast how on one of my rental properties the mortgage payment is $1,300 but $500 of that is applied to the principal loan balance. This is called amortization and that is how the loan balance gets paid down over time. It's a forced saving plan that means every month that goes by you owe the bank less on the mortgage (until it is paid off completely).

TAX DEDUCTION

When you own a rental property, everything related to that property is deductible. Property taxes, insurance, repairs, maintenance are all deductible. So is travelling to your property, your property manager, Home Depot, and anything related to that rental property. So by owning rental properties you will pay less in taxes.  

DEPRECIATION 

Depreciation is a phantom expense whereby the Government allows you to deduct 1/27 of the value of the property (minus the land) every single year. But since the Tax Act of 2017 there is Bonus Depreciation which allows you to deduct much more upfront creating a very nice tax deduction. Consult with your CPA on this one, but suffice it to say that if you have a job where a lot of taxes are being taken out of your paycheck, owning a rental property will reduce the amount of taxes you pay (in addition to increasing your net worth).

YOU DON'T NEED TO USE YOUR OWN MONEY

There are a lot of long term benefits to investing in real estate and buying rental properties. But the most important thing to understand is that you DO NOT NEED TO USE YOUR OWN MONEY to buy real estate or rental properties. You can borrow money from private lenders (like me)