One of the biggest reasons why I started blogging was to write about Rental Properties. I wanted to share, why rental property is the best investment you can make. Buying Rental properties was one of the biggest and the best decision of my life.
This one investment will make sure that I will build huge wealth for my RETIREMENT. My Rental Properties will be paid off by the time I will hit RETIREMENT and It will allow me to enjoy and travel worry free.
It has made tremendous impact in my life to grow in different areas like
- It made me realize that I can dream big, I never had big dreams like this before.
- Rental properties made me millionaire withing just 6-7 years.
- Starting this blog is only possible because of knowledge which came from investing in Rental properties.
- Rental Properties knowledge allowed me to start construction.
- Starting Consulting and plan to invest in startups
Let’s look why Rental property is the best investment.
1. CASH FLOW
Cash Flow is the extra money left after paying off mortgage, Taxes and Maintenance. It’s difficult to find investments which start paying you off from day one. Investments like stocks can take years to start paying you some dividends or enough interest to withdraw money.
Rental properties are one of the investments which can start paying you right away if you buy them correctly.
It’s important to buy properties with positive cash flow. It may not be possible with one house or with couple of units, but bigger properties must give you positive cash flow.
Leverage is when you can use someone else’s money to buy investment for yourself. Real Estate is the best candidate to use LEVERAGE at its highest level.
Idea is here to use lowest possible money from your pocket and get rest of the money from Bank or investors.
You will have to provide 5-20% (depends on size and property type) cash down while buying RENTAL PROPERTIES and rest of the money can come from Bank. Personally, I put down minimum possible down payment to make sure I can buy the biggest possible property available.
3. TENANTS PAY YOUR MORTGAGE\LOANS
How do you like when you provide space for other people to live and people pay off your property mortgage? It’s AWESOME.
You can buy a rental property by putting down minimum money and rest is paid by tenants to cover the mortgage and expenses. There will be work and social skills involved to deal with tenants but it’s worth the hassle.
I assume you have a full-time job with decent salary, how much TIME do you have to work for your salary every week? It’s minimum 40 hours per week at most of the places. How much time do you think you will require to work for making similar kind of money per week managing rental properties?
I am spending on average 4 hours per week for 20 units rental properties. It’s about same amount (Cash Flow + Appreciation + Principal Payments) of money yearly from rental properties as my regular job. But there is huge difference on how much time I spend at my day job compare to rental properties.
Appreciation makes huge difference over time. Your property prices increase over time and historically it’s always going up to the point it’s getting difficult to buy real estate in future.
Two very important points about Appreciation
- It’s compounding over time; compounding makes huge difference to property prices over time. We have seen properties prices increase over 5 times of it’s original every 20-25 years.
- You enjoy increase on total value of property even though you paid just 5-20% of total value. You have mortgage with the bank for biggest part of the properties, but you are taking value increase on total value which is the best part of Leverage.
I never knew about depreciation until I bought rental property and it took me some time to understand this concept.
We know that property prices are going up every year by certain percentage. But from government point of view, property value is going down because of regular wear and tear. For example, Roof, Kitchen, Washrooms are getting older and are losing its value and they may need renovations over time.
We can take certain percentage of value of property loss every year and it can be considered as loss of revenue even though we didn’t spend this money. This loss of money can be used to cancel the income coming from Rents. So, you haven’t lost property value, but you still can use this to reduce your taxes. Extra Tax saving can be used to invest in other properties.
You still owe these taxes when you sell the property
You never have to pay taxes on the amount you used for Depreciation if your property lost value over time. But we know that won’t be true in most of the cases as properties prices are going up. So, you end up paying taxes on the amount you used for Depreciation at the time you sell your property. But you never pay this if you never sell it and you enjoy this free money.
Talk to your accountant about this to make sure you understand this well. It’s personal choice, some people want to pay taxes every year instead of paying in one big payment at later date. Personally, I like Depreciation and I have been using it and I am saving taxes now and investing that into other properties which has far greater return over time.
6. EQUITY AND REFINANCING
In last few points, We just learnt about Tenants are paying your mortgage and property value is Appreciating over time. This means you have equity building up for your property over time. It’s like an account which is increasing in value every single month with every mortgage payment and increase in property value.
What would be the best thing to do with Equity?
I am trying to use the cycle of 3 years, just wait for 3 years to have some good equity build up in the property and then refinance the property to take that extra money out to buy another property. Currently, interest rates are its lowest point in countries like US and Canada, it makes sense to take the money out at low interest and put that into another property which gives you higher return.
Banks love this as well, they are happy to give you extra equity in your property to let you purchase your next property. Of course, they will make sure you have good credit and income from new property to support the refinancing payments.
7. TAX HEAVEN
It’s seriously tax heaven, I have rental properties for over 6-7 years, and Rental properties allowed me to be in lower tax bracket and build huge wealth.
Rental Properties is the best tool to build huge wealth over time because it’s the best investment to save taxes. This is one of the main reason why rich people always invested heavily in Real Estate. Recently, I did construction project which I don’t like as much as Rental Properties because of taxes.
Deduct all the Expenses and use Depreciation
Government allows you to deduct every single expense like Maintenance, Interest Payments, Electricity, Car Kilometers, Tools or any other expense related to Rental property. You will have to pay taxes on just left over which can be easily deferred using Depreciation about which you just learnt in last point.
Properties prices are going up every year but we don’t pay taxes on that, we can refinance the property and take out the money based on increase in property value. But we don’t pay any tax on the money we just took through refinance which is the best part of Real Estate investment.
So, No Taxes.
8. RECESSION PROOF , PEOPLE NEED PLACE TO LIVE
People need place to live and there is no doubt about this. Do you take risk when you buy house and take huge mortgage, of course you do that? Just losing your job will put you at huge risk of not being able to pay your mortgage.
What happens when you buy 20 units?
It means, 20 people need to lose their jobs at the same time for you to stop making mortgage payments. Is that possible? Yes. But that means everything went wrong in the whole city, like CORONAVIRUS.
This means, no one can pay the mortgage payment and Government and banks won’t let that happen. So, they give you options to defer the payments or Government gives money to people to make the payments. This is exactly what is happening currently in Canada, banks are happy to defer my mortgage payments and Government is giving money to my Tenants to pay for Food and Rent.
What happens during Recession?
People lose their houses because they can’t make mortgage payments and they need to rent place to live. So, where they go? They go to rental units.
You might be thinking that things still can go wrong, but we want to be in best situation to handle bad times.
Leave a comment below if you have any question related to Rental Properties.