The Personal Finance Podcast - 5 Ways Rental Properties Will Make You A Real Estate Millionaire

Episode Date: July 22, 2020

In this episode we cover:  Why Rental Properties are a Fantastic Investment How to Build Wealth With Rental Properties  Mistakes to Avoid when Investing In Rentals  How to Run The Numbers  The Tax Benefits of Rentals  Resources in this episode:  M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App CIT BANK (Best Savings Account) Learn more about your ad choices. Visit megaphone.fm/adchoices

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Learn more at tellus.com slash online security. No one can prevent all cybercrime or identity theft. Conditions apply. On this episode of the Personal Finance Podcast, we're going to talk about five ways rental properties will make you a real estate millionaire. What's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the Personal Finance Podcast, we're going to be talking about five ways

rental properties will make you a real estate millionaire. Because what you have to understand is most millionaires, the most millionaires, the majority of millionaires in the U.S. are actually made from investing in real estate. And these reasons are exactly why that happens. And if you listened to last episode, we went into depth on why you have to invest your money and how important it is to invest your money. And investing is by far the best way to build wealth. But the stock market and investing in stocks is not the only way to invest to build wealth. And if you've ever been interested in rental properties or thought, hey, maybe I would like to invest in rental properties. I'm going to show you

why that is a fantastic idea because rental properties are an amazing way to accelerate to wealth. And real estate investing is a win-win because you can run a business providing a nice, clean property for your tenants all while making money while doing it and you're improving neighborhoods and you're doing things that are amazing for your bottom line. And I myself am a real estate investment. So I got started buying rental properties. That's where my bread and butter is. That's what I love to do in the real estate market. And they're just in fantastic investment in one that will generate massive of your patient and persistent. So you just have to understand that real estate is in no way passive. It's no way get rich quick. So you have to understand what you're doing and you have to have some sort of background knowledge so that you don't get burned. Because too many people out there get burned in real estate because they don't know what they're doing. And in a few In future episodes, we're going to go through real estate in heavy detail. We're going to go through all the various aspects of real estate investing and how those aspects of real estate investing can build you wealth as well.

Because there's so many different facets in real estate, and you just have to choose the best one for you. So let's get into five ways rental properties will make you a real estate millionaire. So the first way that real estate will help you build wealth is through cash flow. Now, cash flow is one of the most important ways to build wealth. It's one of the catapults to your wealth journey. But understanding real estate cash flow is not a simple equation. And a lot of people go about trying to run the numbers without having any background

knowledge. And this is where they get burned is when they run their cash flow numbers. Because you have to understand just because you buy a piece of real estate does not mean you will make money. There's a number of factors that go into it that you have to factor in before you buy the property. And in real estate, the biggest thing. you have to understand is that you make your money going into the property. If you buy the property

wrong and you make a mistake going into the property, then you're never going to make money and you're going to have a miserable time throughout the entire process of owning that property. You have to understand your numbers and you have to understand how to run the numbers properly. Because if you don't, you could get smacked in the mouth. So here's what a lot of people do when they don't research real estate and they don't go into getting an education before they start real estate investing. They think that the following formula is the way to build wealth, and it's not. So a lot of people go into it, and it sounds logical from a beginner standpoint, but this formula will get you in a world of trouble. And most people go, rent minus mortgage equals cash flow.

And this is completely wrong. And if you do this, you will get yourself into a lot of trouble. You have to factor in others expenses. Your mortgage is not the only expense that a rental property will have. You have to factor in things like insurance, taxes, utilities. If you have a duplex or a triplex and they're not separately metered, you're going to have to pay for utilities for your tenants. Capital expenditures. This is a huge one that a lot of people leave out. But what capital expenditures are is replacement of big items. So think of things like you have to place a roof every 20 years. You have to replace water heaters. You have to get new AC units or heaters. And if you don't factor those numbers in and you get a roof bill that you need to put a brand new roof on a rental property,

you could lose years of cash flow by not factoring these numbers in. So it's extremely important. Then you have to factor in things like repairs, just the normal repairs, like a leaky faucet or anything like that. Those numbers not factored in can eat up your cash flow. Everything and all your hard work has disappeared because you didn't buy the property right because you didn't factor these numbers in. Then there's property management. Now you may want to manage your own rental property. And you may say, I'm going to do it myself. I don't want to pay a property manager 8 to 12 percent, which I still would factor in the 8 to 12 percent. Reason being is down the line, maybe you want to retire or you want the real estate investing to be more passive than it is

right now. And you don't have that number factored in. Well, you're stuck managing the rents of property because if you put in 8 to 12 percent, then you're going to be going into negative cash flow. So all these numbers have to be factored in before you buy the property. So the real way to calculate cash flow is the rent minus all the expenses I just listed equals cash flow. This will get you a much more accurate number and you'll have a much more accurate depiction of exactly what's going to happen with that rental property. And the biggest question I always get asked when talking about cash flow is how much cash flow should you aim for? And this is a weighted question because a lot of people have different things that they want to do with their money.

but what I personally aim for is $200 per door of cash flow. So let's say you have a duplex and it's got two units. So a duplex is two units side by side. I want to make $400 per month in cash flow after all the expenses because that's $200 each door. If you have a triplex, then $600. If you have a single family house, then $200. The reason being is that rental properties will take some of your time.

It's actually going to take an active effort. It takes time to go find rental properties. it takes time to get with an agent and go look at rental properties. It takes time to manage rental properties. Even if you have a property manager, you're still going to have to manage the property manager because nobody cares as much about your property as you do. So to make it worth your while, you have to cash flow enough. I know a lot of people who try to cash flow, say $50 a month, but if something big happens and something really massive happens to that property, then they're going to lose that entire cash flow and they could lose years of cash flow just by some unexpected event

happening. So that's why I like to target $200 or more. But the cool thing about cash flow, and if you're in this for the long haul, is that cash flow usually goes up over time. So say you buy a house, and it costs you $100,000, and that house rents for $1,000 a month. Well, over time, that rent level is going to go up. And that house in 30 years may rent for $1,800 a month. So your cash flow is rising significantly over time. And this is where wealth starts to be built. is your cash flow because this is how real estate gives you money and helps you build wealth immediately. And each month, you'll see that money coming in. The rent checks just keep coming. And you'll be able to reinvest that cash flow into more properties or more stocks.

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and she sold the same house for $369,000. So she made over 300% on her money all because she lived in the same house for a long period of time. So the cool thing about appreciation is you can see how this works from this example. You can see how just owning a piece of property over the long haul will appreciate overtime. Now it may go down, it may go up. But if you're in this for the long game, if you're in this for retirement or you're in this just to hold on to these properties to build true wealth, then over time that property is going to go up. Now imagine if you bought one house per year at that same rate. So now in 30 years, you have 30 houses with different levels of appreciation. You can imagine how much wealth you will build with a portfolio like that.

And buying one house a year is not out of the question, even on a modest salary. Because as we'll talk about later on in this podcast, there's another factor that's going to have to, help you to be able to do that so you can build wealth. And think about it like this. Let's say you have 10 houses that you paid $100,000 for. And all 10 of those houses appreciate to $200,000 in one decade. You're automatically a millionaire just by that happening on your net worth statement. You've become a millionaire because you bought 10 houses one per year and they've each appreciated enough to make you a millionaire. So now you have cash flow that comes in every single month and every single month you can take that cash flow to reinvest and buy more property.

And you have appreciation and the value of your properties is rising significantly. Hey, real quick, if you're getting value out of this episode, leave a rating and review in Apple iTunes and share it with a friend. Now let's get back to the episode. The third wealth generator of rental properties is loan paydown ratios. And this is something that a lot of people don't think about when they start investing in rental properties. But paying off your loans is a huge wealth-building benefit that people just do not consider. So think about how amazing this is. This is what is truly amazing about rental properties.

Is someone else, meaning your tenant, is getting up every single day and going to work to pay down your loan. Where else can you find something like that? Somebody else is going to work. They're getting up, driving in traffic, going to work, dealing with coworkers, coming home just to pay off your loan. They're paying off your debt for you and you just have to provide them with a nice clean house and a nice neighborhood. And now imagine the same scenario where you have bought 30 houses, so one house per year and 30 years, and they're all in different loan payoff stages. Because now you're coming into a snowball effect of this loan paydown and your properties will start to get paid off because you're getting all this cash flow that you can put towards your loans. And the more properties you get,

the more cash flow you're going to have. And putting that cash flow toward paying down your debt is really truly accelerating your net worth. You're really seeing your net worth start to accelerate. And at the same time, your rental properties are increasing in value through appreciation. And you've been collecting cash flow over this long period of time. And your cash flow has risen over that time. So it's much more than when you first bought the property. It has increased significantly. So over time, to put this simply, your loans are paid down. Your net worth goes up. Now, the fourth wealth generator of real estate, specifically in rental properties, is real estate comes with massive tax benefits.

And the first one is self-employment income. So most businesses have to show appreciation and cash flow as income, not the real estate investor. Real estate investors don't have to show it this way because the government doesn't see cash flow appreciation as self-employment income. So most of the time, self-employment taxes are not due. And that's a big factor for a lot of people. A lot of businesses have to pay a lot of self-employment income tax.

But real estate is figured differently with the IRS. The second tax benefit is the 10. 1331 exchange. The 1031 exchange is an extremely cool way to defer taxes in real estate. And it allows you to buy and sell like-kind properties without having to pay the capital gains tax on those properties. So capital gains tax can really eat away at your wealth building principles, especially within appreciation in real estate. But my favorite thing to do with a 1031 exchange is you can beef up your portfolio if you want to upgrade a bigger property. Say you bought a bunch of single family houses year over year and you want to buy an apartment complex.

Well, you can sell four single family houses or one single family house and use a 1031 exchange on the appreciation and the profit that you made on that house and go ahead and use that and buy an apartment complex without having to pay taxes on that money. So that's the cool thing that you can use for a 1031 exchange. The third tax benefit in real estate is depreciation benefits because income tax is usually tough to get around. But in real estate, income tax is actually offset by depreciation in typical situation. To think about depreciation, if you don't know what depreciation is, it's when you buy a rental

property. There's usually some wear and tear or weathering as time goes on. And you can write that stuff off. So there's a few things that you can't depreciate, like your personal residence or raw land or a fully depreciated property, which is a property that's been depreciated over 27 and a half years. But as a real estate investor, this is a massive benefit. Now, the three rules are you must own the property for at least a year. The property must have wear and tear, obviously. And the third factor is you actually own the property. You're not leasing it from someone else or trying to appreciate it that way. And these tax benefits will save you so much more in the long run.

And if you have the right CPA or you have a great understanding of real estate tax loopholes, you can actually pay minimal to almost no taxes because of your real estate holdings if you have the right situation. And so this is just another wealth generator that you can utilize while investing in rental properties. Now, the fifth wealth generator is leverage. And I hate debt more than anyone you'll ever meet. If you go back and listen to our episodes on debt, I talk about how much I hate debt. But in real estate, leverage is a great wealth builder. Because if you think about it, someone can buy a $100,000 property for $20,000.

Then you go ahead and you allow your tenant to pay the remaining $80,000. They get up to go to work every day, like we talked about, and they pay off your mortgage. And banks are willing to do this because you have an asset that is up for collateral which is the house or the property or the duplex or the triplex or whatever you consider buying, banks are willing to lend because they get that asset back if for some reason you default. And you benefit because you put 25% down and you start building wealth right away. Now this is a fair warning because the thing with leverage is you have to be responsible. You never want to over leverage yourself.

You never want to have too many properties and too many loans at the same time. So always take on debt, even while investing in rental properties with caution, because you don't want to get it in a situation where you're buying a property too high and the bank comes and calls your loan and you have no way to pay it back. And that's why I say real estate is a gradual process. It's a slow process at the beginning, just like any other investment is. But as you build your portfolio and over time, you're going to be able to build tremendous wealth. So if you're interested in real estate, start doing your research and start looking into it. And like I said, we're going to be talking about it much more here in the future because I have a lot of experience with real estate, specifically in real estate investing. It's a fantastic way to generate and build a massive portfolio that builds you wealth. And you can leverage that portfolio and use that portfolio to build wealth for your family. You can hand it down to your family members. You can hand it down to your kids. And they too can benefit from that cash flow in the future. So start to get an understanding if you're interested in real estate of how to find deals, how to look for deals, how to run the numbers. And just start looking at property and practice running the numbers. And you will start to

feel comfortable. And once you start to feel comfortable, that's when you start to make good decisions. Thank you guys so much for listening. And if this is our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving away a free one-on-one money coaching session with me. All you have to do to enter is subscribe to this podcast and leave a rating or review on Apple Podcasts, then send it over to Andrew at dollar after dollar.com. And you'll be instantly entered to win the one-on-one, one-hour coaching session with me. Again, thank you guys so much for listening. We truly appreciate it. And we'll see you on the next episode. Have a great day. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with

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