In the opinion of serial entrepreneur and long-time investor Brandon Turner, real estate is, by far, “the best, safest, fastest path to financial freedom.” Deservedly a bestseller, Turner’s best-known work, “The Book on Rental Property Investing,” abounds with relevant lessons, tips, stories and details, some of which you can begin implementing today. So, get ready to hear a few of them and prepare to learn how to create wealth and passive income through rental properties!
Five reasons to love rental properties
Even though the stock market might be more popular, in the experience of Turner, rental properties are a much sounder investment than anything else. He claims that there are many reasons to love rental properties more than any other source of passive income. Here are just a few:
- Ability to purchase with leverage. You don’t need to have 100% of a property’s purchase price readily available to be able to buy it. In rental property investing, you can always borrow a lot of money from a bank to increase your potential return. This is called leverage and it is what makes buying a large, expensive property easier than buying a premium stock.
- Ability to manage your investment directly. You can’t leverage your time and abilities to make a stock go up - no matter how much you might want to. However, you can leverage them both to add value to a property. In other words, in rental property investing, you can directly manage your investment. That means that you can actually hustle for your future - something you can’t do in other investment areas.
- Assured and eternal demand. Rental property investing guarantees you everlasting demand. No matter how bad the times might be, people will always need a place to live. Moreover, since modern culture increasingly values mobility, the demand for rental properties grows by the minute.
- Timeproof strategy. Stock markets are new, but rental property investing is as old as time. In fact, since the very dawn of human civilization, landlords have built wealth by owning and leasing out residential property. If it has worked for millions of people before you, why shouldn’t it work for you as well?
- Stability, simplicity, and selection. Even though crashes happen from time to time, the real estate market is actually more stable than any other. It’s also far simpler and more straightforward, since everyone is already knowledgeable enough to start dabbling in it. Finally, rental properties offer an incredible amount of variety within any asset class. You can buy many different types of properties – single-family houses, multifamily properties, office buildings – and each of them can be either large or small, new or old, tall or short, and so on.
Rental property investing and the four wealth generators
“One of the greatest benefits of rental property investing,” writes Turner, “especially compared with other real estate niches and strategies, is the opportunity to capitalize on all four of real estate’s major profit sources.” These four sources are appreciation, cash flow, tax savings, and loan paydown. Rental properties may be the only investment that takes advantage of them all. Here’s how:
- Appreciation. Many things devalue over time. Houses – just like, say, nice wines or classic cars – don’t. In fact, they go up in price with every passing year, even if they are used. For example, if you bought a house worth $100,000 in 1990 and lived in it, it might be worth over half a million dollars today, because of natural appreciation. There are many real estate investors who have earned great fortunes solely through appreciation. However, they don’t usually wait for time to increase the price of a property. Instead, they make use of something called “forced appreciation.” This is when they increase the amount of profit a property can earn almost instantly by improving the property through additions and enhancements. Whether natural or forced, appreciation is a powerful tool.
- Cash flow. In the real estate rental business, cash flow is “the income left after paying out expenses that affect the property, such as mortgage, taxes, insurance, vacancies, repairs, capital expenditures, and utilities.” For Turner, steady cash flow is “the lifeblood of any rental property investor.” In other words, even though appreciation is nice, don’t ever buy properties that aren’t ready to start generating revenue as soon as possible. To paraphrase Turner’s advice, don’t buy properties for a “what-if” scenario – buy for a “this-is” reality.
- Tax savings. Most governments in the world like real estate investors, because they ensure stability in the economy by providing housing for “the increasingly rent-minded population.” As a consequence, real estate investors pay less in taxes than the average citizen, even though they earn more income than most.
- Loan paydown. Unlike most other investments, properties can earn you money even when you don’t really own them. For example, you can sublet a property as a tenant, or you can rent your house to other tenants while you’re still paying the bank. Most importantly, you can build wealth by obtaining a loan on your rental property and using the rental income from your tenants to pay that loan down monthly. Do the math accurately and you will have your tenants paying your property mortgages and helping you retire a millionaire – while barely working!
The five keys to rental property success
Although acquiring rental properties involves many different techniques and strategies, according to Turner, the following five keys are “essential and nonnegotiable if you want to find long-lasting success.”
- Think the right thoughts. Begin with your mindset. Instead of thinking “I want to do this” or “I can do this,” start thinking in terms of “I will do this” and “I am doing this.” But don’t stop at thinking: write down your goals now and make a habit of reading them aloud to yourself every day to etch them into your subconscious. Also, don’t forget to turn your problems into challenges: when “I can’t” becomes “How can I?” your brain is stimulated to put your entire body into a problem-solving mode.
- Study the right source. Nowadays, there are so many ways to improve yourself in almost any discipline that many people end up getting stuck in an “analysis paralysis,” spending a lot of time learning and analyzing without doing anything. To overcome this condition, try to be focused from the start. Make a list of books, podcasts and YouTube videos, go over them and then start dabbling in the market. Also, don’t ever pay for expensive coaching or training programs: with so many free courses available, it’s smarter to use your cash for your investments instead.
- Pick the right plan. Turner is not talking about a business plan here. Instead, he has in mind a sort of “vision plan” wherein you’ll outline your “why’s” and objectives, your prospective milestones and eventual destinations. For starters, your plan doesn’t even need to be comprehensive – it just needs to hold answers to the following three questions: 1) What kind of investment property will you buy? 2) How often will you buy it? and 3) How will you finance your deals?
- Acquire the right assets and avoid liabilities. Popularized by Robert Kiyosaki in “Rich Dad Poor Dad,” this advice is as simple as it gets. Finding the right asset isn’t as simple, but that’s where people such as Turner come in. Hear them out before buying any property, because – if solely thanks to experience – they can probably differentiate better between good and bad deals than you can.
- Manage the right metrics. Unlike stocks which you can (and should) forget after buying, rental properties require “continual oversight.” In other words, you can’t just buy a property and leave it be: you have to continually manage and maintain it. There are a few things you should be concerned about, such as last month’s cash flow or the property’s natural appreciation rate over the last decade. If those numbers are fine, then everything else probably is as well.
Four sample real estate strategies
There are many proven paths to earn money in real estate. The following four should help you find the path that will work for you and assist you in building your own, personal road map to rental property success.
- Rental properties. This is the simplest success plan and the one most people have in mind when they think about rental property investing. In essence, it’s a three-step process: 1) buy incredible rental properties below market value, 2) save the cash flow, and 3) reinvest that cash flow into more properties. Rather than guaranteed, this is an “if-then” plan that depends on a stable 3% yearly appreciation rate (which is the U.S. historical average) and your ability to find discounted multifamily properties, whose value can be improved by 10% in a single year through “forced appreciation” (such as landscaping or a paint job). Using these standards, you should be able to earn, every two years, enough money to buy a new fourplex and, by the end of year seven, you should be able to generate about $60,000 yearly in passive income, which is approximately the same as the average American household income.
- Single-family homes. Single-family homes cannot make you a millionaire but they can earn you up to $5,000 per month in cash flow. The first part of this plan entails setting aside 20% of your income for investment properties (and living on, say, $48,000 per year) for an entire year. As a result, you will have saved $12,000 at the end of the year. Combined with your savings, that should give you enough money to loan $80,000 for a three-bedroom, two-bath property in a blue-collar neighborhood. It’s not difficult to rent such a property. Thanks to it, you should be able to make about $300 extra per month in cash flow. Repeat the process for the next four years (save on your income throughout a year and buy a single-family home at the end of it), and by the beginning of year seven, you will have in your possession five rentals and will be making about $1,500 a month from them, combined. Not too shabby, is it?
- House hacking. House hacking is a strategy by which you earn rental income by renting out your primary residence. Of course, you’re going to need a multifamily property to do this. Only then, you can live in one of the units of your property while renting out the others. As a result, you might be able to earn enough money from your tenants to pay your mortgage, and basically buy the property for free!
- The BRRRR strategy. BRRRR is an acronym which stands for buy, rehab, rent, refinance, and repeat. In Turner’s explanation, it’s a “strategy that involves buying fixer-upper rental properties, repairing them, renting them out to great tenants, refinancing them to get your money back, and then repeating the process.” If you play your cards right and get a great house in a great neighborhood, this is a powerful strategy because it can allow you to acquire numerous properties without running out of investment capital.
“My goal with this book,” writes Brandon Turner in the Preface to “The Book of Rental Property Investing,” “is to create the single greatest guide on rental property investing ever written.”
Truth be told, we haven’t read many similar books so far, but we do feel that “The Book of Rental Property Investing” can’t be far off the mark. Rather than just skimming the surface, it delves deep into the nitty-gritty details of real estate investing and can certainly serve as a well-structured reference point for anyone who wants to dabble in the market. A must-read if that describes you.
Rental property investing beats all other types of investing: not only can you buy a house on borrowed money, but its value will increase over time while you live in it. An added bonus is that you even get tax breaks!