I’ve had numerous conversations with entrepreneurs lately who have come to the conclusion that they need to start diversifying their business profits into more than just a savings account. If this is you - pay close attention.
Being a real estate investor isn’t always glamorous but it is one of the best ways to build wealth over the long-haul, especially for the entrepreneurial-minded. Here are six reasons why you should consider investing in rental properties.
1. Cash flow.
Many people invest in rental properties simply because of the cash flow - the extra money that is left after all the bills have been paid. The cash flow can provide ongoing, monthly income that is mostly passive, allowing you to spend your time building a business, traveling or reinvesting in more real estate.
Cash flow from real estate is stable and far more predictable than most other businesses. That's great for entrepreneurs enduring the ups and downs of start-up life. The cash flow can help float you though the bad times and live well during the good times.
2. Tax benefits.
Let me ask you a quick question: if you earn $100,000 at your own business and I earn $100,000 through rental properties, who get’s to keep more?
That’s right: I do. Because the government rewards rental property owners.
Not only is the cash flow received from your rentals not subject to self-employment tax, the government offers tax benefits including depreciation and significantly lower tax-rates for long-term profits.
3. The loan pay down.
When you buy a rental property using a mortgage, your tenant is actually the one paying the mortgage payment, thus increasing your net worth each month. Because of the loan pay down a rental property is essentially a savings account that grows automatically, without you depositing money each month.
Today you might owe $200,000 on a rental property, but next year you might only owe $195,000 because the tenant is making the payment for you, making you $5,000 richer. Thirty years down the road, or whatever the term of your loan, it's paid down to $0. You own a significant asset that you can sell or continue renting, all thanks to your tenant paying the mortgage.
While the loan is being paid down the value of real estate, generally, goes up. Yes, I know, recessions do happen. Values do go up and down. People buy at the wrong time of the market. I get it.
Over time, values do climb higher and higher. That's why I’m not in this real estate game just for a year or even a decade. I’m in this for life. I know my properties will continue to climb so that 30 years from now, everything will be worth far more than I’m paying for it today.
5. A hedge against inflation.
Can you imagine paying ten dollars for a gallon of milk? Or five dollars for a candy bar? While those prices seem exorbitant to you, this is the future because of inflation. Inflation is the process by which prices increase due to the value of money decreasing.
While most people fear inflation, as a rental property owner, I look forward to it!
When the price of a gallon of milk hits ten bucks a gallon, guess what else is going to shoot through the roof? Everything, including rents and property values! The one thing that won’t increase, however, is my fixed-rate mortgage payment. As inflation pushes the cost of living higher and higher, my cash flow will only increase. This is why real estate is often called “a hedge against inflation." When inflation hits - I'm ready!
I don’t like my destiny tied to a board room on Wall Street or a nervous CEO in Silicon Valley.
This is why I choose to invest most of my income in real estate, knowing that I am the one who is responsible for my success or failure.
- If I want a better deal, I need to hustle to find it.
- If the rental market gets more competitive, I can compensate by increasing my advertising.
- If values drop, I can choose to wait it out or improve the property to drive the value back up.
In other words, I get to control the situation, and my financial future, with my own two hands. And that suits me just fine.
Don’t think that just by owning some rentals you are instantly going to begin building wealth. Real estate is powerful - but only if you work it right.
You must learn how to find great deals, how to evaluate a real estate investment, and how to finance any properties you want to buy. Additionally, you must treat it like a business and nurture it as it matures. It's likely not going to be totally passive up front, but as millions of individuals throughout history have discovered, the payoff is well worth the journey.