Where flipping homes is a great strategy for quick cash turns in slower markets, buying and holding real estate is a long term wealth building investment strategy. Essentially, you're buying properties and leasing them out (becoming a landlord), earning smaller monthly cash payments while your tenants pay down your mortgage, and hopefully your property values appreciate.
Owning rental properties, and collecting solid and steady rental income from each of them, is a very appealing means of building alternative income streams. Flipping homes is a great means for rapid cash infusion, but nothing beats a good rental property for reliable, monthly cash flow. With the ability to outsource property management, investors can still make great returns while playing a very hands-off roll in the investment.
When viewed from a long-term lens, it's safe to assume some level of appreciation for your properties. Despite ebbs and flows in market value, by and large real estate is an asset that appreciates. In addition, investors have no lack of available tools to do research and make informed decisions about any given market.
A commonly overlooked benefit of real estate investment is the fact that your tenant not only is providing you with monthly cash flow, but they're also paying down the mortgage on that property as well. While the principal portion of the mortgage payment is minimal in the early stages of your loan, every year that you own the property, the amortization of the principal amount speeds up until you're shaving thousands of dollars off your loan every year.
Very few industry professionals speculate that rents will go down over time. While you as the investor get to take advantage of affordable pricing and record low interest rates, it can be assumed that future rents can be increased thereby increasing cash flow and return on investment.
Owning real estate allows for the deduction of mortgage insurance as well as the depreciation of the property itself. In addition, through the use of 1031 Exchanges, you can defer tax liability indefinitely while continuing to invest funds in new properties.
Real estate investment is one of the few investment strategies that offers financing (high leverage). Try talking to your local banker and asking them for a $400,000 line of credit secured only by $100,000 in your bank account for the purposes of investing in the latest hot stock. Not very likely to happen. But if you turned around and told them you wanted to buy 5 house at $100,000 each, they would happily sit you down with the mortgage department.
Return on Investment
And with that ability to leverage your properties, comes the benefit of a much higher return on investment (ROI). Cash on cash return is much higher when using leverage to purchase real estate, and if the property appreciates, returns are even greater.
Hedge Against Inflation
Most analysts believe inflation is on it's way. Owning leveraged real estate (particularly at record low rates) is a fantastic way to hedge against coming inflation. If prices rise, the cost of housing follows, and owning assets that rise with the tide is a great way to protect your wealth.
For investors that look at real estate as a long term wealth building strategy, the potential to retire in rental income is very real. Over the long term, investors can end up owning multiple properties outright, creating a net worth well into the millions. And the cash flow generated from those properties can provide more than enough income on which to retire.
Finding Good Tenants
By and large, the biggest complaint most investors have about rental properties is finding good tenants. Thankfully, services like MySmartMove.com are making the credit, criminal, and background checks much easier. Renting to the wrong tenant can make a great investment your worst nightmare.
Outsourcing Requires Scale
For most small property investors, outsourcing property management only makes sense through the economies of scale. Hiring a management team to manage 1 - 5 properties can seriously cut into the cash flow that your investments might make. That leaves managing the properties, and your tenants, to the investor. Time vs. Money.
You'll need to make sure you're intimately familiar with Tenant laws in your State to make sure you've met your legal obligations to them in regards to their lease, their tenancy, and their payments. In the event you have to evict them, because of homestead laws, you'll need to make sure you follow the precise letter of the law in evicting them legally. It's not difficult, and it's not expensive, but it can be time consuming.
Just as the market can rise, it can also fall. And for most long term investors, this is usually a problem because over the long term, there's usually a steady increase in value. But should disaster strike, and you absolutely must sell the property, there is a potential for loss if it happens in a down market, where the home has lost value and you happen to be highly leveraged. For this reason, it's always a good idea to keep a reserve to see you through tight spots.
If, after reading all of this, you're ready to get started with rental properties, please use the contact box at right to schedule
a sit down with us! We'll help you develop a gameplan to purchase your first rental!
If you're already an investor, and would like to get on our mailing list of hot investment properties simply sign up in the box at the right!