Want to Build Wealth? Try Rental Properties

People have used thousands of different methods to build wealth over the years. There are likely thousands more that haven’t yet been disc...

People have used thousands of different methods to build wealth over the years. There are likely thousands more that haven’t yet been discovered. But if you study the biographies and resumes of the most successful people from the past and present, you’ll almost always find one consistency: real estate. So rather than trying to reinvent the wheel, why not follow their lead?

Why Use Rental Properties?

There are dozens of ways to use real estate as an investment vehicle for building wealth, but rental properties tend to be the most attractive. They offer benefits like:

• Monthly cash flow. Unlike many investments that require you to cash in the entire investment in order to profit, rental properties deliver steady monthly cash flow. This money can be put back into the property to pay down the mortgage, used to buy another property, or enjoyed as supplemental income.

• Property appreciation. While there’s no guarantee that real estate values will go up, history suggests that property values increase most years. Over three, five, or 10 years, this can dramatically increase your equity.

• Tax advantages. Owning rental properties allows you to enjoy a number of tax write-offs. This includes interest on your mortgage, interest on credit cards used to make property-related purchases, insurance, travel expenses, maintenance repairs, property taxes, and legal/professional fees.

• Economic insulation. When the economy goes into a recession, almost every investment is impacted. This includes stocks, bonds, mutual funds, retirement accounts, etc. Even the value of your primary residence will take a hit. But do you know what keeps on producing? Rental properties. The demand for rental properties actually increases during recessions.

One rental property won’t make you wealthy. But a portfolio of them will. One strategy is to buy one rental property every single year. If you start at age 30 and purchase one rental property per year until retirement age at 65, that gives you 35 individual properties. Without even accounting for the fact that you’ll have paid off many of the mortgages by that point (or that property values will increase rather significantly over three and a half decades), this could easily give you $20,000 or more in monthly cash flow at retirement.

Tips for Building Wealth With Rental Properties

Curious about getting started building wealth with rental properties? Here are several tips that will make the experience more lucrative and rewarding (while simultaneously reducing stress and minimizing mistakes).

1. Buy Below Market Value

You make your money when you buy. If possible, always buy a property below market value. This is the fastest way to earn equity. Ideally, you want to be so discerning that you’re only purchasing properties when you can get them at 80 percent or less of market value. That means buying a $200,000 property at $160,000. That gives you $40,000 of immediate equity. And though it might sound impossible to do in a hot market, it’s all about partnering with the right industry insiders to find off-market listings from distressed sellers.

2. Hire a Property Manager

Owning one or two rental properties isn’t a big deal. You can manage them yourself without much time. But once you get 10 or 15 properties in your portfolio, it quickly becomes a full-time job (and a stressful one at that). The best thing you can do is hire a property manager to make your investments as hands-off as possible. Ask anyone in the industry and they’ll tell you that a professional property management company is worth its weight in gold!

3. Reinvest Your Money

When you have an extra $500 to $1,500 hitting your bank account each month, it’s tempting to pocket it and upgrade your lifestyle. However, the best thing you can do is start reinvesting this money. Take the profits and use them to save up enough money to make a down payment on a second house. Then take the profits from both of these properties to buy a third, and so on. At first, you might only be able to buy one property every year. Then it’ll be every nine months. Then every six months, etc.

4. Hold, Hold, and Hold

Whatever you do, hold onto your properties! As property values increase, it’s tempting to sell and make some quick cash. However, the gold is in the monthly cash flow. Hold your properties and only sell as a last resort.

Play the ‘Long Game’

Investing in a rental property won’t make you a millionaire overnight. It will take years to build wealth using this method, but it’s safe and proven. You’re playing the long game and must be patient. The first three to five years can be slow. After that, the cash flow will start to compound.