Real Estate Is EASY…
Let’s be honest, if you are a high income’r (HI), then you likely have a higher than average intelligence. Which means you can be successful as a real estate investor. So while real estate investing is easy (even the less than average IQ can do it!) you just need to learn how to crunch numbers. The hardest part for a real estate investor is having money for a down payment. This doesn’t apply to you because you are HI’r!
For the HI’r, this becomes less of a barrier for entry. Congrats, you can afford it. Even though it is easy, the most difficult part is having the risk tolerance/confidence to actually do it. Just do it. Can I say that without getting sued? Let me walk you through the steps to own your first investment property step-by-step. I will use numbers that are very similar to one my rentals to keep it real and simple.
- Be confident you can afford it – especially for your 1st property. Here’s how – Buy a property you can easily qualify for the mortgage and one that you could afford even to carry if it was vacant! I know this will require at least a 20% down payment, and time to save, but it will provide you with a lot of confidence! Your mindset here is if you don’t like it, the worst than can happen is that you could sell it.
- Know your market – I recommend investing in the city/town you live in or one that is close enough to manage on your own.
- Use a realtor who understands investment properties – best if they own at least one investment property in the area. They will know what the going rents for different properties. They should be able to provide a cap rate for you.
- Find a good property in decent shape – furnace, roof, plumbing, electrical, sewage pipe, etc…? Get a good home inspector, again if you can find one who is also a real estate investor, that would be very good! I used one on my first property and he found out that I needed a major repair – saved me 5 K on my deal!
- Do the math (here are my example numbers):
- $300K purchase price – 20% down payment = $60K; 25 years at 3.64% = $1216/month
- If any renos. are required, work those numbers into the above
- Property taxes? Utilities?
- Monthly costs – mortgage $1216 + taxes $250 + utilities paid by tenant = 1466/month
- Rental Income? – $1700/month
- Cash Flow: + $234/month
- Save the cash flow for the first year or 2 for any needed repairs – then start pouring extra into mortgage if you want. I currently don’t pay anything extra into the mortgage, I let the tenant pay it down.
- Repeat for as many properties as you want!
- Do not let anyone scare you with stories about bad tenants, etc…that being said, it is worth letting your property sit vacant for a few months to find a great tenant. I once had to evict a drug dealer (no kidding) because I put a tenant in place without doing reference and job checking – yes I was a dummy – BUT, I did learn a valuable lesson I won’t soon repeat! The property now has an amazing tenant with ZERO stress.
- Use a lease that includes the tenant covering yard maintenance – I provide a lawn mower to each property + any other “gardening” tool requested.
- Never buy an investment property for list price, EVER! Have no emotion in these properties, just like making any normal business decision.
- If you are not comfortable managing the property, hire someone! Just make sure you account for the cost in your monthly cash flow.
- When working your numbers, use a higher interest rate (for example if current rates are 3.5%, I would use a 4-4.5% when calculating cash flow – this allows for more wiggle room, remember the goal is to create an investment that allows you to sleep at night.
- Because you are a HI’r, you don’t need the cash flow now, so see your real estate as a “pension plan(s)” that will pay you when it is free and clear 10, 20, or even 30 years from now.
- Go for shorter term financing – 1 or 2 years. Why? It allows for refinancing a HELOC (credit line) back into the mortgage in case of a major repair.
- ALWAYS keep at least 20% equity in a property or more. Again, you don’t want an asset worth less (market value) that what you owe. However if this were to happen, as long as you are cash flow neutral or more, then you can ride out the fluctuations in the market without worry!
Want to know what your return will be? This is simple math, so let’s keep the same numbers as above:
Down payment + Closing Costs + Renos. ($60K + $5K +5K) = $70 K
Yearly +’ve cashflow = $234*12 = $2808
Appreciation: be conservative = 2.5%/year
Return after year 1 = $7500 (2.5% appreciation on $300K) + $2808 (cash flow) / $70,000 (initial investment) * 100% = 14.72% (this doesn’t include mortgage pay down!)
These numbers should make you smile. 🙂 Great return, minimal work if you do it right, and you have an appreciating HARD asset with inflation protection built in with rising rents year after year. I really, really believe you should own at least one rental property. Many more if you enjoy it. What I do not suggest you do is to ONLY have real estate in your investment portfolio. That would be poor diversification, and too risky in my opinion.
Would owning 1 rental property be good for your future self? It could be life changing. Do you have rental properties? Good experience? Are you thinking about adding one to your wealth plan? Please comment!