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On today’s podcast episode, I talk about buying your first rental property. Buying a rental is a lot easier than you think, and you should consider doing it as soon as possible because buying rentals is the path to wealth and financial freedom.
What prevents many new real estate investors from buying their first rental is limiting beliefs or obstacles that they believe that they have that prevent them from buying a rental property. This podcast episode will hopefully clear that up for you.
Another issue I see with rental properties is that some beginners think that buying a rental will create enormous amounts of cash flow for them. When they realize that they are only making a few hundred dollars a month and they are faced with maintenance, repairs, tenant headaches, and evictions they get despondent and they quit and sell their property. I see this all of the time. And the reason that this happens is because they don’t understand the long term wealth building that buying rental properties and holding those rental properties creates. They thought they would get rich from cash flow today. They didn’t understand that the true benefit comes from buying the house at a discount, creating equity (wealth), and then holding the real estate long term to create more equity and more wealth until the house is owned free and clear with no mortgage. At that point, ALL of the rental income is income for the owner of the property FOREVER.
I illustrate this by using an example of my coaching student Dale who purchased his first rental property a few months ago in Melbourne Florida for $94,000. He found this property by mailing out 7,000 postcards to motivated sellers. This was the only house that he purchased from that mailing. I loaned him $80,000 so his out of pocket cost was $14,000 plus closing costs and fees.
The repairs to make this property rent ready were around $12,000. After the property was repaired and ready to rent, Dale found a Section 8 tenant who would pay $1,850 per month. He then went to a mortgage broker to get an appraisal and the house appraised for $194,000 ($100,000 higher than his purchase price).
On investment properties, most lenders lend 75% of the appraisal so in this case it was $145,500. After he paid me back the $80,000 he had almost $60,000 in cash left over which was more than enough to pay himself back for the down payment and the repair costs and closing costs. Essentially this was a no money down deal for Dale.
Let’s look at his current situation:
Appraisal Value $194,000
Loan Amount $145,500
Equity in the Property $49,500
Dale has essentially increased his net worth by $50,000 by buying ONE rental property. But it gets much better than that because if he holds that property the value of the property will double in just 15 years. So will the rent. So 15 years from now he will own a free and clear $400,000 property that is paying rent of $4,000 a month. That translates into almost $50,000 per year in income from ONE rental property. Imagine if he had 5 rental properties. Or 10! This is how you need to look at financial freedom. Calculate how much money you need per month or per year to be financially free forever and to not have a job. Then divide that amount by $4,000 (from Dale’s example” and that is how many rentals you will need to own in order to achieve your goal of financial freedom. If you need $12,000 a month or $144,000 a year then that is just 3 rental properties!
The concept that I explained above is called Buy, Repair, Rent, and Refinance or BRRR. It will benefit you financially to understand this concept because it is the foundation of investing in real estate. If you can find motivated sellers who will sell you a house for 50% of what that house is worth, you can buy unlimited real estate with no money down. And if you hold that real estate long term you will become a millionaire. It’s really that simple. I have a Buying Rentals and Building Wealth Boot Camp coming up. Make sure you register to attend this event where I go through this entire BRRR method step by step.
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