Welcome to part three of our series on real estate investing basics and strategies. Today, we’re diving into rentals. Rentals have become one of the most reliable ways to generate long-term wealth. Unlike rehabbing or wholesaling, rentals can be passed down from generation to generation, creating a legacy of financial security.
Why Rentals Are a Wealth-Building Powerhouse
Rentals have made more long-term wealth than any other real estate strategy. They provide income and can be managed and handed down through the years. With the right portfolio and systems in place, rentals can create generational wealth that stands the test of time.
Acquiring Rentals: The BRRRR Method
The BRRRR method stands for Buy, Remodel, Rent, Refinance, and Repeat. It’s a proven strategy for acquiring and profiting from rental properties.
Step 1: Buy
First, you need to find a discounted property. Avoid buying properties without equity or with negative cash flow, especially if you’re new to investing. You want properties that offer value from day one.
Step 2: Remodel
Once you’ve secured your property, it’s time to remodel. Most discounted properties need repairs. Use private or hard money lenders as traditional loans like FHA or conventional loans won’t typically cover properties in disrepair. Make sure your renovation brings the property up to market standards, or even a bit higher.
Step 3: Rent
After remodeling, rent the property out quickly. Your tenant’s rent will help you qualify for the final part of the strategy. Aim for a good rental price to attract quality tenants and minimize future headaches.
Step 4: Refinance
Finally, refinance your property from the initial hard money loan to a traditional loan, such as one from Fannie Mae. This allows you to pay back the more expensive initial financing and stabilize your monthly payments.
Step 5: Repeat
With one successful property under your belt, you can repeat the process, growing your rental portfolio over time.
Example Scenario
Let’s walk through an example:
- Purchase Price: $68,000
- Repair Costs: $17,000
- Estimated After Repair Value (ARV): $110,000
- Hard Money Loan Costs: $6,000
- Refinance Costs: $2,000
Your total expenses come to around $93,000. When you refinance at 80% of the ARV, you get up to $88,000. This means you’re out of pocket about $5,000. If you rent the property for $1,100 per month and your mortgage payment is $800, you’re looking at $300 in monthly cash flow. Over a year, that’s $3,600.
With $5,000 out of pocket and an annual income of $3,600, you’ve got a 72% cash-on-cash return—that’s impressive for any investment portfolio.
Benefits Beyond Cash Flow
Rentals offer several income streams besides monthly cash flow:
- Amortization: Each mortgage payment reduces your loan principal, building equity.
- Market Appreciation: Property values generally increase over time.
- Forced Appreciation: Renovations increase property value instantly.
- Tax Benefits: Depreciation allows you to deduct a portion of the property’s value from your taxable income each year.
- Inflation Hedge: Your fixed-rate mortgage payments become easier over time as inflation erodes the value of money.
Final Thoughts
Rentals are a powerful wealth-building strategy that can create a lasting financial legacy for your family. By following the BRRRR method, you can systematically grow your rental portfolio, generate steady cash flow, and enjoy numerous financial benefits. From amortization and market appreciation to tax advantages and protection against inflation, rental properties offer diverse income streams that contribute to long-term wealth.
With careful planning and execution, you can establish a sustainable and profitable rental business that benefits not only you but future generations. Start building your path to generational wealth today through rental properties.
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