You can not only become rich but can create enormous wealth by being a landlord. There is nothing more rewarding than buying cash flowing rental properties. You need to master a secret art in order to become rich by being a landlord. A huge fortune can become yours if you can put your continuous efforts and dedicate time to your rental business. A landlord business favors you in million ways to earn a fortune. And you never know if you too end up becoming a millionaire landlord one day.
In saying that, it is important to note that a lot of individuals enter into the landlord business to get rich in a few years. It is absolutely true that wealth can be created by pursuing a rental business. It can be the best financial decision you can take in your lifetime. Like any other business, the landlord business also demands the right management. Failing at which can even make you lose all your money.
Generally, real estate is a great way to grow your wealth with very little risk. What most people do not understand is that real estate is actually not an asset class in its own but a derivative.
A derivative in finance speak is a security which value is determined by another asset. The interesting thing about real estate is that it’s value captures the underlying local economy.
To repeat: real estate is a derivative of the local economy.
So what is the local economy? It is basically the number of people times productivity. This means that if you get more people and smarter people the value of real estate rises. The nice thing is that you can capture all of the economic growth in an area with (relatively) little volatility.
The other thing that you need to know is that (income producing) real estate has dual returns: capital appreciation and cashflow. Quite often you have to decide on one or the other but real estate allows you to benefit from appreciation of the property (if the local economy (again demographics productivity) is healthy this should at least be in line with inflation) while you also get regular cashflow which you can use to leverage (which will increase your returns).
One thing to remember though is that real estate is not a passive investment. Every building is an operating business that has to be managed and here you can add or destroy a lot of value. However, real estate is still not as active as a real product company.
There is more to be said but overall real estate is one of the best financial products out there. It does not offer a get rich quick theme but it allows you to benefit broadly from the economy and you can use your own smarts to accelerate your wealth creation while not needing to work 120hr weeks for 20+ years.
Residential Rental Property
Residential rental property is the way to make money—or so some people claim. The challenges start early, and they almost always involve time and money. Let's take a look at six of the big ones.
Entire books have been written about finding a good rental property, not to mention an Investopedia article or two. So much text has been dedicated to the topic because of its critical importance. Buy too expensive a place, and you'll never make money. But trying to snag a bargain can be troublesome too. Buying a fixer-upper requires that you have the skills, time, tools, and cash to make the necessary repairs and renovations.
If you're in no hurry, this may be a way to get a bargain on your investment; if you already have a full-time job and a family, every minute spent repairing the rental is a minute not spent on a more profitable or enjoyable activity. However, nowadays, there are management companies that can do a lot of this legwork—from locating a property to rehabbing it—for you, for a fee, of course.
Being a landlord requires a lot of responsibility and a lot of money. If you've ever wondered if it's worth it to be a landlord, keep reading to find out exactly what it takes.
Real estate investing can easily make you a lot of money, but can physically owning a property and being a landlord make you even more?
You’ll need to consider, not just the expensive down payment on a property (or properties), but whether or not you’re willing to put in the extra time it takes to fix up, maintain, and find the right tenants for your property.
If you've got some cash languishing in a bank account, it may be time to think about putting it to work by buying properties and renting them out.
Home prices have fallen to multi-year lows, and can be as much as 60% below peak prices. Combine those apparent bargain-basement prices with low fixed-rate financing and the potential returns from becoming a landlord by buying rental properties starts to look mouthwatering.
Consider real estate website Trulia's recent analysis of renting vs buying, which found that it would be cheaper to buy than rent in about 80% of major cities. Assuming you put $30,000 down and got a loan for the remaining $70,000 at 5.5%, your monthly mortgage payment amounts to a paltry $397. Add in $100 a month for property taxes, another $100 for insurance and utility costs, and another $100 for maintenance and repairs, and you're still collecting $300 more per month than you spend.
Your average annual return? 12% on the $30,000 in invested capital. Better yet, the renter is paying off the mortgage. If the home appreciates from here, you're really in the gravy. Let's say, for example, that home prices rise a mere 2% on average over the next 30 years. Your home will be worth $181,000 when the mortgage is paid off. Because the rent has more than covered the cost of the loan, your only cost is still the $30,000 you put in. Net profit (not including the income you've received each year): Roughly 500%.
That said, it can be tricky to find the right property and make the numbers pencil out, says Christine Karpinski, author of How to Rent Vacation Properties by Owner.
Investing in property commercial or residential for letting purpose is not a route to get rich quickly. Investing in Buy to Let is a better investment than leaving money in your bank account or some other investment options, however, it is not a route to quick riches. With the rental income and the property value appreciation, both combined, without a doubt, are an attractive option if you are considering the Buy to Let market.
It is vital to buy a property at a good price. The buy to let property is not for your personal use, so you should have a broader area to source a property below market value. Ideally, you want to buy near where you live, so it is easy to manage.
Although the yields look good on paper, in practice some of these deprived areas tend to leave some landlords with high rates of voids, in some cases damage to the property and rent arrears. There is a lack of interest in this area for the Buy to Let investors for good reason.
Becoming a landlord does not give you a passive income
Generally, some people think being a landlord is a walk in the park, buy a property and its easy sailing from then on. This for residential property is not true, for commercial landlords life does seem to be that much easier, especially if the property is in a prime location.
Being a landlord does require effort, and it does at times lead to stress due to issue’s like rent arrears, damage to property or the process of eviction. Your investment at some stage will require repairs, refurbishment, and you will have to manage the tenancy too. The work needed in managing your properties will be ongoing and is time-consuming, it will not provide you with a passive income.
How Can You Become Rich By Being A Landlord?
Pursuing a rental business comes with its own challenges and rewards. A successful landlord exactly knows what a rental business demands. And, how can he turn his rental business into a money-making machine? There are many advantages to running a rental business. But among those advantages are some rarely known strings attached that can make you rich with your landlord business.
Research the market. Before you buy, you need to find out average rents in the area you're considering; the type of properties that are easy and difficult to rent out; and whether there are rules and regulations about renting that you need to know -- including whether there is a homeowner's association that restricts the ability to rent your unit. Local Realtors and property managers should be able to help, providing information about rental and vacancy rates as well as a condominium or townhouse's CC&Rs, which spell out the rules for shared housing.
If you're considering buying a property in a rent-controlled area, make sure you also talk to a local real estate attorney, Bailey says. Some communities put such tight controls on rents and evictions, that it can be difficult (if not impossible) to pass on rising expenses or evict troublesome tenants. That depresses both the income from your long-term rental and your ability to re-sell the property.
Being a landlord, you can become rich by taking the compounding benefits on your passive income. In a rental estate business, you generate passive income every month without actively participating in your business.
The money you have invested in your rental business will earn money for you. Your money is working for you 24/7. This invested money has the power to work for you for unlimited hours. The more time it works, the more it will make you richer.
The wealthy person knows the advantage of having passive income from the assets they own. It is this secret which makes them even richer and they keep on generating money. Imagine yourself doing a conventional 9-5 job. Can you work for more than 70 hours in a week?
If yes, how much more money can you make by doing that? The rich work for passive income, they spend their time creating assets that can generate passive income for them. Once they have assets that generate enough passive income, they can get financially retired.
Renting out a ratty apartment that has no nice amenities, doing as little maintenance as possible and not keeping up appearances leads to profits. If you don't believe it, look at off-campus housing in any college town in the country. It doesn't sound very nice, but a basic, stripped-down property (no ceiling fans, air-conditioning, etc.) keeps the process simple.
Four walls and a floor provide a minimum of maintenance requirements and few things that can break or be damaged. The challenge here tends to be that, in exchange for a few bucks in the hand, you often get a rough class of tenants and a property that gets worn hard.
Many real estate investors will tell you that they basically break even on the rent and expenses. Their approach is to buy a bargain-priced property, let the tenants' rent pay off the mortgage, and then sell in 30 years, hopefully taking advantage of some price appreciation.
While it's a reasonable approach, the profits are likely to be small, and the capital gains tax can be hefty (given your low-cost basis). And it still requires time and effort that might have been better spent elsewhere.
The silver lining of a rental business is that you can build your equity with other people's money. It can be no better than someone building wealth for you. You can practically build a lot of equity in several years by investing a little money in this business.
There are various types of financing available for rental business owners today. You can start your landlord business by investing a little amount and the remaining amount can be financed easily. Now, you have a rental business in which you have invested very little money. The rest you have borrowed and are using other people's money.
You will pay the borrowed money gradually in several years. Also, you will not be paying this money by yourself. You have tenants on your property that will be paying off this borrowed money for you in the form of rent. Suppose 30 years ago, you have bought a property worth $500,000 by putting $100,000 in down payment. The rest $400,000 is financed from a bank for the term of 30 years.
For these 30 years, you rent your property and generate a good cash flow every month. You paid off the loan in 30 years. Now, you have left with a lot of equity in your hand. You started with only $100,000 and in the span of 30 years; you have multiplied your equity by 5 times. And if you consider appreciation in the picture, you can imagine how much equity you will make.
Property Value Appreciation
The Landlords can become rich by taking advantage of value appreciation on their property. You own a physical rental real estate and that real estate has equity in it. Your value of property tends to increase due to inflation in prices, change in market trends, and population growth.
On average, a landlord sees a 3% appreciation in the property value considering the highs and lows of the market. If you can invest at the right time and at the right place in the rental business, you can become rich in a few years.
Suppose you own a property in a low-income area that is worth only $100,000 today. Think of it after 10 years down the line with just 3% appreciation. You will gain $30,000 on this property. And what if, you start acquiring one property every year? How much gain you can make with multiple properties?
You start with one property of $100,000 and acquire 10 properties in 10 years. Now, what is the effect of appreciation after these 10 years on your wealth? You will not be having only $10,00,000 in equity but will have $300,000 more additionally due to appreciation in the value of your property.
Going back to the cost of maintaining a building—this will likely be a large expense, depending on how many units your building has. As a landlord, you can’t just ignore leaky toilets or other minor issues like you might if you lived in your home and wanted to avoid spending money. If a tenant asks you to fix something, you have to do it.
And in between tenants, you may have to fix up the apartment simply due to the wear and tear of being lived in. If you want to continue charging as much as you did for the original tenant, the apartment will have to be just as nice. Of course, you can use the tenant’s security deposit if they do serious damage, but even that may not cover the whole cost.
It’s best to be prepared for the worst, rather than hope each tenant will leave the place spotless.
Factor in repairs & replacements: All household items -- from sofas to dishwashers -- have a limited useful life. When you become a landlord, you need to figure that everything from paint to plates will need to be replaced on a semi-regular schedule.
With a vacation rental you'll need to replace or recover sofas every two or three years, just to keep the place looking fresh, she says. Towels, sheets, plates, glasses and cookware are likely to wear out even faster. To be sure, its penny-wise to keep things as long as possible. But if you don't replace things when they're looking tired, you lose repeat business, which is pound-foolish.
What about long-term rentals? Dishwashers, stoves, air conditioners and refrigerators wear out too. Figure all major appliances will need to be replaced in seven-to-10 years. You'll likely need to touch up the paint every five to 10 years, or whenever you switch renters.
How do you plan for these irregular, but foreseeable, expenses? The best bet is to read the manufacturer's specifications on appliances to find out their useful life, then shop around to figure out the cost of replacements. Divide the replacement cost of each item by the number of months left in its useful life. Add the figures together and set aside the result in a repair/replacement reserve each month.
In other words, if the $500 stove will need replaced in two years; and the $2,000 air conditioner will need to be replaced in five, you add $21 (500 divided by 24 months = $20.83) and $34 ($2,000 divided by 48 months = 33.33) and set aside $55 each month to ensure you have the money available for replacements when something breaks.
Rental real estate can have a snowball effect on your wealth. This effect can make you a rich landlord in several years provided you implement it in time. You need to first understand it carefully to use it for growing your wealth. Just like the snowball starts with a small chunk of ice. And with momentum, it starts to build upon itself becoming bigger and bigger in size.
The wealth creation in the rental business builds the same way. You start with one rental property. And, when your business starts to build momentum; you also start multiplying your revenues catering to exponential growth. Your portfolio starts building up and you keep acquiring more and more properties in your hand.
Suppose you purchase positive cash flowing rental property worth $300,000. You rent it for $2800 per month and your expenses come at $1800 per month. Now you have $1000 worth of profits every month and $12000 annually. You keep on operating your business in this way and manage to set aside $60,000 in 5 years.
Now you got enough cash to put in the down payment of the second property. So you purchase another rental property with the same specifications as the previous one. This means you will now have $2000 profits every month or $24,000 every year.
Think about how much more time you need to finance your third property. Not more than 3 years right? And now think about the fourth property. You can have it in 2 years and this effect will keep on going and you can potentially become a millionaire in say 10 to 15 years.
Being a landlord comes with a lot of responsibilities that require both your time and your money. But, if you choose the right home to invest in and have enough money saved up for emergencies, being a landlord can make you a lot of money, and even offer you a full-time job.
Is becoming a landlord worth the effort? Only you can decide. Just be sure to look before you leap and go into your new endeavor with realistic expectations and a solid game plan.
By knowing what you are getting yourself into before you do it, you'll be better prepared for what you encounter and more likely to enjoy the experience.