31 minutes | Oct 18th 2020

#066 | How rental properties can grow your wealth (or cause headaches)

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People involved in real estate often talk about it like it’s the most lucrative way to make a living. But real estate is like any other investment:All investments come with riskAll investments take experience and lots of workAll investments require money to start outMike starts by explaining his new venture: a partnership LLC with his friend Liz whom he met at AT&T. Funny story; he met Liz just like he met Maggie: discussing benefits, savings, and investments at work. They decided that East Atlanta was the right location for good rental culture, affordable housing, and the likelihood of value appreciation. So they started an LLC and began looking for houses. They established their criteria, their strategy, both short and long term, and their budgets.After a few months of looking, Liz texts Mike one more and says, “We found it. You in?” The next day they were under contract.How do rental properties work financially?You need to find a place that will actually rent. Will people want to live there?Unless you have the cash, you’ll need to have a down payment. Typically 20%, although there are creative ways around this, which Mike doesn’t recommend.Get a mortgage for the remaining 80%.Then your rent (your revenue) needs to cover your costs.Misconceptions:Rental properties just churn off cash. They might create some positive cash flow, meaning your revenue exceeds your expenses, but it’s typically not that much. Think about it. Why would someone rent a place for $2,000 when they can own it for $1,000 a month. It’s passive income. These things take a lot of work. And the less work you want to do, the more you need to outsource, which eats into your cash flow.It’s easy. If it were easy, everyone would do it and be multi-millionaires.Why is real estate different:It’s easy to borrow money. It’s called debt when it’s bad and leverage when it’s good. Let’s look at Mike’s real example. They bought at $265K and put down $66K, 25%. They’re renting it for $2,000 a month, or $24K a year. That’s almost 10% of the purchase price a year. But they only spent $66K, which means that the return on cash is nearly 50% a year. What other kinds of investment can do that?Real estate is relatively stable. If you have a place where people want to live like the heart of Atlanta, the value will almost always go up.It’s self-sustaining. The renter pays your expenses, pays your principal, and hopefully pays you a little extra cash.Over time, you can cash-out refinance and use the appreciation to leverage up and buy more.Downsides of real estate investing:Requires a good bit of cash.Illiquid investmentBad rentersHouse problemsLong term play unless you’re flippingMust have the mental stomach for itTop 3 Takeaways:Rental properties are an investment like anything else. There are no guarantees.The benefits of rental property as an investment comes primarily from the ability to borrow money for it.It requires a lot of work, so if you’re not ready for repairs, tenants, and headaches, don’t do it! ---Follow friends on FIRETwitterInstagramFacebookLinkedInLeave us a voicemail or text us: 404-981-3370eMail us at:  friendsonfiremm@gmail.comVisit our website: www.friendsonfire.org---Other LinksMaggie’s Blog: Mostly Minimal LifeMike’s Book: Your New Relationship with Money
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