Knowing how to become rich takes a lifetime to achieve. It’s about changing your attitude towards money and changing it into a more productive and investment-oriented attitude. Knowing how to become rich is not about how much money you start with. In fact, it’s about employing whichever sum of cash you have to produce more cash. For the real estate investors of today, stay tuned to learn how to become rich with rental properties.
Learn how to become rich with rental properties with four concepts
As a real estate investor, you’ll need to grasp these four concepts to come up with a worthy financial plan:
You always hear about investing in positive cash flow income properties, but what does it really mean? To be exact, a positive cash flow income property is a rental property that has more income than expenses. Meanwhile, a negative cash flow income property indicates a shortage. Of course, cash flow will fluctuate depending on certain months and seasons. Additionally, when maintenance is needed, expect to have a negative cash flow that month. Understanding how cash flow moves in and out of your investment property can help you in strategizing and planning for the future.
Real estate appreciation
Real estate appreciation is among the most appealing factors about investing in real estate. In other words, owning the property for several years is going to increase the value of the property significantly. In the US real estate market, properties have increased with an average of 3% in the last hundred years. With steady growth, more and more people are buying investment properties to get a piece of the constant appreciation. Keep in mind that appreciation can be both natural and forced. When we talk about the 3% average appreciation, it falls within the natural appreciation on the spectrum. However, with fix-and-flips and other improvement and resale investment strategies, they fall within forced appreciation.
While many real estate investors refrain from taking your typical 20-30 year mortgage, many beginner real estate investors start their real estate investing journey that way. It’s a great real estate financing method to ensure you’re capable of making payments on the property. This intertwines with the equity concept. Of course, equity is the amount you owe on your mortgage deducted from the fair market value of your investment property. With the conventional loan financing method, you build equity slowly over the months and years. However, if you’re buying a property with cash up front, you purchase the entire equity of a property. Therefore, whenever increases or fluctuations in value occur, you’ll either gain or lose equity.
To be clear, equity in real estate only matters if you’re planning to sell or release equity. If you’re not looking for either, you should gather some more information on it as it can be helpful for your real estate investing career.
To learn more about real estate equity, read this blog post: What Is Equity in Real Estate?
Simply put, leveraging is the use of various financial resources to fund the purchase of a real estate deal. In return, this can increase your net worth along with the potential return on investment. Of course, real estate is not the only business that makes use of leverage. Many other types of investment ventures can be made more productive with leverage. To explain things further, if you’re buying an investment property today for $100,000 and you’re putting a down payment of 20% and borrow the rest through a loan or a hard money lender, you are using leverage. Basically, you are using other people’s money to invest. It’s a great real estate investment strategy to implement and a valuable weapon when understood properly.
A real estate investor must factor in the cost of the borrowed money along with the cost of the property to make sure the process is profitable. Read further about the use of leverage in real estate through this blog post: Real Estate Investments and Leverage- All You Need to Know.
Useful tips on how to become rich with rental properties
Understand the tax break of real estate investing
Yes, we all know that there are taxes that are attached with a higher income. However, the beginner real estate investor needn’t worry about tax bills as long as he/she understands the tax benefit of real estate investing. You can deduct real estate depreciation and make use of 27.5 years of a tax deduction for depreciation if you’re buying residential investment properties. Meanwhile, if you’re buying commercial rental properties, you can deduct it over the course of 39 years. Additionally, your rental income is safe from social security and FICA taxes. You can rest and enjoy an almost tax-free rental income.
If you’re still not sure how to become rich with rental properties through tax breaks, read this blog post: The Tax Benefits of Real Estate Investments.
Selling is not an option
When buying an investment property, your first goal is to keep making money off of that property to cover your initial investment and then some. Additionally, when buying an investment property, a key point to learn how to become rich with rental properties is that your journey with the investment and its rental income ends with selling. However, the most successful real estate investors always advise selling if an investment property is making enough rental income to cover its cost. Make sure to invest in positive cash flow investment properties.
Use an investment property calculator
If you want to know how to become rich with rental properties, the simplest and easiest method to do so is through an investment property calculator. This works by utilizing the investment property calculator to conduct a proper real estate market analysis (comparative market analysis)- a true indispensable tool for both expert and novice real estate investors. With Mashvisor’s investment property calculator, you can calculate the cap rate, cash on cash return, and even Airbnb occupancy rate for any potential investment property (whether an Airbnb rental property or a traditional rental property). Give Mashvisor’s investment property calculator a shot and make use of the 14-day free trial by clicking here.
There really is no magic formula on how to become rich with rental properties. It takes serious effort and long and careful studying to find the investment property that hits all the right spots. For the beginner real estate investor, make sure to keep investigating and learning until you join the expert ones!
If you have any more information on how to become rich with rental properties, please share them with us in the comments section.