Rentals are probably the most popular especially for people who are looking to do the long buy rent and hold or longer passive income.
The first way
The first way to make money through rentals is when you buy. A lot of people get anxious to buy a property and the first property that comes up they put in an offer and they don’t negotiate property. You have to look for the right deal. The right deal comes along once every week as long as you know what you are looking for.
So it is important to set a price range for what you are looking for and when the property comes along you want to look at how that property relates to market value. Keep in mind that you are always looking for a deal. That deal relates to what other properties are going for.
What you are really looking for is a Motivated Seller. For example a motivator seller would be someone who can’t afford to hire an agent because they don’t have enough equity in the property. They bought this rental property and now they can’t afford to sell it because they can’t afford to hire an agent. So they post if for sale by owner and have done some open houses on their own. So the first way to make money is to buy a home and when I say make money this is how you will build up equity.
The second way
The second way or most popular way is to look at expenses vs the income that you bring in. When I talk about expenses I mean everything, mortgage, taxes, utilities, insurance, maintenance, repairs and so forth and you put aside a certain amount every month to cover these expenses.
For example, let’s say your rents are $1000.00 a month you should put a certain percentage away to cover some of the expenses keeping in mind the age of the home. If your rent is $1400.000 and your expenses are $1000.00 a month you are making a profit of $400.00 for that unit/property. Now you are making a cash flow of $400.00 and depending on how many units on the property so if it’s a duplex, fourplex or an eight-plex it really adds up and that is really what builds up your cash flow.
The third way
The third way to make money in Real Estate Rentals is through appreciation. Now a lot of times you see comparison of real estate against stocks and bonds and they show you the average price increase over a period of time and you will see the stock of let’s say 2-3 percent and then you will see Real Estate. When you compare Real Estate with Stock and Bonds there really isn’t that much of a difference or they will say you can make more money in Stocks and Bonds.
The thing is they are not talking about the dividends or the yields that you are making off the monthly cash flow, or the money that you made or earned when you first bought it or the appreciation. When you look at Real Estate you want to look at that appreciation that increase in price and that equity that is being built in there. So over the long run you may want to use that equity to finance another investment and that is all free money for you. You take that money out and it’s a loan to yourself and you go out and you invest in another property. This is equity built as a result of you owning the property and as a result of your tenants paying for it, paying the rent and all the bills for you.
The fourth way to make money when you own rentals is through principal pay down. What that means is when you buy a property and you take out a mortgage for that property each mortgage payment there is a portion of the mortgage that goes towards the principal of the loan.
For example, let’s say you take out a mortgage for $100,000.00 each month your payments are $400.00, well $325 of that will go towards interest. Yes, that’s right when you amortize the property over 25 years your payment is heavily loaded with interest in the first few periods. As your mortgage matures the principal gets higher and your interest reduces. So every month you are paying down the original loan. So $100,000.00 loan over a year you might pay another 1000-2000 down so at the end of the year you have more equity in the home as a result of the principal pay down.
So that is why Rentals are so popular because of the multiple ways to make money using Rentals. It is also if you have a good property, good tenants and you haven’t spent too much money on maintenance. So keep in mind that the age of the property or unit is important. An older home will have more issue than a new home or apartment.