Owning a rental property has a lot of advantages and you will thank yourself later in life that you spend your time and resources building up a rental portfolio of cash flowing assets that has appreciated in value over time.
We will touch on multiple ways on how you can approach this, and one of these methods I haven’t really heard anyone talk about, so make sure to read all the way through to see what that is and how I plan on growing my rental portfolio.
Table of Contents (Click to expand)
Why should I buy a rental property?
Passive income: By renting out your property, you can generate rental income that can help cover the property expenses, such as mortgage payments, property taxes, insurance, and maintenance costs. So mortgage paydown and overtime you will own the asset free and clear.
You would also be building –
Long-term wealth: Real estate has historically been a wealth-building asset class. When you own a rental property, you not only benefit from the rental income but also from the potential appreciation of the property over time. Real estate has the potential to appreciate in value, allowing you to build equity and wealth as property prices increase, which has trended upward historically.
Diversification: Owning rental properties provides diversification to your investment portfolio. Diversifying your investments across different asset classes can help protect you from market fluctuations and improve your long-term returns.
Also, what real estate is used for by the rich is for its…
Tax advantages: Rental properties offer several tax advantages that can help you maximize your investment returns. Expenses such as mortgage interest, property taxes, insurance, repairs, and maintenance are generally tax-deductible. Additionally, you may be eligible for depreciation deductions, which can help offset rental income and reduce your taxable income.
Also, real estate in general is a good hedge against…
Inflation: As inflation rises, property values and rental prices tend to increase, Real estate investments have historically performed well during inflationary periods, making them a valuable asset to protect against the effects of inflation.
So, what ways can you use to take down a rental for yourself…
Well the first way is…
BRRRR
Doing the Brrrr method to buy rental properties is probably one of the best ways to grow your rental portfolio.
It involves buying a property, rehabbing it, renting it out, refinancing to pull out your initial investment, and then repeating the process to grow your rental portfolio. So, it stands for Buy, rehab, rent refinance repeat.
The reason this is such a sought-after method to get rental properties, is because you are buying a distressed asset, fixing it up and increasing its value, thereby creating equity and owning a property with no money in it after you refi all your money out of it.
So, let’s go over to the BUY side, because that’s what a lot of people get hung up on. You can accomplish this by using OPM or other people’s money. This could be a family, friend, investor, private or hard money.
You can work out a profit share on the rental income OR if you bought low enough you can refinance all the investors’ money out and more to give them a return on their money.
To find a property in the first place you can contact realtors and let them know what you are looking for, work with wholesalers, or do some direct marketing to motivated sellers.
Once you find the property, use OPM to fund the purchase and rehab, you will then rent it out to stabilize it and get a refi loan, which is usually around 75% LTV and repeat.
This is a great way to create wealth overtime, or to even take down your first rental. There’s another way that works if you have little to no money, and that’s..
Subject to
Buying a rental property “subject to” an existing mortgage means that you’re buying the property while leaving the existing mortgage in place. Essentially, you take over the mortgage payments without formally assuming the loan.
So to simplify it, this is thanks to Pace Morby, and an analogy he uses. It’s like finding someone who has a car, lets call it a Toyota Camry, and can no longer make payments on the car, so you offer to make the payments for them and they are willing to do that because they would rather that then getting the car repo or damaging their credit.
You can then buy it on terms, take over the payments and then rent it out.
It works the same way with real estate, you buy the property subject to the existing loan and take over the payments. You will need to work out the terms of the agreement and perform property due diligence. This, overall, is an excellent creative way to grow your rental portfolio without using our own cash or credit.
It’s important to note that buying a property “subject to” carries some risks. Some lenders may have due-on-sale clauses that could trigger the loan to become due if the property ownership changes. I’m not an attorney so please Consult with one or a knowledgeable professional to navigate the risk and process.
Next we have Probably one of my favorite ways to get your first rental property ..
It’s where you buy a property, like a duplex and live in one of the units and rent out the rest to cover your mortgage payments or even eliminate it all together. House hacking has a lot of advantages. One of the ones that come to mind at first is that you can take advantage of loan products that apply to owner occupants with low down payments, first time home buyer programs and favorable interest rates.
This is a great way to get into a multi-unit rental with little money upfront.
But advantages like..
By renting out a portion of the property, the rental income can cover your mortgage, property taxes, insurance, and maintenance costs. That means you get to enjoy the perks of homeownership while building equity and wealth. Plus, with lower housing expenses, you’ll have more money to save, invest, or pay off other debts.
Also house hacking is..
Less risky than other forms of real estate investing.
Annddd You’re
Learning by Doing:
it’s a hands-on learning experience for newbie real estate investors. When you live next to your tenants, you learn about property management, tenant screening, lease agreements, and maintenance. It’s learning by doing! This practical experience gives you a solid foundation for your future real estate investments.
Ultimately it will jumpstart your real estate career:
Because your tenants’ rent payments contribute towards your mortgage, it allows you to build equity and wealth through principal reduction and property appreciation. Over time, the value of your property can increase, which means you build wealth.
The next way to take down your first rental property is one im working at doing now and is something no one talks about but its….
BRRR
But without the extra R. Let me explain. It stands for Build, rent, refi and repeat. With this strategy you look for infill lots that allow you to build SFR or multi family. You find OPM, other people’s money to fund the deals, and you would be building the rental property from the ground up.
So right now, I’m looking for land in particular pockets in my city that allow me to develop duplexes. I will be sourcing the land myself and teaming up with an experienced investor to help with the entire process.
The average build takes about 12-14 months, because of permits, architects and approvals. Once it’s built, we will rent out both units and refi the initial investment out of it and work out a cash flow split with my partner investor on that deal.
The reason I like this model is because I can generally build a 2400 sq ft duplex for close to the same as a 2400 sq ft single family residence. This will allow me to have 2 doors or tenants and I could cashflow more than if I have one SFR.
I like this because everything is new, so maintenance cost will be low for the first 10 years, and you will have warranties on a lot of the items.
It has less surprises in the rehabs. You can usually get close to your projected cost to build. With rehabs you can find surprise issues that weren’t factored into the original bids that you received.
And, I already have all my systems and processes in place to buy land, so I just focus that target on my desired areas.
This is new for me, so make sure to subscribe and stay up to date on how it goes.
So for you to duplicate this, find an investor partner to purchase the lot and use their experience to get a construction loan and see if you can use the land as collateral.
