In order to build a long term sustainable real estate business you need to focus on a hybrid approach of both active and passive types of investing.
Personally, I love rentals and the benefits they provide but we need the income from rehabbing and wholesaling to purchase these little “freedom makers”.
I call them freedom makers because a good sized, passive income property portfolio can generate enough consistent monthly income to make lifestyle changes and decisions with ease. If you don’t want to work 9-5, grind out double shifts, and want to take a month or 2 months off it doesn’t matter when you have a steady passive income that is fattening up the bank account day to day…. even while you sleep.
That’s pretty AWESOME!
Don’t get me wrong big checks from rehabbing real estate and wholesaling properties will bring in big paydays but that money has a habit of being utilized quickly. If you don’t have a plan you may find that as you make these big chunks of cash you start acquiring liabilities instead of assets.
You know what I’m talking about… the $500 car payment on the new “Beamer”, maybe some upgrades around the house, you pull a credit line and make another couple hundred dollars a month, new furniture, vacations, buy a bigger house etc, it all starts to add up and you have to work harder and harder to feed that lifestyle.
“Delay the short term immediate gratifications so that you may lead a wealthy lifestyle for the long term”.
Hybrid Real Estate Investing As defined by Joe Barletta
“Convert active income from wholesaling and rehabbing to passive income with cash flowing rental properties”.
Wholesaling and rehabbing real estate require time, effort, systems and most likely your day to day involvement. Even if you are well established and have been able to get this side of this business outsourced, you still put your time in to get to reach entrepreneurial freedom.
Rentals are a little different if you buy them right and have done your homework, they can be 100% passive from Day1, as I did with mine. We purchased our first rental in 2012 and just recently acquired our 7th long term rental property.
My idea of passive income means that I have very little involvement with the day to day activity of that asset. All of my rentals are professionally managed, well maintained, and fully occupied.
My property manager charges 9% of the gross monthly rents. My average rent is $935, so about $84 each month per property goes to management. A management cost is a fee that I gladly pay. I never met or hear from my tenants, nor do I want to either.
The only thing that matters is getting that deposit each month into the bank account, the properties are maintained and managed efficiently because I know for a fact there is no way in hell that I could do better.
Money comes in, the bookkeeper pays the mortgages and each month there is a little more that adds up in the account and the tenants are paying down the principle.
“By having the right management company in place it allows you to focus on things you do best in your business…for me that is rehabbing and wholesaling”. Why buy single family rentals?
To start they are an extremely undervalued asset class. There are plenty of pockets across the US that continue to have a lot of bargain real estate to be purchased and will cash flow.
Interest rates will probably never go this low ever again. For example our primary residence is locked in at 3.75% for 30 years and our investment properties all have APR under 5%.
Non owner occupied rates under 5% is mind boggling to me. That is ridiculously cheap money for us as investors to utilize.
Below I outline some of my favorite advantages for owning Rental property and investing in real estate.
“Keep in mind there are other advantages but these reasons and advantages combined in unison create a synergy that makes real estate one HELLUVA investment”…
ADVANTAGE #1 Locking in Cheap Debt To Short The Weakening Dollar
Its no secret that this country just keeps printing money.
Take a look at http://www.usdebtclock.org/.
A little warning though once you see it it will probably haunt your dreams…its tough to wrap your head around the magnitude of these numbers.
Note the unfunded liabilities as of 1/21/17 we are around $104,881,000,000, that is TRILLIONS folks, not billions.
Now as more and more baby boomers retire and the work force will be growing smaller and smaller, you have to wonder how Medicare and Social Security will perform when there will only be 2 payees for every 1 beneficiary.
Today there are 4 payees for every beneficiary, cut that in half and that is where were heading for in 15 years.
According to Laurence Kotlikoff and Scott Burns’ book entitled The Coming Generational Storm: What You Need to Know About America’s Future: In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers.
We are heading for some MASSIVE inflation. Property values, costs of goods, housing gas, heating fuel, rents etc will all rise, but your debt will be locked in at today’s low rates…but if the property cash flows from day 1, you have the ultimate inflation hedge.
As your tenants pay down the mortgage debt the equity increases and along with the cash flow as you increase the rents over the years.
This is all hypothetical but the writing’s on the wall, we are facing some serious changes.
ADVANTAGE #2 - Tax Strategies
One word “depreciation”.
This is a very powerful overlooked facet of owning rental property. Good Ol’ Uncle Sam lets us depreciate a portion of the building, not the land, each year, as an expense and reduce taxable income.
In our case where we are acquiring properties that actually produce positive cash flow and make money, we are able to receive all or a portion of that money tax free, thanks to the phantom expense of depreciation.
Advantage # 3 - Leverage
This goes hand in hand with Advantage #1.
Real Estate is an asset unlike stocks or bonds where banks will actually lend you money to purchase. This can be as much as 70-80% of the value.
Using leverage allows you to acquire the asset, control it and increase the value through improvements. In addition you can maximize your cash on cash return while taking full advantage of the depreciation in tax liability and the appreciation of the asset.
Advantage #4 – Control
I mentioned this above. When we control a property we have the ability to directly increase the value of the asset. When we make improvements to a distressed property this will enable us to increase rent and maximize the value of the asset.
Advantage #5 – Cash flow, Cash flow, Cash flow , did I say CASH FLOW!!!!!
Very simply put, the tenant pays the monthly rent on the lease agreement.
We pay the expenses which include mortgage, insurance, taxes and insurance, also known as PITI, and any other misc costs and what is left is Cash Flow.
As we accumulate rentals we increase our cash flow. When we reach a point where the cash flow is significant enough to cover all living expenses you have achieved a level of financial freedom that does not rely on your weekly paycheck or job anymore.
Congratulations, I am picturing it now beaches, cocktails, sunsets … alright enough day dreaming back to the article ;-)
Let me say this… my highest and best use of time is rehabbing and wholesaling.
I love owning rentals but I am not a landlord. It doesn’t fit my personality. So I gladly pay a great management company a small piece of the action to look after my assets so I can focus on what I do best.
I think this is where most people fail and hit the wall with rentals because they try to do it all themselves. In order to scale and build a sizeable portfolio you need a team.
If you would like to get more information on how to build your rental portfolio enter your email at joebarletta.com for the latest trainings, blogs and videos on real estate investing.
To your success, JB