I m trying to buy as many rental properties as I can, because of low-interest rates and the incredible returns I am seeing on my current rentals. I am currently making over 24% cash on cash return on all 7 of my properties. I explain how I do this in my complete guide to purchasing long-term rentals.
The key to my strategy and obtaining great returns is being able to leverage my money. Leveraging means you are not paying cash for investments, but using other people’s money in order to use less of your own. By using other people’s money, you can buy more properties and increase your returns on the total cash invested. Being able to borrow money to buy a rental properties is one of the biggest reasons rental properties are such a great investment.
Cash versus loan returns
If you buy a $100k house with cash and make $500 a month in cash flow, you are making about 6% cash on cash return from your cash flow. If you buy a $100k house and put 20% down, you will have a mortgage payment, but the returns on your cash invested increase. If you are paying a 4% interest rate, your principal and interest payment will be about $382. You are only making $118 a month cash flow after subtracting the mortgage payment, but you are making 7% cash on cash return, due to the lower initial investment.
You are actually making much more than a 7% return in the above scenario, because you are also paying down the principle on the loan by an average of $118 each month. That $118 equals another 7% return on your money that you would not have on a cash purchase! You’ve more than doubled your return by getting a mortgage instead of paying cash. The really exciting part about using leverage is when you get higher cash flows, the returns increase even more. If you can make $800 a month cash flow without a mortgage, you will be making 9.6% cash on cash return. With 20% down on the same property, you would cash flow $418 a month after mortgage payments and make over 25% cash on cash return just from cash flow! The way to make big money in rental properties, is finding properties that will give you big cash flows and buying as many as possible, while leveraging your money. I currently make over $500 a month cash flow on all my properties, while leveraging my money.
Ability to buy more properties
The best part about leveraging your money is it allows you to buy more properties. You can buy three or four homes with $100k instead of just one home paid for with all cash. Using the cash flow figures from above and buying three properties instead of one, you are now making $1254 a month cash flow instead of $800 a month. Not only does your cash flow increase by purchasing more properties, but the equity pay down increases, the tax benefits increase and the appreciation increases. If you are able to purchase homes below market, then every time you purchase a home, your net worth increases as well!
Advantages of rental properties are multiplied with leverage
Rental properties have many tax benefits including depreciation. The IRS lets you depreciate a percentage of your rental properties every year and write that off as an expense. If you have three houses instead of just one, you can get triple the tax deductions.
If you have three properties instead of one and your market appreciates then you also have the benefit of triple the appreciation. It is the same situation if rents go up. The more properties you have the more money you will make.
With multiple rental properties you are also paying down the loans on three properties. When you think of the tax savings, possibly appreciation and equity pay down the returns shoot through roof.
Downside to more rental properties
There is a downside to more properties. You will have to shell out more money for repairs and improvements since each property will need repairs, not just one. You will also have three rental properties to manage instead of one. However, if you are able to cash flow $400 or more with a mortgage, you will still be way ahead of the game by leveraging your money. You will also have more total cash flow coming in, which is very important in my system.
In my system all your extra cash flow is spent paying down one mortgage at a time. The more cash flow coming in, the faster you can pay off a property. With one property cash flowing $800 a month you could pay off a 30 year mortgage in 6.5 years. With three properties cash flowing $1254 a month you can pay off a 30 year mortgage in 4.5 years. Once you pay off that first mortgage the water fall effect begins. The extra cash flow from paying off the mortgage goes into paying off the next mortgage even faster.
The principle and interest on the mortgage that was paid off above equals $382. When that mortgage is paid off, that $382 a month equals $4,584 a year, which will go toward paying off the next mortgage. If you can keep buying properties their cash flow will pay down the mortgages even faster. Pretty soon you will be paying off mortgages in a year or less with all the cash flow coming in. That is when the fun really starts!