When I was finally able to start saving some money a few years ago, I wanted to grow it as fast as possible. I researched many investment opportunities; franchises, stocks, mutual funds and Real Estate.
I have been a Realtor since 2002, but I wanted to keep an open mind towards other investment opportunities. Everything I read and researched kept pointing me to Real Estate being the best investment. So far, I have been very pleased having purchased 7 rental properties and getting at least a 20% cash on cash return on all of them. I detail how I have been able to achieve these returns in my complete guide to investing in long-term rentals.
When I was younger, I kept telling myself I did not need the finer things in life, that I was happy with whatever I had and could afford. I told myself I didn’t need more expensive things because I didn’t believe I could ever afford the things I really wanted. In the last couple of years I have completely changed my thinking process. I now believe I can achieve and acquire whatever I really want and I was doing myself a disservice by masking my true desires.
One of my passions is automobiles, I love classic and exotic cars. I purchased a 1986 Porsche 928 a few years ago and absolutely love that car. The 928 was the most expensive car Porsche made at the time it was built, but I was able to purchase the car for only $6,000. I think the 928 is one of the all time bargains for classic/exotic cars, unfortunately not all classic/exotic cars are bargains. My all time favorite car is a Lamborghini Muira, which was built in the late 60’s and early 70’s. The Muira was the predecessor to the famous Lamborghini Countach, which is also one of my all time favorite cars. A Countach will run at least $100,000, in today’s market and a Muira is somewhere in the $500,000 range if not more. Not only are these cars extremely expensive to purchase, but maintaining them will cost 10’s of thousands of dollars a year. It is not easy to maintain or find someone who knows how to maintain a Lamborghini.
I knew if I ever wanted to be able to afford a Countach or a Muira, I would have to make a lot more money or get very high returns on the money I was investing. I have been able to do both in the last few years and a lot of that increase has been from my decision to start investing in long term rental properties. I have purchased seven rental properties so far and I am making over 24% cash on cash returns on all of them. I am making over $500 a month cash flow on each of those properties. In fact I am making about $4,000 from my rental properties every month. That is $48,000 a year in additional income from my rental properties, with very little management or time required.
I know $48,000 a year is not enough extra income to justify purchasing a 100k car, but I just started investing in December of 2010. I plan to keep purchasing rental properties for at least the next ten years. My super aggressive goal is to own 100 rental properties by 2023. I have no idea how I will accomplish this goal given my current income and buying pace, but I also have no idea what exciting and lucrative opportunities may present themselves in the future. For the purpose of this article, I am going to assume I will buy three houses a year for ten years to show the income potential of long term rentals. With this strategy I could easily afford the Countach and possibly the Muira with enough saving and planning.
Cost of a rental property
I go over the cost of a rental property here, lets assume it costs $30,000 to purchase and repair one rental. You can buy your first rental for much less money using strategies listed here. You don’t have to invest $90,000 a year to buy three rentals a year, because you can begin refinancing rental properties after you own them a year and taking cash out to invest in more rentals. I also use the snowball method to pay off my loans, meaning I take all extra cash flow and use it to pay down one mortgage at a time. I usually buy my properties for about $100,000, with less than 4% interest rate and 20% down. That leaves a payment of $381 for principal and interest. Given these variables, here is a ten-year projection for the income potential of buying three houses a year each with $500 a month cash flow.
Ten year projection
Here is a chart showing the cash flow, houses paid off, extra cash flow from paying off mortgages, money paid towards mortgage reduction and total income for ten years.
Cash Flow=profit for each year
PO=How many properties are paid off
ECF=Extra cash flow from paid off properties
MRCF=Mortgage reduction amount from cash flow
Cash flow PO ECF MRCF INC
1. $18,000 0 0 $18,000 $18,000
2 $36,000 0 0 $54,000 $36,000
3. $54,000 1 $4,572 $112,572 $58,572
4. $72,000 2 $9,144 $189,144 $81,144
5. $90,000 3 $13,716 $292,860 $103,716
6. $108,000 5 $22,860 $423,720 $130,860
7. $126,000 7 $32,004 $581,724 $158,004
8. $144,000 9 $41,148 $766,872 $185,148
9. $162,000 12 $54,840 $983,712 $216,840
10. $180,000 15 $68,580 $1,232,292 $248,580
I hope the numbers make sense, I didn’t want to write a novel to explain every detail. Basically after ten years, you would have invested $900,000 to buy 30 properties(assuming you didn’t refinance or use other methods to put less money down). You would be making $248,580 a year, which turns out to be 27% on the $900,000 invested. You would also own 15 houses free and clear that would be worth 2.25 million dollars.
The really exciting thing is these numbers are unadjusted for any inflation, rent increases or appreciation to make the math simpler. My models for my rental properties show a much higher income at the end of ten years because I am making more than $500 a month cash flow per property and I am also planning on buying more than 30 houses in the next 10 years. If things go as planned I will have more than enough passive income to afford that Muira!
If you can’t afford to buy this many houses or don’t want to buy this many, you can still have a great passive income by buying one house a year. Check out my complete guide to investing in long term rental to see how I find properties, get mortgages and detailed numbers on my rentals.