Real Estate has probably made more millionaires than any other business or job. Once you understand the tax advantages and use of leverage, you can grow your empire rather quickly.
My favorite author, Robert Kiyosaki (“Rich Dad Poor Dad”), says that the government incentives real estate developers to ensure high interest from entrepreneurs.
I tend to agree. Think about when you see a rundown part of town, who do you think comes to the rescue? Real estate developers slowly buy land at low prices and begin renovating and retrofitting the neighborhood.
Multi-Generational Investing
Real Estate is IDEAL. If you are new to the world of real estate, please ensure you are reading as many books as possible. Don’t make the same mistakes I made, buying a home with no factual information. That was back in 2008, and we still own this house. But we had a rough go at it.
The acronym for IDEAL is Income, Deprecation, Equity paydown, Appreciation, and Leverage. We will go down the list one by one to ensure that we all have a good understanding of the benefits of real estate.
Income. The number one reason people get into the real estate business is income. Robert Kiyosaki identifies his three types of income as earned (job), portfolio (stocks), and passive (real estate).
Whether you call rental income passive is entirely up to you. In the article “Should You Manage Your Own Rental Properties?” I describe what goes into managing your homes. The book “The Book on Managing Rental Properties” is the bible for property management, and I highly recommend you read it before becoming a landlord.
But, we are here for the income, so let’s talk about cash flow. There are many ways to build a rental property empire. I would identify them as single-family, multi-family, and commercial.
Inflation vs. Passive Income 2
Single-family. Single-family is the slowest way to build up an income base. However, if you aren’t trying to be a real estate mogul, this way has its perks. My wife and I own three single-family homes that we bought slowly over time.
To buy single-family homes, you don’t need to establish business credit. You can purchase them under your personal credit report. Creating a business entity (LLC) may be your best bet if you are going for straight cash flow via rentals. Otherwise, you can buy a home, wait 2-3 years, move, and build your empire that way. That’s what we did.
The main perk of single-family residences is dealing with single families. I have two families in our two rental properties. We have two roommates (house hacking!) for our primary residence that pays for our entire mortgage. So tenants pay the mortgage on all three of our properties. Multi-family units bring multiple headaches (but worth it in the long run).
It is difficult to create positive cash flow with single-family residences unless you use the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat). Here you buy a distressed property under market value. You then renovate and rent it at a nice profit. However, you need a fantastic team to pull this off, especially in today’s costly markets.
The 8-Hour Mindset Destroys Wealth
Multi-family. Multi-family housing is any property under five units (2-4 units). This distinction is vital because you can still use your personal credit for these homes.
It is much easier to cash flow with multi-family housing. Instead of buying one 3,000 square foot home, you buy one 3,000 square foot home split into three 1,000 square foot units. Usually, the multi-family is about the same price as the single residence; however, you receive three separate rent payments.
Let’s run the numbers on a single-family home that costs $300,000 versus a 3-unit multi-family home that costs the same. The mortgage on both residences would be roughly $1,370.
The single-family rental would command $1,600 in rent. The multi-family would command $900 each—a difference of $1,100 in favor of the multi-family. I write more about single-family versus multi-family in my Real Estate Lifestyles series.
I Live Paycheck to Paycheck 3
Of course, with more tenants, you bring in more work, time, and effort. Being a landlord, you will see all kinds of craziness that you could have never predicted. Yesterday, one of our tenants broke their second microwave in a year. How does this stuff even happen?
Commercial. Commercial property is anything over five units, so you will need a business line of credit and entity to become a player. However, the numbers speak for themselves. If you can manage to buy a couple of apartment buildings, that may be enough for you to retire (if you have additional passive income streams.)
The book “Zero Down” does an amazing job showing you the steps to buying a commercial property. Once you see the steps, you can begin to tailor your real estate education and business prowess towards these significant purchases.
Which is best for you? We all need passive income from real estate, so we must jump into something. There is a vast range of options, from renting rooms to owning a large apartment building.
How much cash flow do you need? Start with how much cash flow you need now and when you retire. If you need $10,000/month as passive rental income, you most likely need to go the commercial route.
If you envision your total needs at $10,000/month across all income streams, then you can play around with the sources. You may have a military pension, Roth IRA, crypto, dividends, and a YouTube channel. Perhaps you only need $1,500 from rents.
The Golden Handcuffs of Lifestyle Inflation
You may decide to buy a rental property with cash to get you to this amount. Real estate is all about knowledge because information gives you options.
In the following articles, I will cover why high net worth individuals seek rental income because of tax advantages and leverage.
Conclusion. There are many ways to earn passive income from real estate. If you own land, you have even more options. I wrote about these options in “Self-Storage vs. Mobile Home vs. RV Park.”
Rental income is the first thing that comes to our mind when discussing real estate. But real estate is a mindset, so choose which form of income gives you the most staying power.
If you hate being a landlord, maybe you look into self-storage. If you have land near the highway, perhaps you build a billboard. Don’t limit yourself to doing what everyone else is doing.
The best plan is to reverse engineer how much cash flow you need for retirement. Then separate this pot of money into your various income streams. Identify how much income you truly need from real estate.
Within this final number, you’ll find your calling. You may only need one set of RV hook-ups, or you might need an apartment building—that’s the fun of real estate.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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