In an effort to provide readers with truly helpful content, I have asked fellow real estate investor, friend and mentor Richard Scarbrough to help. A frequent guest on the Smarterlandlording Podcast, Richard is a wealth of real estate knowledge. His experience in the business totals over 40 years, and it is perhaps best if I let him describe some of what he has done.
When I started investing in real estate, there was hardly any information available. I had great desire and blind optimism to do a lot of different things such as buying homes, moving them, infill lot development, apartments (8, 24, 40 and 216 unit complexes) buying and selling mortgages. I thought if I could own 100 homes I would be rich, so I bought homes from Northaven to Southaven (communities here in the Memphis, TN area), any type property, anyway I could finance it. I also bought, rehabbed and flipped to retail buyers over 400 homes. Along the way I tried numerous management companies that always seemed to manage my properties in a way that I had no cash flow. Some of the above ventures lost money (which I call “seminars” ). But what was more important and cost the most was the lost TIME, as it took me almost a decade to get to back to even after the “216 unit apartment seminar.” Now at age 71 looking back at 40 years of investing I realize that about a third and maybe half of my investing time was spent recovering from mistakes, therefore anyway we can educate others to avoid these errors is time well spent.
From time to time, I will be publishing some of what I am going to call “Richard on Real Estate.” I hope you will find these posts helpful and entertaining. Let me know what you think or if there is a topic you would like to learn more about by leaving a comment below.
Without further delay then, here is Richard on Real Estate.
The Advantages of Owning Rental Property
There are four major advantages of owning rental property:
- Cash Flow – This is usually defined as the difference between the monthly income and the PITI (principle, interest, taxes and insurance) monthly payment. This one gets all the conversation, but is not the most beneficial until the property is paid for. You should also allow for repairs, maintenance and vacancy loss. You will get maximum cash flow if you are the manager.
- Equity Build Up – Equity build up is gained from the loan being paid down each month, depending on the term and interest rate of the loan. Equity buildup can be several hundred dollars a month. With a fixed rate amortized loan, equity buildup increases every month.
- Price Appreciation – As our government prints money to solve problems we will have inflation. Real Estate is one of the few investments that benefits from inflation, as inflation increases the property values and pushes rents up.
- Tax Savings – You can depreciate your property as if it was a piece of equipment wearing out and deduct actual dollars off your income tax. This saves you real dollars while you own the property. This tax advantage is the main reason I started investing in rental property. It was very distressing to work so hard and pay more than one third of my income in taxes every year. Not paying taxes legally is real money.
Each of the above benefits should be figured as a return on your investment, and each one may be worth more to you in different seasons of your life. The great thing about real estate investing is that you get all four all the time.
It has always amazed me that if you say the words “Rental Property” to anyone, you get a flood of negative comments. The only things people think and talk about are all the problems with tenants, such as not paying, tearing up the property, etc.
When confronted with this I always ask people if they have ever had a problem with their car. Yes is always the answer. I ask further if they think they might have a problem with their car in the future. Yes again. Going deeper I ask if these problems mean that you do not want to own a car. No, is the answer. People want a car because the car takes you from where you are to where you want to be, even though you might have problems. Rental property can do the same thing – take you from where you are to where you want to be. This is what people do not think about.
Rental property gives four major financial benefits outlined above along with many other non-financial ones. It can give you monthly cash flow as the tenants pay off the mortgage, inflation will pull the rents and property value up higher, and tax benefits that can lower your income taxes to almost zero.
Just as traveling is easier with a car, advancing your financial position is easier if you have rental property. There are a lot of good people who are in different seasons of life who will pay on time and take care of property. Owning residential rental property really does offer many advantages.
Well said Kevin. Car and a good spouse everyone wants even with all the troubles that come along. I agree that you will get maximum benefits of rental property if you manage well. Management is the key. You said that in the past. I followed that advice and started managing my own properties. Even Though we never met and you don’t know me, I appreciate your guidance.
Kay,
Thanks so much for the kind words! I am glad I have been able to help.
Kevin