Rental Real Estate is the Ideal Investment – With Ideal (I.D.E.A.L) being an acronym that I’ll cover in this episode. It’s all about the many ways you make money from rental properties and what makes it like no other investment.
Welcome to Episode #25 - Rental Real Estate – The I.D.E.A.L Investment
Now first, I try to give credit to the sources for all information I present here – but for this one, I don’t actually know who came up with this acronym. I’ve heard it multiple times from different sources, so let me just be clear that I did NOT create it.
So, with that out of the way – Ideal (I.D.E.A.L) is a great way to remember the many benefits of Rental Real Estate Investing.
The [I] is for Income.
Its not just first in I.D.E.A.L because it fits perfectly (“Rent” doesn’t)… It’s also first because this is really why you should want to own Rental Properties to begin with – the so-called "Passive" or Rental Income.
We can debate just how “Passive” it is, but I can say for 100% certainty, that if you have a cash-flow positive Rental Property (one that’s still cash-flow positive even after setting aside something like 20% of the rent for reserves, plus paying all debt and expenses) – then it’s hard to go wrong. Cash-flow can solve just about any problem. What’s cool about Rental Properties is that they have the potential to pay for themselves and kick off nice cash-flow on top of that.
Rental Properties are a Business. And just like any Business, they should produce Income. The Tenants are like your Customers, but they could almost be considered employees, because they work on your behalf (to pay the rent). The House or Rental Unit is both your product and your service. And your Customers (Tenants) pay for this in the form of Rent. And when the Rent covers all the debt payments, expenses, reserves and there's still money left over (called positive cash-flow or profit) – it’s an amazing thing to behold. Especially when you only had to put down 20% to purchase it (which I’ll cover later in the IDEAL acronym).
The [D] is for Depreciation.
This is the greatest tax savings trick of Real Estate Investing. You get to Depreciate (or write off) the value of the land improvements (meaning the building and what’s within) – over some period of time, like 27 ½ years in most cases. But ways exist to accelerate the Depreciation into a much shorter time, including down to the same year the property was purchased. There are scenarios where you could buy a property on December 31st (owning it for less than a full day), but write off a full year of Depreciation, as if you owned the property for the full year!
However its handled, this becomes a write-off (or offset) of your taxable income. You can actually have a profit, but through depreciation, show a loss on your taxes for that year and owe nothing in taxes. I’ve mentioned before how this and other tax saving factors of Rental Real Estate took me from owing $14,000 in taxes almost every year to getting $6,000 back as a refund – a swing of $20,000 because I had purchased two rental properties that year, and I owe much of that to the magic of the paper loss created by Depreciation.
The [E] is for Equity.
Equity is created in two ways… First it happens every month when the mortgage payment is made and some amount of that payment goes towards the principle balance of the loan, thus causing you to owe less and therefore have more Equity. Through Amortization, this amount is small in the beginning, but as time goes by and the loan enters year 5, 10 and 15… The amount of each monthly payment that goes towards principle payment gets ever larger and larger. It doesn't take long before hundreds of dollars of principle payment takes place each month, potentially creating an equal amount of Equity growth.
The second way that Equity is created comes from Appreciation, the [A] in IDEAL that I’ll mention next. This is sort of a phantom increase, because its not realized (becoming real) until the property is sold. But it’s nice to update your Net Worth each month and calculate your Equity growth from both mortgage principle pay-down through amortization and property value Appreciation.
The [A] is for Appreciation.
Yes, Rental Properties can simultaneously Appreciate and Depreciate! Because like I said earlier, the Depreciation isn’t real - it's only on paper. But the Appreciation can be all-to real, and it comes in both the value of the property typically going up over time (sometimes drastically so); and the rental income also tends to increase over time, creating more cash-flow that hopefully exceeds any increase in expenses.
If you buy your properties in the right areas, its hard to go wrong with Appreciation, as good areas of town tend to stay good or get better; whereas bad areas tend to stay bad or get worse. And while there are always the bad areas that get improved, you don't want to be betting on that. You want to buy in areas that are either already good or clearly in the path of progress towards becoming so. And these areas will tend to Appreciate well, taking your Net Worth up right along with them.
So buy in places that people actually want to live. That way tenants will be glad to have a home there. And they'll be willing to pay ever increasing rents to stay there. And if you ever decide you want to sell your property, it'll be worth more than what you paid for it, because again, people want to live there, they'll be willing to pay an increased price to do so.
The [L] is for Leverage.
IMHO, Leverage is the greatest benefit of Rental Real Estate Properties, in that you can typically get a Bank or other Lender to give you 80% (sometimes more) of the money to purchase the asset – and at what are currently all-time low interest rates! But I’ve spoken about this multiple times already. I just can’t help repeating myself here, as I’m RE-amazed by this each time I buy another Rental.
What other investment can you name outside of Real Estate, where a Bank or other Lender will gladly provide you with $0.80 out of every $1 needed to purchase a property - and then 100% of the dollars needed to rehab it!? But yet you get 100% ownership; and keep 100% of the tax benefits; and keep 100% of the income; and 100% of the Equity and Appreciation? It really is the best deal going for any investment, so start savings your 20% now and get your credit right to get in the game. It's not too late to grab your piece of the IDEAL Investment.
So that’s it… Nothing all that long or drawn out here on this. I just wanted to give my take on IDEAL. Remember this acronym when you’re trying to explain to your stock market investing friend or family member, why you’re going to run circles around them when it comes to investment return. And why when the stock market crashes and they’re wiped-out, you may be excited as to how this may allow you to make even more money than before.
The great recession happened in 2008 / 2009, but there was never a better time to buy Real Estate than a couple years later in 2010 / 2011. I regret whenever I think about it that I did not get into Real Estate Investing until 2015. When there’s another downturn (there always is), I’ll be ready this time.
Hopefully you won't still be letting your fears of Tenants, Toilets and Termites - stopo you from benefiting from the IDEAL Investment. And if you get a Rental Property in the Raleigh / Durham area that you'd rather not manage yourself - hire me and Blue Chariot Management to handle it all for you. Check me out at BlueChariot.Management.
Also, I've just changed my Real Estate license association over to eXp Realty - so Blue Chariot Realty is now brokered by eXp Realty. This gives me access to tools, systems and training that will allow me and Blue Chariot Realty to excel in the remaining months of 2019, then on into 2020 and beyond. So if you know anyone in the Triangle area of North Carolina who needs to buy or sell a house, please have them visit BlueChariotRealty.com. A new version of this site is coming that will be fully integrated into the eXp system and Triangle MLS.
So I don't know about you, but I'm putting things in place to do big things in the coming months and years. I'm on the verge of achieving life long dreams - some of which I'll be able to tell you about very soon. I'm just back from Egypt and Dubai, so time to start planning our next trip. What do you have in works for the final quarter of 2019? What are you putting in place to make 2020 the best year of your life? And how can I help?
You're helping me by listening to this Podcast, and I hope the same is helpful for you. It's been said that the best way to learn is to teach, so as I discuss these topics, it only serves to strength my own knowledge and understanding of the same. So THANK YOU - and let me know if I can be of any greater aid to you or if there is something specific you wish to hear or learn about.
The acronym is I.D.E.A.L. - where I = Income; D = Depreciation; E = Equity; A = Appreciation; & L = Leverage. These are the benefits of Rental Real Estate Investing and how you make money in multiple ways. This is how it's not unheard of to make a return of something like 50% with Rental Properties; whereas you may be lucky to make 5% with other investments. Even if you are making 10% or 15%, even 20% with other investments - you can often do twice as good with well purchased, well located, and well managed Rental Properties.
So this episode of the... and Landlord Podcast is just to get you thinking about the many benefits and ways of making money as a Rental Property Investor... Does your investment in Precious Metals (Gold & Silver) produce an Income? Do you get Depreciation from your Stocks? Now maybe you have some Equity in your Stocks or Gold if they are now worth substantially more than you paid for them, so you might have some value Appreciation there - but was a Bank or other Lender willing to give you a loan of 80% of the purchase price? If there was any Leverage involved, it was only against the value of other Stocks you already owned.
Rental Real Estate is the only class of investment of which I'm aware that provides all of these I.D.E.A.L benefits. An investment that can pay for itself because it produces an income. Gives great tax benefits because of Depreciation and other expense write-offs. Builds Equity quickly through both Amortization (Mortgage Pay-down) and value Appreciation that is highly likely if you are buying where people actually want to live. And skyrockets your Rate of Return (ROI) by leveraging 80% of the asset price from a Lender, leaving you to only put in 20% - yet you are still 100% owner!
Rental Real Estate is the I.D.E.A.L Investment!