Real Wealth Through Rental Properties

Since the market has cooled in many cities, many new investors are starting to panic because they are worried about how to now make money in real estate. They can no longer buy a property, slapped on some paint, and sell it six months later for a $50,000 profit.

These investors are used to making money through quick appreciation or asset growth. This is really a secondary means of making money in real estate. The recent boom has given the false impression that property prices always go up.

The key to building true wealth in real estate is through buying and holding. Good and consistent tenants can create wealth for you by paying for mortgage, insurance, taxes, and other fees through rental payments. The power of leverage also allows you to make huge returns by using the banks money. If you put $10,000 down on a $200,000 home, with 5% yearly appreciation, you will have 100% yearly growth of the money that you actually invested.

With real estate you have many vehicles for creating and building wealth. Since it is very difficult to predict short-term prices, it is important not to rely on appreciation alone.

The following principles will help in your mission of wealth building:

Positive Cash Flow: Obtain a property that can command rents that will cover the mortgage, taxes, insurance, etc and still have something left over for reserves and profit.

Equity Growth: Assuming you have a mortgage that pays principal and interest; as tenants pay their rent, they are also paying a portion down on the balance of your mortgage. The longer you hold the property, the more they reduce the balance of your mortgage. By reducing your debt, this contributes directly to increasing your net worth.

Reducing Your Tax Bill: Through real estate you can take advantages of the numerous tax breaks offered to property owners by Uncle Sam, thus reducing your personal tax bill. This will result in increased income and equity growth.

Asset Growth: This is old fashion appreciation. As you hold your property for the long term, it will increase in value, which will increase your net worth. This is compounded by the fact that your mortgage balance will also decrease with time.

Increased Rents: Over time, the cost of living increases, this will allow you to also increase your rent. If your mortgage payment stays fixed, this can allot you hundreds of dollars of additional cash flow per year.

These principles should be considered if you are looking to seriously invest in real estate for the long term.