For those who have stopped by before, you may have seen that I have a goal this year to dive into the world of real estate and purchase and rental property.
However, I’ve yet to really explain why it is I’m choosing this route. After all, depending on whom you talk to, real estate could be either the easiest/best thing ever, or a “why on earth would you do that” type deal.
There’s real risk involved in real estate, and if you don’t know what you’re doing it could turn out very poorly.
Despite all the risk involved, I’m still determined to jump in. There’s several reasons for that, but here are a few of the bigger ones:
Currently I’ve got about 86% of my Net Worth tied up in stock market investments. The rest is in cash/my car.
If I were not saving up for a rental property, that percentage would likely be even higher. If you ask me, that’s a pretty substantial portion of my Net Worth in the stock market.
As the realist in me would say: I have all my eggs in one basket.
When things are going well (as they have for the past 8-9 years) that’s great; but we all know that the good times don’t last forever.
What’s more, sure, historically the stock market has returned 7% on average annually, but that does not guarantee a 7% average is what we’ll get in the future.
Don’t get me wrong, I’m not saying I’m going to stop investing in the stock market. I will absolutely still take advantage of my tax advantaged accounts and max those out for the near future.
However, I do realize that the future isn’t going to be all roses. And when the bad times come, I don’t want all my eggs in that one basket.
Enter real estate: a great way to diversify my investments and give me an asset that isn’t directly linked to the stock market.
By identifying and managing a good rental property, there are many other benefits that can come from it. Such as…
One of the things that really caught my eye when it came to real estate: the cash flow.
There are several markets where you can purchase a good property and then rent it out for a positive cash flow.
What does that mean? It means that each month, the rent you collect from tenants is higher than all of your expenses (mortgage, taxes, insurance, maintenance, etc).
That positive cash flow each month is straight income that you can do whatever you want with!
Maybe save it in cash for property emergencies, or save up for another rental property. Heck you could even take that income and invest it into the market!
What cash flow really has me intrigued about is what that does for my FIRE plans.
Lets say I’m going to spend $40,000 a year in retirement. The 4% rule says I need to have $1 million dollars in order to be Financially Independent.
However, if I can find a property that, on average, nets $500/month in cash flow, That’s $6,000/year. Now I only need to cover $34,000 worth of expenses every year. This means I only need $850,000 in investments to pull from!
The more cash flow, the more my expenses would be funded, the less I would need to save total.
I can’t forget to mention another benefit:
Loan Pay Down
I’m not in a position to be paying cash for properties, so I’ll surely be getting a loan to finance the rental property.
But guess what.. I won’t be paying it!
Yep imagine that, taking out a loan and getting income from it (positive cash flow) while not paying it off yourself (can my car loan work that way please??)
The thing is, the tenants of your rental property are going to be the ones paying your mortgage for you. Each month, they’ll be the one’s chipping away at that loan through their rent payment as you gain more and more equity.
Eventually, that loan is going to get paid off in full. Now you completely own a property without having had to pay any of the mortgage… how cool is that!?
Plus, even more monthly cash flow now 🙂
Lastly, I like the sense of control that investing in real estate can bring.
When investing in the stock market, you are completely at the mercy of Wall Street or economic conditions you have no control over.
For whatever reason, it can sometimes leave me with an uneasy feeling knowing that.
With real estate, you are largely, if not all in control. Sure, you can’t control the appreciation and changes to your overall rental market, but you can control most everything else.
You choose the property, you choose the property manager/tenants. You choose rent prices, renovations, etc. You’re your own CEO! (make sure to pay yourself the big bucks 😉 )
Coming back full circle… so why real estate? My answer is why not real estate?
There are plenty of risks involved, but you can say that about any investment.
I’m definitely no guru, and I’m sure whenever I pull the trigger on my first property I’ll take some lumps and learn many things the hard way.
Despite all this I see enough potential in this area to truly think this could be a great path going forward.
I’ll be sailing in uncharted waters (for me) but I’m steering the ship and a few people have left me some pretty reliable maps 🙂
Do you own any rental properties? How has your real estate journey gone? If no, would you ever consider it? Why/Why not?