How Rental Properties Build Long-Term Wealth

Securing your long-term wealth can ensure generational stability for your family. Using rental properties, you can create a foundation for wealth that will grow, outpacing inflation over time in a secure investment. Regardless of the real estate market, rental properties remain in demand: in the United States, over 34 percent of households are renters. Such a hungry, constant market guarantees your property investment can continue to generate income consistently — along with more substantial wealth as you continue to invest your profits.

Renting Properties and Passive Income

The main idea with rental property investment is that it generates income passively. Once you get it set up, you can hire a property manager to keep things running smoothly at your properties. As you generate income from each unit, you invest in more until you’ve amassed wealth.

If you’re at the beginning of your journey, you may consider the “BRR” strategy, which stands for buy, rent, and refinance. With this strategy, you purchase your initial investment, repair it if needed, then rent it immediately. While the rental generates income, you can grow your real estate investment venture quickly by refinancing your property, using the money from it to invest in your next property. This is a fast-growth strategy many swear by, but it works best in a hot market.

As you grow, your properties continue to generate passive income due to the accrual of rent you take in. At this stage, be mindful of expenses: your property manager fees, repairs and maintenance, taxes, HOA fees, and more can add up fast. While you invest hotly, you should put your passive income towards other wealth-building investments if possible. Your new acquisitions are financed by refinancing the previous property, until after property four or five, when you should be generating enough rental income to avoid having to do that anymore.

Investing Your Real Estate Earnings

Remember how we said rental properties are a foundation of wealth? That’s because you can build on top of that consistent, steady income — and reduce your risk — by diversifying your investments. You can springboard an investment portfolio using the money generated by your properties.

Additionally, be sure to consult with a financial advisor and an accountant about the tax write-offs associated with property investments and how you can save on taxes by investing your earnings into another property to grow your wealth.

Your Property, Your Asset

In a hot market, or when you’re cashing out for retirement, it will be advantageous to sell one or more rental properties. Therefore, when you’re searching for the ideal rental property, ensure it’s got the potential to grow in value based upon location, neighborhood, school district, demand, population growth, etc. Don’t lose sight of the fact that your properties are your assets, and part of your long-term wealth strategy — the crowning achievement of your investments when you finally cash out.

Long-Term Wealth, Long-Term Strategy

Building wealth through rental property investment is not a get rich quick overnight proposition. If you over-invest aggressively, or stay in your BRR phase too long, you could hinder your long-term growth. Instead, using real estate properties to grow your long-term wealth works best when it’s a long-term strategy, like investing in stable 401(k)-style stocks rather than going for broke on something with heavy risk involved as the flip side to its potential exponential success. Your long-term strategy has to include plans for:

• Vacancies;
• Emergencies;
• Property tax accumulation; and
• The occasional bad investment.

Strong Start, Strong Investment

If you are able to make a 100 percent cash purchase at the start instead of financing your first rental property or depending upon a refinance of your personal home to make it happen, you’ll reduce your risk considerably, and put yourself on a stronger start to accumulating long-term wealth. If you have this privilege, you can rest easy knowing you have no mortgage on the rental property, and your passive income is generating a fair amount of long-term wealth. Another advantage to being mortgage-free on your rental property: you can save and invest your rental profits, then use that to invest in your next property. This is much less risky than your BRR strategy, and can hold you steady in the event of a recession or cool market.

While it can be tempting to jump into short-term success options, your best bet is to start small and build as you learn. You’ll be able to toss aside practices and procedures you find inefficient; you’ll learn more about the market, and you’ll understand that luring steady, paying tenants isn’t always about investing in the most glamorous property, but in something practical that is a “good hold.” If you have time in your life and career to do it, taking a slow but steady path can generate the best long-term wealth.

Overall, selling is rarely the best option for anyone looking to focus on long-term wealth. You’ll want to focus on properties that can reliably produce income over time, with the intention to sell occurring only before your retirement.

Bottom Line: Study the Market Constantly

Investment opportunities are common, but vary in what they can produce. You have to study the market and find a balanced property that will stand the test of time. Has a neighborhood been reliably the same for decades at a time? Can you depend on it to stay that way in the future? What are the local property taxes like? Understanding these nuances can contribute to your success as you begin to generate that passive income and funnel it towards future investments as needed. Your investment property calculator is your best friend: use it wisely, and keep tabs on your current assets for the best success.

Sources

*https://www.rubyhome.com/blog/renting-stats/

*https://www.realestatedisruptors.com/blog/the-only-way-to-build-wealth-is-with-rental-properties/

*https://www.mashvisor.com/blog/how-to-become-rich-with-rental-properties/