I had been flipping houses for around two years when I got into a conversation with my
friend Justin. Justin is about three years younger than me. At that time, I was focusing
on flipping properties, but he was buying rentals left and right. He had right around 40
houses in his portfolio, all of which were rentals.
“So, when are you going to start buying rentals?” he asked.
I immediately recoiled. “Never,” I thought to myself. There was NO part of me that was
interested in going down the rental route. My brain was immediately overwhelmed with
thoughts of all the nagging repairs I’d have to deal with – my beautiful hardwood floors
scratched up by unruly dogs, doors dinged by tenants moving in and out, 3 a.m. calls
about leaky faucets. The last thing that I wanted was to pour myself into a property,
make it beautiful, and then have a bunch of tenants move in and tear it apart.
The truth was, I was in total fear.
My First Rental Property
But Justin was doing really well in the rental market, so I decided to cross my fingers and
dip my toes into the world of rental properties. I bought my first property for $65,000. I
was really hoping that things would go well, but to be honest, I had no idea what might
happen. I took a leap of faith and hoped for the best.
To make a long story short, within 18 months, that $65,000 property was appraised at
$148,000. At the time of the purchase the seller agreed to finance the note, which
started at $57,000 and is now at $48,000. So, if you look at the difference between the
current appraised value and the value of the note, I made around $100,000 on that leap
of faith in under 2 years.
Bankers Love Assets
What I learned from that experience is that the banks LOVE assets. They see that I have
this rental property that’s going up in value while the note is getting paid down. And on
my end, I’m getting consistent cash flow from the property, which is great. Now it’s only
$200 or $300 per month, but it’s consistent.
That house is making me richer every day. Because I bought in a hot part of town, the
property is steadily appreciating. I have the consistent income from the rental payments,
which means I can pay down my note.
Then, when I need something from the bank, I can tell the banker that I have this
property worth $120,000 and I owe $48,000. All of a sudden, that banker is really excited
to talk to me.
What I Now Know About Rental Properties
I’ve learned a lot about rental properties since I made that first purchase. Here are a few
of the key lessons that I’ve learned:
It’s All About Financing
Financing is the game. Period. So that original property that I purchased? I can take that
to the banker, refinance, and get a loan for 80% of that appraised value.
That means I walk away with $70,000 of cash – tax free – to go repeat the process with other
properties (remember: borrowed money isn’t taxed). Then those start appreciating in
value, and I refinance and do the same process again… and that’s how you end up
building your wealth.
Tenants Pay Down Your Debt
Another great thing about owning rental properties is that your tenants end up paying the
debt FOR you. Now, of course you have to do your part and keep your tenants happy.
But your tenants, through their lease payments, are paying down your note. And
because your properties are appreciating in value, you’re building equity each month.
Within a few years, you’ve got enough equity to refinance, take the money, and buy
another property. Your tenants are the ones who paid down the debt and put you in the
position to do that.
So, if you make your tenants happy, they will make you rich.
Owning Rental Properties Is Like Tree Farming
Once you get to a certain point, it’s like being a tree farmer. Let’s say you have 15 trees.
Every year, you harvest a tree and sell it, and that income covers you for the entire year.
Now, let’s say you have 15 houses. Instead of selling – every year you refinance a
house. You take the lowered loan balance, raise it up, and put that money right back in
And when you go through all your trees – or houses – then you just start back from the
beginning with the first one. You never sell or pay off anything.
And the best part? It’s all tax free income. 100%.
Now I see why Justin was so gung ho about investing in rental properties.
I get it – investing in rental properties might not be sexy. And they’re not a “get rich
quick” scheme. But they’re a great way to get rich – and I mean really rich – slowly.