Rental Income: A Headache or a Dream Come True?

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  • “Going to be a slumlord, huh? Have fun with that!”
  • “My brother tried that for 10 years and lost money every year.”
  • “My uncle owned a multiplex once. All the units got trashed and he constantly had to evict people for not paying.”

For whatever reason, when I started getting excited about buying a rental property (for that oh-so-nice rental income), the above reactions are what I got from my family, friends, and co-workers. Maybe they were just trying to be helpful – trying to protect me from a future disaster – but I think there was more to it than that.

I wanted to do something great – earn a passive income, create options for my future life, and grow my net worth to huge sums! Many people have these dreams. Few people take the first step to achieving them. The “advise” I received was basically their excuse for their own lackluster existence. They were the lobsters in the bucket that continually pulled everyone else down because if someone else was successful, that ultimately meant that they themselves were a failure.

I wanted a rental income. I didn’t care what experience Aunt Suzy or distant friend Bill had. In almost every book that I’ve read about millionaires, almost every one of them mentions rental revenue as a fantastic passive income that will help you grow wealthy. So let’s think for a moment.

  • All the broke people said, “Don’t do it. Rental income doesn’t work.”
  • While the millionaires retorted, “Rental income is a God-send. Not only do you receive a passive income, but your asset grows in value as well!”

Should I listen to the broke nay-sayers or the wealthy property owners? Ummm… I’m going to choose the advice of the millionaires.

Rental Income: A Dream Come True

We bought our first rental home (with cash, thanks to Liz’s house flip before she moved to Holland) on November 30th, 2015 for $81,000. It was a three bedroom, one bath home that needed quite a lot of work – mostly cosmetic, but we knew it was going to take us some time.

rental income20 gallons of paint and poly later (which equates to 4 months’ time), the house was ready to rent out. We had a couple of open houses, qualified the applicants, and selected the first one that met our stringent criteria. It was time to collect some of that rental income.

The Rent

The three guys moved into our rental on April 15th. To date, we have received the following payments – all on time:

  • $1,200 deposit
  • $600 rent for half of April
  • $1,200 for May
  • $1,200 for June

Not including the deposit (I suspect we’ll refund them in full since they’ve proved to be such great renters already (how do I know? They have rugs everywhere. They mulched the front yard. AND, they even edged the outskirts of the property… LOVE IT!)), we have already been paid $3,000 in rent. In the next 20 days or so, we’ll receive another $1,200, all while I’m doing absolutely nothing.

The Asset

When we bought the house, it was worth $81,000. We put $8,000 into it, the housing market got hot, and suddenly our property value jumped to $120,000! If we wanted to, we could probably list the rental house tomorrow and get a bid for full asking price before the sun goes down. That’s how hot the market is in our area.

So, not only are we receiving a regular income for doing practically nothing, but our asset value is skyrocketing as well! In a matter of just 7 months, we increased our net worth by $39,000 just by fixing up a house that was already in pretty decent shape!

The Future Investment

The majority of people told me to avoid rental properties. A select few told me rental properties were nice for extra income, but were a hassle at times. The millionaires told me (via the books I’d read) to develop rental income…. and then reinvest it…again…and again….and again. This is the nugget that very few learn about and even fewer truly understand.

Rental income is nice. It can be used for a child’s tuition, a nicer car, or for a vacation home on a lake somewhere. This is what the majority of rental owners do with their profits. This however, is not how you become wealthy with a rental property. The key to wealth is through re-investment.

Liz and I earn a rental income of $1,200 each month. We NEVER spend it.

The rent checks simply get deposited in the bank, and we let the account grow, and grow, and grow. We’re letting it get beefy so we can buy the next place (again, with cash) at the end of 2017. At that point, we’ll be earning a rental income of approximately $2,600 a month.

Give it two more years and we’ll buy another cash property. Rental income…$4,000 a month.

With the ramp-up of income, we can likely do this 5 more times in the next 5 years. That’ll give us a monthly rental income of $12,000, and a rental asset value of over $1,000,000! What do you think of rental properties now? I hope you’re in my camp. They’re an absolute dream come true!


 

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31 comments to Rental Income: A Headache or a Dream Come True?

  • Nay saying is such a defensive detachment and normalization strategy. Nay sayer’s inner dialogue:

    “I tried to get rich once and it was really hard. Despite my best efforts my execution as a landlord completely failed. Since I had the same experience that 100% of people I know have, and failure does not suit me, there must be something wrong with land-lording. Despite being vertically gifted, having a blog, and being debt free, there isn’t anything special about Derrick, so he’ll fail too. I have to calm myself down, because I get upset when people try to be different.

    The reality is:

    5 minutes or less were probably spent coming up with a rental income strategy compared to 5 hours talking about it with drunken friends at the local bar.

    Nay-sayers’ circle of friends are all the same (they think alike, dress the same, and aren’t comfortable with major physical, intellectual, or philosophical differences among them.

    Being scatterbrained (caffeine, excessive sugar, watching ads on TV, texting while driving) only allows the typical person to consider why someone might have a different experience for like um… 5 seconds, what was I just thinking about? Oh! Sports Center just came back on!

    Congratulations on being different in all the ways that matter Derrick. I’m happy for your success and grateful you’re willing to share what makes you successful for all the world to see – if they can only find the time to focus for 10 minutes to read what you have to say and think about the content. PS: agreed that the GR market is very hot at this time – what will your purchase strategy be in 2017 for finding value in a market that is likely to be overpriced?

    • Ha, exceptional rant my friend! You’re dead on though. There are a lot of critics out there that will achieve nothing because that’s what they talk themselves (and many of their friends) into.

      My plan for late 2017 isn’t perfectly defined yet. Honestly, I think the next stock market crash is looming, so here’s how I see it playing out:

      1) Liz and I save up as much cash as possible each and every month
      2) The stock market tanks
      3) Layoffs ensue for many
      4) With fewer solid incomes, there will be more houses for sale (people moving on to other jobs somewhere else) and demand will decrease (due to fewer flipper projects)
      5) Liz and I will be able to more easily find a deal, especially with a cash offer.

      Who knows if it will play out this way, but I give it a 50% chance.

  • What is the basis for your 50% chance of a stock market crash soon (i.e. 1-2 years)?

    • Many factors:

      1) Robert Kiyosaki predicted a market crash in 2016 due to the baby boomers selling out of the stock market (reduce demand, reduce stock prices)
      2) The national debt is getting out of control – if the government decides to slow spending (which they should since they don’t have any money) then the economy will slow as well
      3) No matter who wins the election this year, many people are going to freak out, which will likely cause the market to turn on its head
      4) Historically, there’s a recession every 8-10 years. We haven’t seen one since 2007.

      I’m no expert, but it sure feels like something bad is going to happen soon. I’d rather not ignore it. In fact, I’d much rather benefit from it!

  • Julie

    I get the same reaction from friends when I tell them we’re working to pay off our home. They act like we’re crazy and ask “why would you want to do that?” People just don’t get it…

    • Ahh yes…the people that don’t ever think about the future… How hard is it to understand that if you don’t have a mortgage, all that money goes into your own bank account?? For some reason, people treat a mortgage payment like it’s a benefit. They get a tax deduction…the value goes up…. etc. They somehow forget about the added interest they’re paying for 30 years of their life.

  • Brian

    The markets are a game that we all play differently (without this, where would the other side of every trade come from?). Some long-term investors ride a declining market all the way down while others sideline their money but subsequently miss the largest market rally in recent memory. And who knew in the 1970s that oil would be so cheap and plentiful now? I think a major consideration for the foreseeable future is how to not lose much in the markets. With stagnation and low returns, any sizable losses will be very difficult to regain. For those of us not very far from retirement anymore, this consideration is front of mind all the time. Great post, Derek.

    • Great comment, Brian. The stock market is questionable (it’s been rocky for over a year now) and real estate has been taking off and sees no sign of cooling off! After dabbling in the real estate market, I can’t wait to nab another one. You think you’ll do the same Brian?

      • Brian

        There is some appeal in rental properties, but I don’t think I will be looking for one. My mother’s experiences paired with my own aversion to home-improvement projects implies that rentals are not for me. But I’m always open to the right opportunities, so in the future it could be more appealing.

        • Fair enough. Rental property investments are not for everyone. I actually like improving properties – it’s great manual labor that I don’t get from my full-time job at the desk. 😉

  • Kathy

    I have been there done that and gotten the t-shirt with rental properties and they absolutely were not for me. I acquired them from my mother who loved them and treated her tenants like a brood of little chicks she protected under her mama chick wing. For her it was so passive that she had more than one tenant who was over 3 months in arrears. She never inspected the properties so they were frequently trashed when the tenant moved out, leaving her holding the bag for the expense of repair and fixing up because she never collected a big enough security deposit to cover the costs. The first thing I had to do was get them paid up to date and then one by one I sold them. I can’t count the number of nights I lost sleep because the next day I had to confront a tenant. Like my mom, I hate confrontation, but unlike her I did it. Rental property done right is NOT passive income. You have to screen prospective tenants, show the property, inspect the property, arrange repairs and field calls from tenants for a variety of demands. If I were to ever do it again, I’d get into commercial property, or multi-unit apartment buildings with an on site manager. But of course, that eats into your income and isn’t always a sure thing that they know what they are doing either. And with commercial property, even businesses fail. So I’ll stick with stocks and bonds. I can sleep much better at night.

    • Interesting perspective, Kathy. Thanks for commenting!

      For me, I love real estate because it helps ME sleep at night vs. the stock market. I have absolutely no control over the market. It goes up, it goes down, it can drop 30% in a matter of days and *poof* thousands of dollars are gone. THAT’s where I lose sleep at night. With real estate. I choose the property, I choose the tenants, and I can even choose to fix up the place if I want to increase the value.

      You’re right though, real estate is not 100% passive. There is some leg work to be done here and there. Yes, I spent a good 10 hours or so getting a tenant into the place, but beyond that I’ve earned $3,000 for a 2.5 hour, $10 repair job. I’ll take that income any day!

  • Julie

    What percent do you put towards 401k/Roths Derek? I’m curious if you don’t put any money in the market and instead put it all towards rentals. I’m sure it difficult to do both. Right now I contribute 24%(includes match) into my 401k and my husband contributes 15%. We want to invest in rentals one day too but it seems it will take quite a while once we start saving the cash to buy a house since we put a good chunk into the market.

    • Hi Julie. I put 7% (which turns into 17% after my company’s contributions) into my Roth 401k. Based on an 8% avg return, this should net us at least $2 million by age 65. Truly, this is our back-up plan since no one really knows what the market will do long-term. The rentals are a more safe play for us, and we hope to have over $1 million in real estate in ten years as well, netting us $100k of income. If nothing else, it’ll keep us diversified between physical assets and paper investments.

  • Julie

    Wow, I thought I had a good match at 6%. That’s awesome! I agree with you on the market. I’m excited to follow your journey in buying more rentals. Can’t wait to join you and buy our first rental in the next five years. We’re finishing paying off our mortgage on our dream home. One more year, God willing!!!

    • That’s great news Julie! Paying off your home mortgage will really boost your cash flow! You won’t believe how quickly it adds up. Keep me in the loop on your journey!

  • […] Rental Income: A Headache or a Dream Come True? (16) […]

  • […] Rental Income: A Headache or a Dream Come True? (18) […]

  • Hey Derek! Just came across your blog and share your approach with rental properties as well as your economic outlook of a possible dip in the near future. While I am building up my cash reserves in the mean time, I’m still watching properties that come to market…some are just too good to pass up and not at least bid on. Hasn’t been all easy with my current rentals and like others have mentioned, rentals can be a pain at times. Despite the headaches (e.g. just filled a 2 month vacancy!), I know the long term benefits of holding these rentals will far outweigh the short-term pains.

    • Oh man, long term benefits are out of this world! Hold onto a few rental properties that are cash flow positive for 20 years and you’ll likely be sitting pretty. Have you ever considered buying your rentals with cash?

      • Sure! I just put in a cash offer last week. With some deals that are super competitive, financed offers don’t stand a good chance unless they’re overpaying. Since I’m offering on distressed properties and fixing them up a bit, I’d pull most if not all of my cash back out using a cash out refinance so that I can then repeat the process.
        OB @ Out of State Investor recently posted..8 Signs to Look for in a Real Estate Market

        • Very cool. It’d be even better if you had the cash for the renovation too – that would mean almost zero risk! With our first rental, we bought it for $81k cash, still had $15k in the bank, but ended up cash flowing the repairs since we were still working our day jobs! This is exactly what we intend to do with the second one. Then, with two rental incomes, the cash will come even more quickly so we can do it a third time!

  • […] Rental Income: A Headache or a Dream Come True? (19) […]

  • nell

    Hi, it was great to read your interesting posts on paying off your mortgage, and looking at investing for rental return. One thing I can’t get my head around right now – is it better to use spare money to buy an investment property or to pay off the mortgage on your own home? We have a lump sum which is currently offset against our mortgage, but I’m not sure if we would be better to buy a property now? If we carry on at current repayment levels (keeping the lump sum in the mortgage), we will be mortgage free in 6 years. But that means that the housing market could keep rising for 6 years and we will miss the potential capital gains, or not be able to access the market at all.

    I’m sure you considered this so I’m interested in your reasoning? Many thanks

    • Hi Nell. Great question! Many would encourage you to invest in the rental and just continue to make your regular house payments. Not me.

      I, unlike many professional advisors, realize that there is a huge emotional component to life and debt repayment. I knew that if I focused on paying off my house, I could get it knocked out far faster and earn more than if I were to complacently invest in something else while keeping my debt (and, once I realized this it only took me 11.5 months to pay off $54,500).

      Secondly, I considered the elements of risk and fear. If I kept my mortgage on my home, invested in another property, and then lost my job, there was a higher likelihood that I’d lose both houses to the bank, leaving me homeless. If, however, I paid off my house and THEN invested, my risk of homelessness was basically 0%.

      There’s no greater feeling than owning your home free and clear, and by doing away with the mortgage payment you can build up cash faster than you ever thought possible!

      I hope this helps you decide, Nell. Thanks for popping in and posing the question!

  • I recently sold a condo in Ca and was able to pay $85k cash for a small house in Missouri. I had a rental property before and sold it just before the real estate crash. Somehow I knew it was coming, at least in that area. I was strict on who I rented to and had a great experience.

    But now, I am a 62 year old woman living in a small town with very low RE appreciation. There is a need for more rentals, but I’ve heard the quality of renters applying is very low. Every time I pass one of many little run down houses for sale I feel a pull. What do you think?
    Linda Luke recently posted..The Four Agreements – Simple & Powerful Tools for Life

    • Hi Linda. Thanks for the question! And congrats on having a paid-for house!

      There are poor renters in my area as well. What I did differently is I found a house in a decent part of town, very close to a desirable school and the local college. I fixed the house up quite nice to attract decent renters, and then I had a strict set of guidelines for myself to pick a quality candidate.

      The first was that they needed to bring home 3X more in income than the rent. In other words, with a $1,200 rental, they needed to earn $3,600 net in order to qualify. If they earned less than that, then I struck them off my list. That was also the beauty of buying with cash. I didn’t feel the need to rent to the first interested party that came along to cover my mortgage. I waited a month, came across an amazing candidate, and it has been smooth sailing ever since.

      If you decide to move forward with the rental, be sure to read this article — How to Attract the Best Tenants for a Rental Property

  • […] enough money to buy a rental house outright? I strongly recommend it. Liz and I bought our first rental with cash almost a year ago and we’ve been earning 12% on our investment. Not too […]

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