What does it take to succeed with rental property investments? How can you maximize returns while minimizing risks in real estate?
Building wealth through real estate requires strategy, knowledge, and careful planning. In Set for Life, Scott Trench breaks down the fundamentals of investing in rental properties and explains how to leverage your investments for optimal returns.
Keep reading to discover proven methods for building a profitable real estate portfolio that can generate lasting wealth.
Investing in Rental Properties
Trench recommends investing in rental properties because it helps you build wealth in several ways at once. First, you earn money each month from tenants paying rent. At the same time, your property may increase in value, especially if you buy in an up-and-coming area or make improvements to the property. Lastly, each time you make a mortgage payment using the rent money, you own a little more of the property, so you build equity in the property over time.
(Shortform note: How do you find rental properties to invest in? Brandon Turner describes several methods in The Book on Rental Property Investing: One option is to work with a real estate agent who can give you access to the Multiple Listing Service (MLS) database. You can also contact property owners who may be interested in selling or drive around neighborhoods to find vacant homes. Landlords in the process of evicting tenants can often be eager to offload their properties to avoid legal complications, so check public eviction records. Finally, online platforms like Craigslist allow you to connect with sellers or advertise your interest in buying investment properties.)
Rental properties also give you more control compared to other investments like stocks. As a landlord, you can proactively find creative ways to cut costs, respond quickly to issues, and make improvements that boost your property’s value. Trench points out that many landlords are inexperienced, so if you treat your rentals like a serious business, you can outperform other landlords.
(Shortform note: While being a landlord gives you control over your investment, you don’t have to handle everything by yourself. Turner recommends building a team of professionals to help manage different aspects of your property. Think about recruiting property managers to handle day-to-day operations, contractors for maintenance and repairs, real estate agents to help find good deals, and financial experts to handle money matters. You’ll also want legal support from a real estate lawyer to handle contracts and potential tenant issues. Working with a team allows you to make strategic decisions while delegating specialized tasks to professionals, helping you outperform other landlords who try to do everything themselves.)
Trench says that real estate investing also allows you to use leverage, which is a technique of borrowing money to buy more valuable properties. For example, imagine you’ve saved up $50,000 to invest in real estate. Instead of buying a $50,000 property outright, you use it as a down payment on a $300,000 house, with the bank lending you the remaining $250,000. This way, you get to control a larger asset with less of your own money. Then, if the house’s value increases by 5% in a year, it’s now worth $315,000. Subtracting the $250,000 loan, your equity is now $65,000. You turned your $50,000 investment into $65,000—a bigger gain than if you’d bought a $50,000 property that increased to only $52,500.
Trench writes that eventually you can sell properties that have appreciated and use the proceeds to purchase larger, potentially more profitable properties. This allows you to continually grow your portfolio and increase your returns.
| How to Use Leverage Successfully While leverage can multiply your profits, it can also increase your risks if you’re not careful. According to recent data, about 13.5% of properties sold by investors actually lost money. Experts provide tips for using leverage successfully. Create a business plan before investing: Make a detailed plan that outlines how you’ll add value to the property, maintain it, and keep it competitive in the market. This ensures your leveraged investment pays off instead of becoming a financial burden. Use tax strategies. Work with CPAs (certified public accountants) and tax attorneys to take advantage of benefits like depreciation and 1031 exchanges, which let you defer capital gains taxes when selling one property to buy another. Look for opportunity zones. These are economically distressed areas where special tax benefits apply. If you hold these investments for at least 10 years, you pay no taxes on capital gains. However, be sure to conduct careful research and meet all requirements. |
