Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I’ve owned rental houses since 2004, and I bought my first apartment building in 2008.
It’s been a wild ride to say the least. But over that time I’ve learned a lot, and earned a lot. And overall, it’s been a very rewarding experience.
So you could say I’m a big fan of owning rentals. Especially rental houses.
And because I’m a big fan, I’ve been preaching the rental house gospel to pretty much anyone who will listen... through seminars, coaching and over scotch and cigars. I’ll talk about rentals anytime and anywhere. With pretty much anyone.
But even after doing a lot to spread the word over the years, a lot of folks remain intimidated by the prospect of owning rentals.
Sure, the first one can be daunting. But if you buy right, it gets easier the more you buy.
What seems crazy to me, though, is that folks still shy away from them even though they know the tremendous benefits that rentals provide.
So I was very happy to see a piece recently that succinctly summarized the benefits of owning rental houses. And I want to share them with you.
The one caveat, though, is that while the article discussed 5 big benefits, they missed one HUGE benefit. And it’s a benefit especially relevant to folks who have day jobs.
Here are their 5 and my additional 1…..
You Need Financial Freedom
Yes we’ve all heard the siren song of “financial freedom” from every weekend TV roadshow guru. Not having a day job is an extremely enticing prospect to a lot of people.
Me included.
Pardon me for being direct, but very few real estate wholesalers will ever see true financial freedom.
Why?
Because wholesaling is basically a job. You can tell because if you stop working, and the money stops rolling in, then it might as well be a job.
Rentals are obviously different.
Done right, which means buying right and doing a proper job of screening tenants, rental houses can be a largely “hands off” cash-generating machine.
And the cool thing is, if you keep the houses up and treat your tenants right, you can end up with tenants who stay for years.
How do I know?
I have one tenant who has been with me for 10 years. And three more that have been with me since 2008. My average across my portfolio right now is just over 5 years.
That’s a good foundation for “financial freedom.”
One other thing to consider... sooner or later, you’re going to want to stop working. I certainly do. What’s the plan then?
For me it’s going to be a bunch of free-and-clear rental houses with long-term tenants.
That’s true financial freedom.
Create Leverage
The article defines leverage as using the bank’s money to make your own.
And it’s an unbelievably great concept.
Think about it...
Which is better – buying 1 house for $100,000, or putting $20,000 down on 5 different houses and holding them until you retire?
I’ve done the math, and 5 rental houses are a lot more profitable than 1.
Cash Flow is Tax Free
The article stated that “due to depreciation and mortgage interest deductions, your cash flow should be tax free.”
Depreciation is the coolest “expense” ever invented, because you can deduct, but you don’t pay out of pocket to get it.
Between that, and your mortgage interest deduction if you decide to use leverage, your cash flow can be partially or completely tax free for several years.
Now I’m not a CPA and I don’t play one on TV, so if you need to learn more talk to a professional.
An Excellent Long-Term Investment
This has played out in spades for me.
I bought many of my rentals before and during the early part of the crash. And guess what happened when the real estate market hit bottom?
I was under water on every single one of them. Close to 50% underwater in a couple of cases.
But I didn’t lose a minute of sleep over it. Because what I paid was irrelevant since I didn’t plan to sell.
What did matter is that I kept them all pretty much consistently full through the crash and the cash flow kept coming in, month in and month out.
And now that the market has recovered? I have equity back in all of them.
People Want to Rent Houses Over Apartments
I learned this one the hard way when I bought my first apartment building.
Since I had a bunch of rental houses, I thought I had the rental thing down, and that it would translate to apartment buildings.
It doesn’t.
The point is, as much as I worked to keep my building in good shape and treat my tenants right, I would consistently lose my best tenants after only a 1 or 2.
Because they wanted to rent a house instead. I don’t think that’s ever going to change.
My Bonus: Tax Benefits
My big #6 reason to buy rental houses is that rental real estate can generate substantial tax benefits, especially if you have a day job.
Now I’ll say again – I’m not a CPA, nor am I an attorney. So if you want to learn how this works, spend a couple of bucks talking to the folks who are paid to know this stuff.
The bottom line is that if you have a day job, and can qualify as an “active” rather than “passive” investor (talk to your CPA), you can offset the taxes you pay from your day job with the depreciation and mortgage interest driven tax losses that rental houses generate in the first several years.
Very cool indeed.
So those are the 6 powerful reasons why you should be getting into rentals. Now that you know, isn’t it time to get busy?
You Share
I’d love to hear about your rental experiences. Share below.