My wife and I moved out of our former primary residence a year ago, and we have been renting it out for $4,000 a month. Our current tenant is moving out next month and we will need to find a new one.
The house is probably worth about $750,000 and we have a $450,000 mortgage on it, which we managed to refinance when mortgages were rock bottom at 2.5%.
Should we plan to sell the house in two years in order to get the capital gains tax exemption, and then use the proceeds to buy a new investment property?
Or would we be better off keeping the property, continue renting it and abandon the tax exemption in order to hold on to our low mortgage?
Looking for Opportunities
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at [email protected].
Dear Looking,
You have a 30-year mortgage at a rock-bottom rate of 2.5% that you will possibly never see again in your lifetime. Why are you in a rush to sell?
If you are trying to get ahead without paying taxes, you have time, but how much time is the question.
The biggest challenge with waiting to sell is that your home could appreciate significantly, and you may not qualify for the capital gains tax exemption of $500,000 when filing jointly with your spouse.
You don’t say how much you bought it for, but even if you had bought it for $500,000 and the home is $750,000, you’ve still got time before hitting that cap of $500,000. As long as you don’t exceed that, and the government does not change that number, your plan to wait and sell makes sense.
As you’re looking to buy a new investment property, consider doing a 1031 exchange. With a 1031 exchange, you can sell whenever you want, and defer paying taxes on the profit. The “catch” is you need to move that money into another investment property. Plus, you may have to take on a new mortgage.
Factor in the new rate and the potential rental income, and see if the math makes sense. If that other investment property you’re looking at doesn’t net you the same or similar profit as your current rental, then don’t sell.
The bottom line: Unless there’s a strong reason for you to sell independent of taxes — perhaps you need the extra money, or you are sick of dealing with tenants, for instance — it seems like the best move would be to hold on to the home, or try to swap it out for another.
And don’t just take it from me. “There is no hurry to sell,” Ed Fernandez, president and CEO of 1031 Crowdfunding, a company specializing in 1031 exchanges, also advises.
“You can always capture the gains any time after two years, but in this scenario, it looks like the cash flow you are receiving from the current mortgage might be better than any opportunity you would have to go out and buy in the current market environment,” he added.
That’s two opinions in favor of retaining your rental. The third opinion? That’s up to you.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
Whether you’re taking your first steps or fine-tuning your strategy, understanding the fundamental language of real estate is paramount. In this post, I’ll cover the top 5 real estate investment terms that are essential for every investor’s toolkit. From cash flow to leverage, these terms form the bedrock of successful investing. I think it is also important to know the right meaning for these terms and many people stretch the meanings or completely change them!
So, let’s dive in and equip ourselves with the knowledge that will shape our journey towards financial prosperity.
1. Cash Flow – The Foundation of Financial Success
Let’s start with a term close to every investor’s heart – cash flow. Beyond the straightforward inflow and outflow of funds, it serves as the cornerstone of financial success in real estate. It is one of the primary metrics I use to make purchase decisions. I also look at how good the deal is and how much value I can add.
Many people will tell you that cash flow is simply the rent minus the mortgage and insurance. However, if you want to know the true cash flow you will need to know all of your expenses. Here is an example of what true cash flow looks like:
Rent: $2,000
Mortgage: $1,100
Taxes: $200
Insurance: $200
Hoa: $50
Vacancies: $100
Maintenance: $200
Property management: $180
One investor might tell you the cash flow is $500 a month but they are leaving out many of the expenses the property will incur over time. The true cash flow would be -$30!
Determining cash flow requires a variety of calculations, so I’ve created a calculator to help you out: InvestFourMore Cash Flow Calculator
2. Cap Rate – A Metric for Strategic Decision-Making
Cap rate, a metric mostly used on commercial properties and multifamily housing gives an idea of what the property will make without financing and what the property is worth based on the NOI or net operating income. The basic formula is:
net income / price = cap rate
The Cap Rate formula may seem simple enough but it can be manipulated very easily. Investors may not include all the expenses in the NOI or they may use projected income instead of actual income. Never take these numbers as absolute without digging into them.
You can use my calculator here: InvestFourMore Cap Rate Calculator
3. ROI – Evaluating Investment Performance
Return on Investment (ROI) serves as the scorecard for your property’s performance. As a pair to cash flow, ROI helps you determine what the property will make based on many factors like loan pay down, appreciation, and value add. Cash flow looks at what the property makes on a monthly basis and ROI looks at the big picture.
ROI is not easy to figure because some years may have a huge increase in value thanks to adding tenants or making repairs while other years may have much more modest returns. You would figure ROI on an annual basis and may want to separate out first-year ROI from the later years’ ROI because of those jumps in value.
Below is a video of a value-added play I invested in recently.
4. Leverage – Maximizing Potential While Mitigating Risks
Leverage is the prime weapon of real estate investors if you are looking to scale quickly. With leverage, you only invest a fraction of the total purchase price, which can cause your returns to be significantly higher than investing in something like stocks. To achieve leverage, you use financing. Financing is one of the most important aspects of investing in real estate. You can make more money with loans than by paying cash.
On this site, I talk about the many different, creative ways you can finance real estate investments.
5. Equity – The Silent Wealth Builder
Equity, an often-underestimated force in wealth accumulation, goes beyond property values, embodying true ownership.
equity = current market value - amount financed
Equity can be built slowly through market appreciation and loan pay down. You can also build equity by adding value and getting great deals on properties. I prefer to use both! Many people may say equity does not matter because it is not cash in hand, but it can become cash in hand by using a cash-out refinance, or selling. You can even use a 1031 exchange to sell and not pay taxes on the profit.
Thanks to leverage and equity, my net worth has skyrocketed to over $10 million just from real estate.
What’s the best way to invest in real estate?
Even better, you can use equity and leverage together to purchase additional properties and scale up your business using the BRRRR method.
Conclusion
This primer serves as a solid foundation for fundamental real estate investment terms. As you navigate real estate, I invite you to explore the extensive resources on InvestFourMore, where a wealth of data-driven insights and strategies await.
Feel free to engage with the community, sharing your experiences or seeking guidance. Here’s to your continued success in the world of real estate investment – stay informed, stay strategic, and keep building your path to financial prosperity!
Return on equity (ROE) and return on investment (ROI) are two important financial metrics that are used to measure the profitability of a rental property, a business, or another type of investment. Both metrics are expressed as a percentage, and they both measure the amount of profit that is generated from a given amount of investment. However, there are some key differences between ROE and ROI. I think most investors think of ROI when determining how good their investment is, but ROE can give indications of how good the investment is based not just on the initial investment but the current equity. Some properties may have a great ROI but a poor ROE. These numbers can help you decide if it is an investment worth keeping or selling.
What is Return on Equity?
ROE measures how effectively equity is being used to generate profits. Equity is the property’s value minus any liens or debts against the property. For example, if a property is worth $500,000 and has a $200,000 mortgage against it, there is $300,000 in equity. This figure may not be the figure you want to use to base keep or sell decisions on since there are selling costs as well. It may cost you $50,000 to sell the property after commissions, closing costs, and repairs to make the property marketable. If you sell the property you may have to pay taxes on the profit as well. If you are making $100,000 in profit on the sale, you might have to pay $15,000 or $20,000 in capital gain taxes unless you use a 1031 exchange.
The return on equity is calculated by dividing the profits the property makes by the equity. If the property makes $10,000 a year, then the ROE would be 5 percent if there is $200,000 in equity.
10,000/200,000 = .05
However, as I said earlier you may want to use a different number based on the money you would get out of the sale. If you are only getting $125,000 after all the costs you would have to pay you would be making 8 percent:
10,000/125,000 = .08
What is Return on Investment
ROI measures the profitability of an investment property based on the profit generated and the initial investment into the property.
For example, if a property has a net profit of $10,000 per year and there was an initial investment of $100,000, then its ROI would be 10%. The ROI analyzes the property based on how much money was used to buy, rehab, and rent the property, not by how much money is tied up in it now. ROI is useful in seeing how a property might perform, but I would argue it is not as important when figuring out whether to keep or sell an asset.
How to know when to sell rental properties?
Differences Between ROE and ROI
The main difference between ROE and ROI is that ROE measures profitability in relation to equity or the money you could get if you sold the property, while ROI measures profitability in relation to your initial investment. ROE is a better judge of how well a property is performing today.
Once you have invested a certain amount of money into a property, you can’t undo that investment. The money is spent and keeping a property because it has a high ROI or you dumped a bunch of money into it, might not be the best financial decision. You could have a very high ROI but a very low ROE because the property has increased in value.
A real-life example of ROI vs ROE
I bought a property in 2010 for $97k that I sold in 2019 for $275k. I spent about $27,000 buying that property and in 2018 it was making about $9,000 a year. That is a 33 percent ROI just based on the rent coming in! The tricky thing with real estate is that the property was also appreciating in value, had tax advantages and the loan was being paid down. The ROI was much higher than 33 percent, probably close to 100 percent.
This seemed like an amazing investment so why did I sell it? My ROE was much lower because I had $220,000 in equity in the property. I could use a 1031 exchange to sell the property and pay about $15,000 in selling costs ( I am an agent so I save money there). I could take about $200,000 out of the property which means my ROE was only 4.5 percent based on rent alone. If I factored in taxes and appreciation, that ROE might increase to 10 to 15 percent.
The question I had to ask myself was not if that was a good ROI, but if that was a good use of the money I had tied up in the property, or ROE.
I decided to sell because I could take that money and get a better ROE on a new property that had a better rent-to-value ratio. I could also get a great deal when buying which also increases my returns. Instead of making $20,000 to $30,000 a year from rent, appreciation, loan pay down, and tax advantages. A bigger property with better numbers could make me $50,000 to $70,000 a year with that same amount of money. I could build more equity as well because I am getting a good deal on the new property.
Other options to optimize ROE
If you have low ROE, you don’t always need to sell. You may be able to refinance the property and take some of that equity out to use in other deals. It is harder to refinance with higher rates but this made a lot of sense when rates were lower. When you refinance you are replacing the old loan with a new loan and when you use a cash-out refinance you are replacing the old loan with a larger loan and getting cash back in the process. One of the advantages of a refinance is that the cashback is tax-free since it is not income.
Conclusion
ROE and ROI are both important financial metrics that can be used to measure the profitability of a company or project. However, they measure different things, so it is important to use the right metric for the situation.
I hope this article was helpful. Please let me know if you have any other questions.
I have owned rental properties for more than 13 years and being a landlord was one of the best choices I ever made but it is not easy. There are many aspects to owning rentals from finding good properties, to financing them, to managing them. Many people may think the hardest part of being a landlord is unclogging toilets at 2 am but I have never done that and never plan to. There is a lot that goes into owning rentals but you don’t have to do all of it yourself and owning good rentals will give you the income to pay for help. Good rentals can also build a tremendous amount of wealth!
How hard is it to become a landlord?
Being a landlord means many things and how hard it is depends on what tasks that landlord chooses to do. Sometimes landlords do all or most of the work on the properties they own, and sometimes they do very little if any work on them. The hardest part of becoming a landlord for most people is finding good properties and finding the money or financing to buy them. Not every property will make a good rental, in fact, many properties will lose money if you buy them at retail value and use an investment loan for the financing.
Here are the basic steps to becoming a successful landlord, not just owning rentals that may or may not make any money.
Find a market or type of rental property that makes money. Many single-family homes will not make any money as rentals. It is important to choose a market with good rent-to-value ratios. You may also consider multifamily or commercial rentals which can sometimes have better numbers but may take more work, have more risk, or need more management.
Get the money to buy a rental. Most landlords will use loans to buy properties but even with loans the down payments are usually at least 20 percent of the value of the property. A $200,000 property could require $50,000 or more in cash to buy with a loan after the down payment and closing costs.
Repair and maintain the property. Most properties are not ready to rent right away. You may need to make repairs and you will for sure have to maintain the property while you own it. You can do this work yourself or hire it out.
Find tenants for the rental property. Once the home is ready to rent you will need to find someone who wants to rent it. The home will have to be marketed, tenants screened, leases created, and money collected. The landlord can do this themselves or hire a property manager to do the work.
Keep tabs on the property and tenants. After finding tenants the work is not done. Landlords will have to check on the property, handle maintenance requests, and possibly handle late rent, hostile tenants, or even evictions. Again, the landlord can do this or have a property manager handle these tasks.
Why spend all this money and do all this work to buy rentals?
A lot of people are probably thinking to themselves why do I want to do all of this to own a few rentals? A few rentals may not make you rich, but once you buy a few, it becomes easier to scale and buy more. If you can buy 10 or more rentals it can provide you with a healthy income and a sizeable net worth that will increase with time. My rentals have made me millions of dollars in less than ten years thanks to getting great deals, market appreciation, cash flow, and the tax advantages that come with them.
Why do some landlords work harder than others?
As you can see there is a lot of work that is needed to be done when you own rental properties. Some landlords will try to do almost all of the work themselves, even the repairs. Other landlords will hire out as much of the work as they can. However, there is still work to be done by landlords, and finding and financing properties is often the hardest part of being a landlord.
Doing the work yourself can save money but it also costs you time and often peace of mind. Working on houses is hard and dealing with stressful tenant situations is also hard. Many people underestimate just how much work is involved and get out of the business as fast as they can. However, owning rentals can be very rewarding financially and spiritually knowing you are providing housing or a place to do business.
How much work should the average landlord expect to do?
When I bought my first rentals I managed them myself with the help of my wife but I never did any repairs to them. I hired out all of the maintenance and remodeling work to my contractors since I also flipped houses. Obviously, I had a huge advantage over many new investors since I already had people who could do the work. If I were to start over again not knowing anyone in the business here is what I would do. This strategy would also apply to me buying properties out of state in an area I have no contacts in.
I would decide what kind of properties to buy and where to buy them. This can take a lot of time and work, especially if you are new to real estate. My book Build a Rental Property Empire goes over everything you need to know if you are brand new. It can take months before you have learned enough to pull the trigger. For some, it may take longer but that is okay as this is a big investment.
I would work to find the right financing which can also take a lot of time. Finding local banks where you want to buy is often the best option but there are many other ways to get the money for rentals. You also may need to be saving money or finding a partner if needed. A lot of the time landlords spend on the business is preparing to buy properties.
Once you know where to buy and have the financing lined up, I would have an agent help you find properties but I would not rely on them to do all the work. There are many ways to find deals and getting a great deal is the fastest way to build wealth in real estate. If you had to spend time doing anything, I would learn how to get great deals.
Before you buy a property you should have some idea of who will be managing it and repairing it. If you choose to use a property manager they may also have contacts or in-house people who can repair and maintain the property. If I were buying properties out of my area this is the route I would take. Take your time finding the right company and don’t pick the first one that says yes!
Once you own the property I would have someone else manage it but you will need to check on it once in a while to make sure the people you hire are doing their job. If the property is far away, hire a third party to check on it for you. You don’t need to be the one taking calls from tenants or renting the property, or collecting rent. The property will also need to have accounting set up and tax information collected which property managers can also handle.
You can scale with rentals by refinancing properties or selling them. I think the landlord should be actively looking at their loans, and returns every year on the properties they own. A lot of landlords have trouble scaling but a refinance or selling properties or using a 1031 exchange can increase the portfolio and ROI.
I think most of the work a landlord does should be in the beginning finding and buying deals. If you want to scale and make the most of your time, leave the management and maintenance to someone else. Focus on the most important tasks and remember to look at the big picture.
Why do I have my property management in-house?
I just told people I think they should hire a property manager but I don’t do that myself, why? I own a real estate brokerage (Blue Steel Real Estate) and my staff manage my properties. I am not the one showing properties (unless they are big commercial properties), and I am not collecting rent, or taking any calls from tenants. I have my own property management company in-house that can handle that for me and I focus on the big picture.
Conclusion
Buying rentals has made me many millions of dollars but it is not easy and it takes work. If landlords focus on the right work it can be a great business. Once you learn how to buy the first properties, the next purchases get much easier. If you are willing to put in the work to buy the right properties and hire the right people to take care of them it is a wonderful business/investment.
Taxes are unavoidable but that doesn’t mean you have to pay more than you owe. What happens to your tax liability with proper financial planning? The simple answer is that it can allow you to minimize what you owe while preserving more of your income to fund your financial goals. Talking to a financial advisor is a good first step in creating a strategy for effectively managing tax liability.
Understanding Tax Liability
Tax liability refers to the money that an individual, business or organization owes to a federal, state or local tax authority. A simpler way to think of your tax liability is the difference between your taxable income and the tax deductions you’re able to claim.
As a general rule of thumb, earning a higher income can result in a higher tax liability. The U.S. uses a graduated tax system, which means that income and tax rates move together. As income increases, so does your tax rate.
The amount you pay in taxes is determined by your income, but capital gains can also affect your tax liability. That’s important to know if you’re focused on investing and building wealth, as higher net-worth individuals may face a steeper tax liability if they’re reaping capital gains from investments.
What Happens to Your Tax Liability With Proper Financial Planning?
Managing your tax liability is important as it can directly influence how much of your income or investment earnings you get to keep. The more income and assets you have to work with, the easier it becomes to build wealth.
Proper financial planning can help you implement strategies that are designed to minimize taxes while maximizing income and assets. Having a solid financial plan in place can generate significant tax savings year by year. You can then use those savings to generate additional income through investments, grow your retirement accounts and increase your net worth.
Does financial planning require you to work with a financial advisor? Not necessarily. You could always go it alone. But there are some distinct advantages to having a financial advisor help you formulate a plan for managing tax liability.
Financial advisors have extensive knowledge about how tax planning can affect your financial plan. A good advisor is also familiar with the tax code and the latest tax rules. Even if you think you have a relatively straightforward tax situation, a financial advisor may be able to pinpoint areas where you can improve tax efficiency that you might have missed.
Financial Planning Strategies for Minimizing Tax Liability
There are different ways to approach tax planning in order to reduce your tax bill, depending on the specifics of your situation. If you’re working with a financial advisor to create a tax plan, then it may include any or all of the following.
Retirement Planning
Retirement planning is a focal point of a solid financial plan, particularly with regard to taxes. Aside from ensuring that you have enough money to retire, it’s also important to consider how much of your savings you’ll be able to keep once you start making withdrawals.
In terms of how you plan for retirement, your financial advisor may suggest any of the following:
Maxing out annual contributions to a traditional 401(k) or to a Roth 401(k) if you have that option.
Contributing money to a traditional or Roth IRA each year.
Funding a Health Savings Account (HSA) if you have that option with a high deductible health plan.
If you’re self-employed or own a business, you might open a solo 401(k), SEP IRA or SIMPLE IRA to save for retirement instead. It’s important to understand the tax treatment of different retirement savings options.
For example, traditional 401(k) plans and traditional IRAs allow for tax-deductible contributions. Qualified distributions are taxed as ordinary income in retirement. Roth accounts don’t offer a tax deduction, but you can make withdrawals tax-free when you retire.
A Health Savings Account is not a retirement account, per se. It’s meant to be used to save money for medical expenses, but it can double as a source of retirement income since you can withdraw funds for any purpose after age 65 without a tax penalty. You’ll just owe regular income tax on withdrawals.
Investment Planning
Investment planning is related to retirement planning, but it can include different aspects of managing tax liability. For instance, say that you’re investing through a taxable brokerage account, which is subject to capital gains tax. Your financial advisor can offer different strategies for managing tax liability, which may include:
Holding investments longer than one year to take advantage of the more favorable long-term capital gains tax rate.
Choosing tax-efficient investments, such as exchange-traded funds (ETFs), which can trigger fewer turnover events than traditional mutual funds.
Harvesting tax losses to offset some or all of your capital gains for the year.
Your advisor may also be able to guide you on how to deduct expenses related to investment properties if you own one or more rental homes. They could also help with executing a 1031 exchange if you’re interested in swapping out one property for another to minimize capital gains tax.
Tax Deductions and Credits
Tax deductions reduce your taxable income, which can help to push you into a lower tax bracket for the year. There are numerous expenses you might be able to deduct, including:
Mortgage interest
State and local taxes
Charitable donations
Business expenses
Self-employment expenses
Medical expenses
Student loan interest
Tax credits, meanwhile, reduce what you owe in taxes on a dollar-for-dollar basis. For instance, if you owe $1,000 in taxes and qualify for a $1,000 tax credit, the credit can wipe out what you owe. Some credits are refundable which can increase the size of your tax refund for the year. A financial advisor can walk you through the various deductions and credits you might be eligible to take in order to reduce your tax liability.
Withdrawal Planning
As you approach retirement, it’s important to consider how you’ll withdraw the money that you’ve saved. Your advisor can discuss different strategies for withdrawing money from a 401(k), IRA or taxable brokerage account so that you’re not overpaying taxes or draining your retirement reserves too quickly.
Your advisor may also discuss ways to tax-friendly ways to create supplemental income in retirement, such as purchasing an annuity or taking out a reverse mortgage. An advisor can also help you figure out when to take Social Security benefits to maximize your payment amount and how to coordinate those benefits with other sources of income in retirement.
The Bottom Line
Knowing what happens to your tax liability with proper financial planning is important for creating a long-term strategy for growing wealth. Handing over more money than you need to in taxes doesn’t offer any tangible benefit and it can be problematic if it leaves you with less money to save and invest. Having a trusted financial advisor to work with can ensure that you’re meeting your tax obligations without shortchanging your goals.
Financial Planning Tips
Tax planning can seem complicated if you’re not well-versed in the Internal Revenue Code. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Robo advisors can offer a more affordable way to manage financial planning, as the fees may be lower than what traditional advisors charge. However, it’s important to know what you’re getting for the money. For example, some robo-advisors offer tax loss harvesting but not all of them do. Additionally, robo-advisors aren’t really equipped to offer one on one advice about tax planning or investing. Those are good reasons to consider working with a human advisor instead, even if it means paying a slightly higher fee.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
In a world where virtual investments like crypto increasingly receive media attention for their volatility and uncertain futures, people desire to put their money into something stable and tangible.
Real estate has historically been one of those investments, but the barriers to entry have always been steep—until the emergence of real estate crowdfunding platforms.
What is Real Estate Crowdfunding?
With real estate crowdfunding, individuals can pool their money to fund a property investment. Crowdfunding platforms benefit investors by allowing individuals to combine a relatively small amount of money with others so they can collectively fund a real estate investment they otherwise wouldn’t be able to.
The entity owning the property benefits from crowdfunding by receiving funds they otherwise wouldn’t through traditional investing.
Real estate crowdfunding gives all investors exclusive access to investments typically reserved for the ultra-wealthy.
Real estate crowdfunding can include debt or equity investments. Equity investing occurs when an investor owns a property and receives income through things like rent and profits from selling the property for more than what they paid.
Debt investing involves loaning money to real estate buyers. Those who loaned their money receive their investment in fixed increments, depending on the loan terms.
What Type of Investors is Real Estate Crowdfunding Best For?
Real estate investing was historically reserved for accredited investors, who, according to the SEC, must fulfill one of the following requirements to be considered accredited.
You have an individual income of more than $200,000 per year in the last two years and expect to maintain the same income level in the current year.
You and your spouse jointly have an income of $300,000 per year in the last two years and expect to maintain the same income level in the current year.
You have a net worth exceeding $1 million, excluding your primary residence, either individually or jointly with your spouse.
You invest on behalf of an entity with at least $5 million in assets or a business in which all the equity owners are accredited investors.
In addition to being accredited, investors need the time, effort, and knowledge available to find a property, conduct all activities related to property management, and take on all the risks of a single property.
While some real estate crowdfunding platforms do require individuals to be accredited investors, several do not. With these platforms, all investors, accredited or not, can invest in the relatively stable real estate market without the time, effort, and patience previously required.
You might be interested in investing in real estate via crowdfunding, but where do you begin? We’ve rounded up the top seven best real estate crowdfunding platforms in 2023, with some extra honorable mentions. We’ve found something for everyone’s specific financial needs, so read on to get started with your real estate investing journey.
Table of Contents
Best Real Estate Crowdfunding Platforms for 2023
Fundrise is an ideal platform for those just getting started in the real estate crowdfunding space. It’s also ideal for people who want a platform to provide increasingly larger investment opportunities as they grow as investors.
What You Need to Know:
Minimum investment: Depends on the chosen account level
Property types: Check out their assets page to learn about available property types, including apartment buildings, residential and commercial properties.
Pros
Variety of account levels offers something for everyone.
Relatively stable investing options through private real estate, as opposed to REITs or stocks
Diversified portfolio strategy via the soon-to-be-released Innovation Fund
Cons
Minimum iPO investment is $1,000
Limited customer support services
Lack of complete fee transparency
Fundrise prides itself on being an easy-to-use and low-cost option for those looking to break into real estate crowdfunding. Fundrise uses its commercial software to find and advertise properties to its investors. Utilizing its own software enables Fundrise to charge lower fees, leading to more money in investors’ pockets.
Fundrise currently has 330,000 investors using its site, a total asset transaction value of $7 billion, and $194 million in net dividends already earned by its investors. The company’s investments are all tangible, private real estate investments, typically more stable than REITs and stocks tied to the stock market’s performance. Also, because the company is investor-owned, Fundrise allows its users to invest in its iPO, or internet public offering.
While the platform offers something for the beginner up to the seasoned investor, it leaves much of the troubleshooting up to users, as Fundrise has limited customer service assistance. There’s no way to directly speak with a representative if you have an issue—only an email address and troubleshooting articles are on the website. Fundrise’s total fees for individual investments aren’t clearly stated on its website either.
If you’re a green investor looking to break into the real estate crowdfunding space, Fundrise may be an excellent option. Check out our Good Financial Cents Fundrise Review for more information.
RealtyMogul: Best for Single Property
If you’re an accredited investor looking to focus on finding and investing in the best single piece of property, RealtyMogul may be for you.
What You Need to Know:
Minimum investment:
$5,000 for individual property investments
$5,000 for REITs
Recurring management fee: Usually 1.0%–1.25% annual fees
Accredited investors only?: Yes for single properties, no for REITS
Property types: Office, residential, single-family, and others
Pros
Two REIT options to invest in focused on income and growth
Options for accredited and non-accredited investors
Trustworthy platform, evident by its A+ ranking with the BBB
Cons
Requires a high minimum investment.
High management fees and limited fee transparency
No secondary market for investments, making them illiquid
RealtyMogul’s beginning was inspired by a realization from its founder, Jilliene Helman. While working in wealth management, Jilliene’s experience with her clients showed her three things:
Real estate investors were her wealthiest clients.
There was no connection between her clients’ level of income and the amount of time they worked.
Her clients prioritized real estate investing for its ability to earn them passive income.
Thus, RealtyMogul was created to allow investors access to the real estate market and gain wealth through passive income strategies.
RealtyMogul currently has over 245,000 investors, over $950 million in investments, and $5.5 billion worth of potential deals currently listed on its site.
RealityMogul offers various investment options, including several property types and REITs available to accredited and non-accredited investors. Additionally, the platform’s Better Business Bureau’s A+ ranking provides the assurance investors need to know they are utilizing a trustworthy site.
RealtyMogul’s initial investment costs are steep—investors will need $5,000 to join the platform. Additionally, the company’s fee structure isn’t easy to navigate and depends widely on the investment. RealityMogul’s investments are also relatively illiquid, meaning investors won’t see a return on their investments until maturity, which could take upwards of three to five years.
Investors wanting to utilize a trustworthy platform to find their ideal single piece of real estate should look to RealtyMogul for assistance. Check out our review of RealityMogul to learn more.
DiversyFund: Best for Building a Portfolio Over Time
If you’re a non-accredited investor looking to grow your real estate investment portfolio gradually, DiversyFund may be right for you.
What You Need to Know:
Minimum investment: $500
Recurring management fee: Not available on website
Accredited investors only?: No
Property types: REITs (multi-family properties)
Pros
Relatively low minimum investment compared to other crowdfunding platforms.
Good option for non-accredited investors
Completely automated, making investing simpler
Cons
Few investment choices
Long investment timeline of at least five years
Lack of information on its website
DiversyFund offers a wealth-building, diverse portfolio to average investors. With DiversyFund, you don’t have to be an accredited investor or have thousands of dollars to invest in real estate. With a minimum of $500, you can invest in a multi-family REIT using DiversyFund.
The platform is completely automated, taking the guesswork out of investing in real estate. DiversyFund is great for everyday investors, especially those who aren’t accredited or don’t want to spend a lot of time learning the ins and outs of real estate investing.
DiversyFund does have a limited amount of investment options—it only offers multi-family property REITs. Additionally, investments take at least five years to see returns, which means those investing with DiversyFund should anticipate sitting tight for a while before realizing any gains from their investments. DiversyFund’s website also doesn’t include much information about how the company works.
If you’re a non-accredited investor looking for a simpler way to access the real estate market and gradually grow your portfolio, DiversyFund may be for you.
Roofstock: Best for Single Family Homes
Roofstock is an ideal investment platform for accredited investors who want to invest in single-family properties.
What You Need to Know:
Minimum investment: $5,000
Recurring management fee: Marketplace fee to buyers ($500 or 0.5% of the purchase price, whichever is greater)
Accredited investors only?: Yes
Property types: Single-family rentals
Pros
Variety of ownership structures to invest in
Investments monitored by property managers
IRA investment option
Cons
Minimum investment timeline of five years
Only accredited investors
No mobile app
Roofstock was founded to simplify single-family rental investing by making it as easy as possible for investors to enter the market.
Roofstock offers its accredited investors a variety of ownership structures to invest in, including individual accounts, joint accounts, limited liability companies, corporations, revocable trusts, irrevocable trusts, and limited partnerships. All Roofstock’s assets are managed by an asset manager and a property manager, taking these burdens off the investor and saving time. Roofstock boasts its ability to allow investors the benefits of passively investing in real estate without the headache of property management.
Roofstock enables investors to use an IRA as the title holder to their investment, a unique retirement investing strategy not offered by many other crowdfunding platforms. It also supports a 1031 exchange program, enabling investors to substitute one property for another while putting off paying capital gains taxes on the investment.
Some downsides of Roofstock include the patience required to see any returns, which may take at least five years. The platform is also limited to accredited investors and doesn’t currently offer a mobile app.
If you’re an accredited investor looking to break into the single-family home market, but you don’t want the headache of actually managing the property yourself, Roofstock can be a great option for you.
Cadre: Best for Multiple Investment Styles
Cadre seeks to be a one-stop shop for all things real estate investing.
What You Need to Know:
Minimum investment: $25,000
Recurring management fee: Yes, but the amount varies by investment
Accredited investors only?: Yes
Property types: Apartment, hotel, industrial, and other properties
Pros
Data-driven approach to finding investments
Wide variety of properties to invest in
Greater liquidity than other platforms
Cons
High minimum investment
No 1031 exchanges
Three to eight-year waiting period for investments
Founded by Ryan Williams to offer investors greater access to commercial real estate investing, Cadre’s data-driven approach enables its platform to source the most attractive real estate investment options in the most sought-after markets in the United States.
Cadre allows its investors to realize returns through a wide variety of investments. These include property deals, Cadre Funds (a portfolio diversification strategy), and the Cadre Secondary Market (which enables participants to buy and sell real estate shares).
Cadre currently has over $5 billion in total transactions, a rate of return of over 27%, and over $338 million in gross distributions to investors.
Cadre’s downsides include its high barrier to entry—accredited investors will need at least $25,000 to get started. There are also no 1031 exchange options, and property deals can take anywhere from three to eight years to see returns.
If you’re an accredited investor with a lot of money to invest and want to see quicker returns than traditional real estate investing, Cadre may be the best option.
AcreTrader: Best for Farmland
Folks looking to invest in farmland should check out AcreTrader.
AcreTrader’s mission is to provide direct access to farmland investments. AcreTrader chooses its farmland through an extensive underwriting process, enabling users to invest in the most sought-after farmland possible.
Historically, farmland was a problematic asset to invest in due to extensive research, administrative tasks, and property management. AcreTrader’s tool eliminates those burdens, enabling investors to yield passive income returns with farmland.
Using AcreTrader, investors purchase shares equal to 1/10 of an acre in the enterprise that owns the farm. That piece of land is chosen in a highly selective process to ensure that the investment will realize the 7.0%–9.0% returns AcreTrader boasts. AcreTrader also has self-directed IRA investment options for accredited investors looking to utilize AcreTrader’s platform.
AcreTrader’s downsides include the inherent risks associated with investing in farmland, including the land’s subjectivity to adverse weather conditions, the seasonable nature of crops, and government policies that could affect land’s market value.
Additionally, farmland investments may take anywhere from five to 10 years to see returns, so investors in AcreTrader need to ensure they are committed to this platform for the long haul. Farmland is also a highly illiquid investment, so AcreTrader’s platform users won’t be able to opt for an early return.
If you’re an accredited investor looking to invest in farmland but need someone to research which farmland to choose, AcreTrader may be a great platform for you.
Fund That Flip: Best for Fix-and-Flip Investments
Fund That Flip is a unique platform for individuals looking to invest in residential house flipping.
What You Need to Know:
Minimum investment: $5,000
Recurring management fee: 1.0%–3.0%
Accredited investors only?: Accredited investors only
Property types: Single or multi-family residential real estate
Pros
Up to 11% investment returns
Very rigorous underwriting process
Offer bridge loans, allowing borrowers to get funding as quickly as five to seven days
Cons
House flipping is inherently risky
Minimum investment is a bit high
Must be accredited
Fund That Flip utilizes extremely highly selective underwriting, only accepted 6.0%–8.0% of all potential real estate investments. The chosen projects are managed by a seasoned team of redevelopers, so investors know that their projects have the highest chance of seeing a return. Fund That Flip boasts up to 11% returns for its investors.
Additionally, Fund That Flip offers bridge loans to its borrowers to help further fund redevelopment efforts.
House flipping is inherently risky, but Fund that Flip reduces some of that risk by doing the underwriting and sourcing work itself. All investors must be accredited, and only 8.0% of loan applicants to this platform are approved, making it difficult for just anyone to join.
If you’re a real estate investor looking to break into the house flipping market but don’t want to deal with the headaches of finding a redeveloper and a property to flip yourself, Fund That Flip may be a great option.
Other Real Estate Crowdfunding Platforms to Consider
While we’ve mentioned our favorite real estate crowdfunding platforms, there are many other worthy sites to choose from. Here are a few of our honorable mentions:
HappyNest
HappyNest prides itself on enabling everyone who wants to join the real estate market to do so. HappyNest’s investments are unique because they involve investing in net lease (triple-net) agreements. With these agreements, renters pay some or all expenses associated with using the property, including maintenance, insurance, and taxes.
HappyNest can keep costs down and provide access to all investors. All it takes is $10 and a 0.04% monthly asset management fee—plus a willingness to wait at least three years—to see investment returns.
CrowdStreet
Crowdstreet offers a variety of debt and equity investments in various property types, including multifamily, retail, office, industrial, and land. The minimum investment is a steep $25,000, and fees may be required depending on the opportunity. However, Crowdstreet prides itself on the ability to grant investors access to previously inaccessible real estate markets.
PeerStreet
PeerStreet is a crowdfunding platform for real estate debt investing. Investors provide capital to borrowers in real estate, who pay interest every month on their loans. PeerStreet investors then receive a part of the monthly interest on the loan payments. There is a $100 minimum investment, with management fees around 1.0% of loan fees, but you must be accredited to participate with the platform.
EquityMultiple
EquityMultiple’s unique value proposition lies in its team of experts, who have over $75 billion in transactions under their belt and provide asset management through the entire investment process. Their technology is also easy to use.
This platform, reserved for accredited investing in commercial real estate, requires a minimum investment of $5,000. Fees for common equity investing are 0.5%–1.5%, and debt and preferred equity fees are 1.0%.
Jamestown Invest
Jamestown Invest has over 80,000 investors and $13.2 billion in assets under management. A platform for accredited and nonaccredited investors, Jamestown Invest requires a minimum of $2,500 to begin investing in its commercial real estate offerings, including office, retail, and mixed-use spaces in the United States.
Bottom Line – Choosing the Best Real Estate Crowdfunding Site
There are a host of real estate crowdfunding options for all investors, investment types, investment amounts, and accreditation statuses. Your personal investor profile and desired real estate investing outcomes determine the best real estate crowdfunding option.
While each platform is different, they all create a more accessible real estate market. While investing always comes with a certain amount of risk, real estate investing has traditionally been considered more stable.
Historically, its barriers to entry were high due to relatively high property costs and the time and effort needed to find and manage a property. With crowdfunding platforms, those barriers are reduced, making the real estate market more accessible for investors.
Best Real Estate Crowdfunding Companies
Company
Property Types
Minimum Investment
Annual Management Fees
Accredited Investors Only
AcreTrader
Farmland
$15,000
0.75%
Yes
Cadre
Apartments, hotels, industrial properties
$25,000
Varies
Yes
CrowdStreet
Multifamily, retail, office, industrial, and land
$25,000
Varies
Yes
DiversyFund
REITs
$500
Not available
No
EquityMultiple
Commercial
$5,000
0.5%–1.5%
Yes
Fundrise
Apartment, residential, commercial
$10
1.0%
No
FundThatFlip
Single or multi-family residential
$5,000
1.0%–3.0%
Yes
HappyNest
Pandemic and internet resistant businesses
$10
0.04% (monthly)
No
Jamestown Invest
Office, retail, and mixed-use spaces
$2,500
Varies
No
PeerStreet
Real estate debt
$100
1.0%
Yes
RealtyMogul
Office, residential, single-family
$5,000
Varies
Yes for single properties; No for REITs
Roofstock
Single-family rental
$5,000
$500 or 0.5% of purchase price
Yes
Have you invested in any real estate crowdfunding platforms? If so, what has been your experience?
Best Real Estate Crowdfunding Platforms FAQ
How should I pick a real estate crowdfunding platform?
First, determine if you are an accredited or nonaccredited investor. Next, decide how much money you’re willing to invest and how long you’d like it tied up. Using the above chart as a guide, choose a platform based on your specific criteria.
What are the common costs and fees for real estate crowdfunding?
Real estate crowdfunding has several associated costs, including but not limited to the initial investment cost, account-opening fees, and asset management fees. Initial investments can range from $10 to tens of thousands or more.
Account opening fees usually fall within 0.25%–1.0%, and management fees can have a fixed rate of anywhere from 0.5% to 2.0%.
What are the risks of real estate crowdfunding platforms?
Ultimately, crowdfunding platforms are tied to real estate assets with inherent risks. While platforms make it easier to search through properties, good investments are still challenging to find. Like anything online, there is a necessary amount of due diligence on the investor’s part to ensure that the platform is legitimate.
What is the minimum amount needed to invest in real estate?
With crowdfunding platforms, individuals can invest in real estate for as little as $10, although most of these platforms require at least $500–$1,000 to get started. Check out our resource for ideas on investing in real estate with any budget.
How can I invest in real estate with less than $5,000?
Some crowdfunding platforms allow you to invest less than $5,000 in real estate, including Fundrise, DiversyFund, and Jamestown Invests. In addition, you can use self-directed IRA funds or REITs to invest. Both options often enable you to invest less than $5,000.
Last Updated on February 25, 2022 by Mark Ferguson
Buying one rental property may not make you a ton of money right away. However, rentals can be an amazing investment when held for the long-term and when multiple properties are purchased. There is also the opportunity to buy larger commercial or multifamily properties, which can increase returns as well. With a good rental property, you should be making money every month (cash flow); you should make money as soon as you buy by getting a great deal; you will have fantastic tax advantages, you can use financing which greatly reduces the amount of cash needed; and the property value and rents will most likely go up in value over time.
Rental properties have been a great investment for me. I make more than $100,000 a year from the cash flow on my rental properties after all expenses including mortgages, property management, maintenance, and vacancies. I now have 20 rental properties which are a mix of residential and commercial. I bought my first rental property in December of 2010 for $97k. I started with residential properties but now buy almost all commercial, including a 68,000-square-foot strip mall in 2018.
You cannot buy just any property and turn it into a rental if you want to make a lot of money. You have to buy properties below market value with great cash flow to be a successful rental property owner. Not only do I make money every month from my rentals with minimal work, but my rentals have also increased my net worth thanks to buying below market value and appreciation (I don’t like to count on appreciation, but it is a nice bonus). This is not just a hypothetical article. I have owned rentals for many years, kept track of their returns, and written many articles about what I have learned.
The cool thing about real estate is while I have more than $6,000,000 worth of rental properties, it did not take millions of dollars to buy them.
Why did I choose rentals?
One of my passions is automobiles. I purchased a 1986 Porsche 928 a few years ago, and I absolutely love that car. I also have a 1999 Lamborghini Diablo, a 1981 Aston Martin V8, a 1998 Lotus Esprit Twin Turbo, and a few other cars. In my early 20s, I never thought I could afford any of these cars in my early. However, I started to make decent money as a real estate agent in my mid to late 20s. The problem was I was not saving much money. I just kept spending it. I knew if I ever wanted to get ahead in life and be able to afford these cars, I would have to invest the money I was making. I researched everything I could and decided rental properties were the best investment. I worked very hard to save money to buy my first rental.
As soon as I started buying rentals, I could see the fruits of my labor. I was making money every month from rent, I made money as soon as I bought the house because I bought it below market value, and it was forcing me to save money. I wanted to buy as many as I could, and I knew with steady money coming in every month from the rentals I could someday feel comfortable buying expensive cars.
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Why are rentals a good investment?
Not all properties are a good rental, but if you can find properties that are, they can be an amazing investment. A rental property should have a number of attributes
Cash flow
Good rentals will make money every month after paying all expenses. The expenses should include mortgage, taxes, insurance, maintenance, vacancies, and property management. The cash flow is the rent minus all of these expenses. Some people like to shoot for different numbers, but I always liked to see $400 to $500 in cash flow per property.
Buy below market
I get a great deal on every rental I buy. I don’t want to pay retail when I can pay to 20% to 30% less than retail. It is not easy to get great deals, but it is possible. On almost every house I have ever bought, I got a great deal. That instantly increases my net worth, makes me more cash flow, and looks better on my balance sheet for banks.
Leverage
You can put as little down as 20 percent when buying rentals. You can put even less down when buying a property as an owner occupant and then turning the property into a rental.
Tax advantages
Most expenses on rental properties are deductible or depreciable. You can also depreciate the structure of a rental property, which means you can save thousands of dollars each year on your taxes. You can also complete a 1031 exchange on rentals to avoid capital gains taxes.
Appreciation
Many people only talk about housing prices when comparing rentals to the stock market, but appreciation is a bonus. It is not what you are shooting for when buying a rental property because no one knows for sure if prices will go up or when.
It is not easy to find rental properties that are a good investment. It takes me months to find great deals that make over $500 a month like mine typically have, and they are not available in every market. My typical rental property used to cost between $80,000 and $130,000, and it rented for $1,200 to $1,500 a month. I put 20 percent down on the properties and finance the rest with my portfolio lender. I usually end up spending $25,000 to $35,000 in cash to buy each rental property. Cash flow is not the only benefit of rental properties. I slowly pay down the mortgage every month; I have great tax advantages; and they will most likely appreciate.
I am able to save that much cash from each rental property because I make a very good living as a real estate agent as well as from fixing and flipping houses. I like to have nice cars and a nice house, but I always make sure I am saving and investing money first. There are ways to buy rental properties with little money down, but I think you will get further ahead in life by saving as much as possible and investing wisely.
How much do you need to buy a rental?
I go over the exact cost of a rental property here, but let us assume that it costs $30,000 to purchase and repair one rental. You do not have to invest $90,000 a year to buy three rentals a year because you can begin refinancing rental properties after you own them for a year and take cash out to invest in more rentals. You can also save the cash flow from your rental properties to buy more rental properties. I usually buy my properties for about $100,000, with a four percent interest rate and 20 percent down, which leaves a payment of $381 for principal and interest. Those numbers combined with rents from $1,200 to $1,500 a month leave me with at least $500 a month in income from my rental properties.
How much should a rental property cash flow?
It is not easy to make $500 a month in cash flow from a single rental property. I detail how to calculate cash flow here, and I created a cash flow calculator to help people determine cash flow. Cash flow is not the rent minus the mortgage payment: you must consider many other factors. My rents range from $1,250 to $1,600 a month, and my mortgage payments range from $450 to $650 a month. I have to account for maintenance and vacancies on my rental properties, which leaves me with about $500 in profit each month. I buy my properties for $80,000 to $130,000 and usually make quite a few repairs before I rent them out.
What are the long-term returns for someone with little money?
Investing in rental properties can provide fantastic returns when you have a lot of money to invest. Even if you have little money, you can invest in rental properties. I am going to walk through how many years it will take someone to accumulate one million dollars from investing $7,500 a year into long-term rental properties.
The more money you make and save, the easier it is to make one million dollars from rentals. However, even people who do not make a lot of money can get there, although it may take a little longer. I am going to write out this plan assuming someone has a $75,000 salary and can save 10 percent of their income a year.
When you first start out, $7,500 does not go very far, and it takes a lot of money to buy an investment property. Luckily, there are many ways to buy a rental property with much less money if you are an owner occupant or use some of the techniques I discuss here. In the first year, the best bet is to buy a HUD home or REO that needs some work but will still qualify for an FHA or conventional loan. The key to my strategy is buying houses below market value. HUD or REO houses are a great way to do that. We will assume the investor can buy a house similar to the ones I purchase in my area, which cost around $100,000. There are closing costs that the buyer is charged when they get a loan, but you can ask the seller to pay most of your costs.
Buying as an owner occupant year one
The first step is to buy a house. But you cannot buy just any house; you want to buy a house as an owner occupant that you can later turn into a rental. You also want to get a great deal on a house to gain instant equity. To get a great deal on a house, you may have to buy one that needs some repairs. With a HUD home, you can roll $5,000 of the repairs needed into the loan with the FHA escrow and only put 3.5 percent down for the down payment. If the home needs a lot of work, you could use an FHA 203K loan to roll more repairs into the loan. We will assume this house needs $4,000 in work to qualify for a loan, and you bought a HUD home with the costs rolled into the loan. With an FHA loan, you have to pay mortgage insurance every month and an upfront mortgage insurance premium (which could be $200 or more a month).
With a conventional loan, mortgage insurance is much lower than FHA, and you might be able to remove it after two years. However, you may not be able to roll the repairs into the loan, but you could get the seller to fix some items before closing. If the repairs are cosmetic items, you should be able to get a loan without making the repairs before closing. I will assume the total cash needed to close on this hypothetical house is about $5,000. Hopefully, this house was bought below market value because it needed some repairs and was a foreclosure. Once the house is repaired, it should be worth around $125,000.
Since you bought this house as an owner-occupant, you have to live in the home for at least one year.
Year two
After one year, you have gained about $22,000 in net worth; $125,000 – $100,000 purchase price – $4,000 repairs rolled into the loan + $1,000 gained in equity pay down. In year one, no rent was collected because the home was owner-occupied to get a low down payment. In year two, the house is rented out and you can buy another owner-occupied home using the same strategy. When you try to buy a home right away, you won’t be able to count the rent from the first house as income right away. It is best to buy houses priced low enough that you can qualify for two houses at once to make this work. Otherwise, you may have to wait up to a year for the rent to count as income and can buy again.
You can only have one FHA mortgage at a time, so this time you have to get a conventional loan with 5 percent down. In the second year, you have saved up another $7,500 from your job and have $2,500 left over from the first year for a total of $11,500 saved. The second home also costs $100,000, and the seller pays 3 percent closing costs. The down payment needed is $5,000, and $5,000 in repairs are needed on this second house. The total cash needed to buy an owner-occupied home is $10,000 and the repaired value is $125,000.
The first house is rented out for $1,300 a month (which I will do all the time on a $100,000 purchase), and the payment is $550 with taxes and insurance. Add vacancy, maintenance, mortgage insurance and we’ll assume $300 a month in positive cash flow.
Year Three
In the second year, you made $25,000 from buying house number two (equity) and made $3,600 from cash flow. You also made $2,500 from equity pay down on both loans (I am assuming each loan will pay down $500 more each year). In year two, all the savings was used from year one, but you saved $7,500 and made $3,600 in cash flow for a total of $11,100 savings. Buy another house using an owner-occupied loan and use $10,000 of cash. Net worth increases to $53,100 after adding the equity pay down, cash flow and equity gained in the purchase of a new home.
The second house is rented out again using the same figures, although the mortgage insurance may be less because we are using a conventional loan instead of an FHA loan.
Year Four
Another house is bought below market value in year four. Cash flow increases to $7,200 a year plus $1,100 in previous savings and $7,500 saved this year. You now have $17,300 cash saved up before we subtract another $10,000 for the purchase of a new house as well as cash for the repairs. Net worth has increased $25,000 on the purchase plus $4,500 in equity pay down. The total net worth increase is now $90,800 for the last four years.
You own four houses and three of them are rented out. At this point, you may be able to remove the mortgage insurance on the conventional loans that have been held for two years, but I am not going to in my calculations to keep things simple and conservative.
Year Five
In year five, we repeat the entire process again and come up with the following numbers. Cash flow increases to $10,800 and previous savings $5,800 and $7,500 saved up equals $25,600 saved cash. The investor purchases another property and uses $10,000 in cash to leave $15,600 in his cash account. Net worth increases by $7,000 for equity pay down: $10,800 for cash flow and $25,000 for the purchase of a new property. The total increase in net worth is now $133,600.
You may have noticed this investor just mortgaged his fifth house. For many people, getting a loan on more than four houses is very difficult. However, the investor is buying houses as an owner occupant, which makes it much easier to get a loan.
Year Six
The same process is repeated all over again. Cash flow is $14,400, previous cash is $14,100, savings equals $7,500 for $37,500 cash minus $10,000 for a new purchase. The investor has $27,500 left in his bank account. He increases his equity pay down to $13,500, has an increase of $25,000 in net worth from a purchase, and an increase in net worth from cash flow of $14,400. He now has increased his net worth by $186,500.
Year seven
In year seven, the seventh house is purchased. Cash in the bank equals $26,000 from previous savings, $18,000 in cash flow, and $7,500 in new savings, which totals $53,000. You are now able to buy two properties this year! Buy another owner-occupied property using $10,000 and an investor-owned property.
To purchase an investment property, we need to put at least 20% down, and we still need to make repairs. We are buying below market value still, so we are going to assume we are adding $25,000 more a year in equity and $3,600 more a year in cash flow. Estimated costs for down payment and repairs is $32,000 to buy an investment property. You have $11,000 of cash left after buying two properties this year. Net worth increased by $60,500 after adding the usual amounts to total $247,000.
Year eight
Year eight is very exciting because we get to add two properties into the mix instead of just one. With the extra houses added, increased cash flow, and continued equity pay down, our net worth increased $98,200 in just one year! Total net worth is now $345,200, and you are making real progress! You have $42,200 saved up after buying another house in year eight as an owner-occupant, so you can buy another investment property, but won’t, because our margins will be too thin with only a couple thousand in savings.
Even though you are still making only $75,000 a year, you increased your net worth by almost $100,000 a year. There are not many people who can increase their net worth by more than they make in a year!
Year nine
In year nine, you are adding $26,500 in equity pay down, $28,800 in cash flow, $25,000 in built-in equity with purchases, for a total net worth increase of $80,300. Your total net worth increase over nine years is now $425,500. You also have $60,000 saved up after paying for one house as an owner occupant, which is enough to buy another investment property, leaving $26,500 cash left over!
Year ten
In year ten, you have enough cash to buy two more properties and have $28,000 in cash left over. Net worth increases by $114,500, bringing us up to a total increase of $540,000.
Year eleven
You can buy two more properties and increase your net worth by $129,200 for a total of $669,200. Cash flow is at $43,200 a year, and there is $36,700 of cash left over after buying two more properties. You could buy a third house this year but decide not to stretch your limits. You need to make sure you have plenty of reserves for the rentals.
Year twelve
This year, you buy three houses because there is $94,600 in cash available. After buying the three houses, there is $22,100 cash left in savings, equity was paid down, and $44,500 and $50,400 in cash flow was generated. Total net worth is now $814,100! You are getting closer to making one million dollars investing in real estate!
Year thirteen
You have increased your net worth by $190,200 this year because you bought three houses last year. The total net worth increase is now $1,004,300! Your actual net worth will be higher than this because I did not calculate savings from your income into the net worth, just the gain from buying rental properties. Cash flow is now $61,200 a year, and you have paid off $54,000 of equity in one year!
You own 16 rental properties which are producing over $60,000 a year! The incredible part is we did not increase the rents at all, even though they are likely to go up over thirteen years. We assumed there was no appreciation, even though there likely will be over that time. Due to the tax advantages of rentals, you are probably taking home as much in passive income from your rentals as you are from your job.
Things we did not consider
This was a very basic calculation for how to make one million dollars investing in rental properties. It would take a book to go through all the variables and possible roadblocks that might come into play. Here are a few items we did not consider, which would have an impact on the time it takes to reach one million dollars in increased net worth.
Inflation will increase the prices of homes and wages as well as rents. While the investor has to pay more for houses each year, he will also be making more and saving more. The biggest factor is the rent increases. His rent on the first houses he buys will increase as time goes on, but his payments will stay the same. His cash flow will increase greatly as time goes on, which we did not account for.
Taxes were not accounted for either because that gets very complicated. The cash flow the investor is making would be income, but the investor could offset that with depreciation from the rental properties. I assumed those two factors even themselves out.
Investment property purchases had 20 percent down, where the owner-occupant purchases had 5 percent down. There should be an increase in cash flow on the investment property purchases because of the lower down payment, but I left them the same to make the math easier.
Refinancing was not considered either, but the investor could easily have refinanced a couple of properties to get more cash out to buy more rental properties. This would have increased cash flow and net worth due to the increased number of properties purchased.
Obtaining more than 4 or more than ten mortgages can be difficult. I am assuming the investor is able to get as many loans as possible with a lender. I can have as many loans as I want with my portfolio lender, but many people cannot. This would be a roadblock once he reached ten financed properties.
Buying owner-occupied properties each year is possible but may not be realistic. Moving thirteen times in thirteen years may put a bit of stress on the family!
I also assume the investor manages his homes himself, which is doable in the beginning but it maybe tough when he gets ten homes or more.
How Did I Build a Rental Property Portfolio
I have 20 rentals now, but I did not buy them overnight. I started in 2010 and slowly bought them over the last 9 years. I bought 1 in 2010, 2 in 2011, 2 in 2012, and kept building from there. I worked very hard to make a great living as a real estate agent, but I also used real estate to buy more rentals.
I bought my first rental by refinancing my personal house and taking cash out of it. I also refinanced some of my rentals along the way so that I would have more capital to buy even more rentals. I was lucky that our market appreciated so much, but I also bought every rental property way below market value, which allowed me to take cash out when I refinanced.
I stopped buying residential rentals in 2015 because the market in Colorado became too expensive. However, I was able to invest in commercial rentals in my area and cash flow on them. There are a lot of different ways to invest in real estate!
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How much have my rentals made me?
I put together some stats to show how much rentals made me after four years of owning them. It has been a few years since then, and things have gotten even better! At the time, I had bought 11 rental properties. After doing some calculating, I discovered my rental properties have appreciated and been bought cheap enough to produce a gain of $600,000 since December of 2010! It is important to remember that net worth is all on paper, and I would not realize $600,000 in profit if I decided to sell all of my rental properties today. I would have to have selling costs, and I would have a large tax bill if I sold my rental properties.
How much equity have I built with rentals?
One thing I have done with every rental property I buy is buying them below market value. I try to buy my properties at least 20 percent below the current value, and if a home needs repairs, I want that rental property worth 20 percent more than the price I paid plus the cost of the repairs. For example; if I buy a rental for $100,000 and it needs $20,000 in work, I want it to be worth $144,000 or more when I am done repairing the home ($100,000 + $20,000 = $120,000 * .20 = $144,000). That means I usually gain at least $20,000 in net worth on every rental property I buy. The 11 rentals I have bought have gained at least $220,000 (I buy many properties at more than 20 percent below market) just by buying homes at the right price.
I also have been lucky that prices have increased significantly in Northern Colorado in the last few years. I would say lucky for the sake of calculating net worth, but the increase in prices has made it harder to buy cheap rental properties with great cash flow. If you want to know how much my houses have appreciated, I broke down each rental and how much money it has made below.
Rental 1
I bought my first rental property for $96,900 on 12/5/2010. At the time I bought it, I knew it was worth at least $125,000, which is not a huge spread between the buy price and fair market value, but the home needed less than $2,000 in repairs.
The house is now worth at least $165,000 and most likely more. I had it appraised earlier this year, and the appraisal was $165,000 and our market values have increased since that time. If the house is worth $165,000, then my net worth increased about $66,000 after you subtract the repairs. The home was rented out for 1,050 a month when I first bought it and now is rented out for $1,400 a month.
Rental 2
I bought rental property number 2 for $94,000 on 10/5/2011. This home needed much more work than number one, and I spent about $15,000 repairing the house. At the time I bought this house, I thought it was worth $140,000 after it was repaired, and this house is now worth around $175,000. That leaves me with a net worth increase of about $66,000 on this property as well.
This house has been rented to my brother-in-law since I have owned it. The rent has been steady at $1,100 the entire time but could be $1,400 to $1,500. My brother-in-law has a house under contract and will be moving soon.
Rental 3
I bought my third rental property for $92,000 on 11/21/2011. This house needed repairs, and I spent about $14,000 getting it ready to rent. At the time I bought this house, I thought it was worth $135,000 fixed up, and this house is now worth around $170,000, which creates a net worth increase of $64,000.
This home has been rented to the same tenants for $1,250 a month, but we just raised the rent this month to $1,300 a month. It would probably rent for $1,400 to $1,500 to a new tenant.
Rental 4
I bought rental property number 4 for $109,000 on 1/25/2012. This home also needed about $14,000 in repairs before it could be rented. At the time I bought this house, I thought it was worth $145,000. This house is one of my most valuable rental properties and is worth $185,000 in today’s market. That leaves a net worth gain of $62,000.
This home was rented for $1,300 up until this year when I rented it to new tenants for $1,500 a month.
Rental 5
I bought rental property number five for $88,249 on 12/14/2012, and it needed more repairs than the others. The market had definitely begun to improve at this point, and finding a home that was under $100,000 was very tough. This home was a good deal, even though it needed $18,000 in repairs. I thought it was worth around $130,000 when I bought it, and I now think it is worth $165,000. That leaves a net worth increase of $59,000.
This home has been rented to the same tenants for $1,200 a month.
Rental 6
I bought rental property number six for $115,000 on 3/7/2013. This house needed about $15,000 in repairs, and I thought the property was worth about $150,000 after it was fixed up when I bought it. It is now worth $170,000, and that leaves a net worth increase of $40,000.
This home was first rented for $1,300 a month until earlier this year it was rented for $1,400 a month.
Rental 7
I bought rental property number 7 for $113,000 on 4/18/2013. This house needed only $9,000 in repairs, and I thought it was worth $155,000 when I bought it. This neighborhood has done great, and the home is now worth $185,000, which leaves a net worth increase of $63,000.
This home has been rented for $1,400 a month since I bought it.
Rental 8
I bought rental property number 8 for 97,500 on 11/18/2013. The home needed $15,000 in repairs, and I thought it was worth $150,000 once fixed up. It is now worth $165,000, and that leaves a net worth increase of $52,000.
This home has been rented or $1,400 a month since I bought it.
Rental 9
I bought rental property number 9 for $133,000 on 2/14/2014. This home only needed $4,000 in work before it was rented, and I thought it was worth $155,000 after it was repaired. I think it is worth $165,000 now, and that leaves a net worth increase of $28,000.
This home is rented for $1,400 a month.
Rental 10
I bought rental property number 10 for $99,928 on 4/13/2014. The home only needed $3,500 in repairs before it was rented, and I thought the home was worth $125,000 when I bought it. I think it is worth about $130,000 now, leaving a net worth increase of $26,500.
This home is rented for $1,250.
Rental 11
I just bought rental property number 11 on 7/24/2014. This house will need about $15,000 in repairs, and I paid $109,318. I think this house is worth $155,000 repaired, leaving a net worth increase of $30,000.
I think this home rents for $1,400 a month.
What is the total gain?
If you add up all these numbers, my total net worth has increased by $556,500, but these numbers do not tell the entire story. I had more costs than I listed when I first bought these houses, but I did not go back through each closing file to get those exact costs. On many of these properties, I had the seller pay some closing costs, which covered much of my buying costs. I also had some carrying costs while I was getting the properties repaired and they were not rented out yet. However, I also did not include any of my cash flow or the money I made on these properties since 2010. I used all of my cash flow to pay off rental property number 1, which added up to over $70,000. That $70,000 in cash flowdefinitely covers all the closing and carrying costs I had on each property and went directly to increasing my net worth by paying off a loan. Speaking of paying down loans, I did not include the equity I have gained over the last 3.5 years by paying down my loans. I have paid down thousands of dollars of loan balances with regular payments on my rental properties.
Net worth is not money in my pocket but what I am worth on paper. Even though it is cool to see this number increase over time, this money is not all readily available. I would have to sell my rental properties to see this money, and I would not see all of it. There would be selling costs when I sell the properties and taxes owed once I sold them. Since I am using the depreciation on the rental properties to save me in taxes, I would have a higher than normal tax bill because I would have to recapture that depreciation.
What about in 2019?
I have 20 rentals that have increased my net worth about $3,000,000 in the last 9 years. I have gotten lucky that Colorado has appreciated like crazy, but they were still awesome deals even without that appreciation. They make me about $13,000 a month after all expenses. The cool part is I have spent less than $350,000 on the properties after refinancing some to take money back out. Talk about an amazing investment!
You can see all my rentals here.
My book on making money with rental properties
I provide a lot of information on my blog and YouTube channel, but I also have written six books. My book Build a Rental Property Empire has been a best-seller for years. It goes over everything I do to find, finance, repair, manage, and even sell my rentals. I also added a commercial chapter to go over that aspect as well. You can find the book on Amazon as a paperback, audiobook, and Kindle. Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely.
Conclusion
It can take time to make a lot of money with rentals, but it is possible. Over the years I have bought a 1999 Lamborghini Diablo, a 1998 Lotus Esprit, a 1981 Aston Martin, and more thanks to the rental properties. The rentals have also allowed me to be aggressive with my house flipping business because I know I have that cash flow coming in every month. We flipped 26 houses last year!
Flipping houses can be a very lucrative business, but in most cases, you have to pay a lot of taxes. There are ways to pay fewer taxes flipping, but it takes some sacrifices from the investor and a lot of time. Most flips are taxed at the ordinary income tax rate, but in some cases, you may be able to pay only the long-term capital gain tax rate. I flip many houses a year and to me, it is not worth the time it would take to pay fewer taxes on flips, but for others, it may be worthwhile. I am not an accountant and for specific legal or tax questions please consult an attorney.
What are the tax rates on house flips?
Flipping houses is considered a business by the IRS, not an investment. Rental properties are considered an investment and have much more favorable treatment from the IRS. Rental income itself is considered ordinary income, but you can depreciate rentals, which is a huge tax advantage.
When you sell rental properties, the profit is often considered long-term capital gain and taxed at a much lower rate than ordinary income. If you make $30,000 on a rental property sale you may only pay 15 percent taxes instead of twice that if you are in one of the higher tax brackets. It is possible to flip a house and pay that lower tax rate, but there are many things you have to do to qualify your property.
Can a flip be considered a rental property?
The IRS tax codes are not the clearest things in the world. They tend to be very vague when giving instructions on how to figure taxes. The IRS says a rental property has to be held for a certain amount of time for it to qualify for long-term capital gains. However, they do not specify what that time frame is. Many people assume it is one year, but there are no guarantees with the IRS. Some even argue a property has to be rented, not just held for one year to qualify.
It is argued that you can buy a house you intend to flip, fix it up, rent it for one year, and then only pay long-term capital gains taxes. However, the IRS has many intricacies and you should always consult an accountant when trying to figure out the tax code. The IRS created this code because they felt dealers or professional house flippers should have to pay ordinary income tax on their earnings because it is their profession. Just like a doctor, real estate agent or most anyone has to pay ordinary taxes on their wages. If you are flipping ten houses a year, holding them all for over a year, and then trying to pay only long-term capital gains on the taxes, the IRS may say you are a dealer and you owe ordinary income taxes
Is it worth it to pay fewer taxes on flips?
For me, it is not worth holding properties for over a year to save money on taxes. If I have to rent them for a year it would really not be worth it. I try to sell my flips in six months or less, although that does not always happen. Here are the concerns I would have holding on to a flip longer than I have to.
I have a limited amount of money I can spend on flips. It takes almost $50,000 of my own cash to flip a house and I have from four to ten going at one time. If I had to hold them for one year I would not be able to flip as many houses, because I would not have the cash to keep buying them.
I have to pay interest and carrying costs when I hold flips. Every month I hold a flip I would have costs piling up that would eat into my profits. My carrying costs can be as much as $1,000 a month and I have cheap financing.
My loans are only one year long on my flips. If I held them longer I would have to pay off those loans or refinance them, which would greatly increase my costs.
The longer you hold a property the more risks there are the market could change. I buy rentals for cash flow and I am not as concerned about market changes, because I will make money with rent. You make money on flips from buying low and selling high. If you hold a property for over a year, the market could decrease and you could lose money.
All of these factors are assuming I hold a flip for one year, but what if I rented the flip to make up for the costs?
Does it make sense to rent a flip for one year to pay long-term capital gains taxes?
If I were to rent my flips after I fixed them up, I might be able to get away with paying long-term capital gains tax. Again, there are no guarantees because I am a professional flipper. Here are the problems I see with renting a flip.
I make a lot of repairs on my flips and I want them to look great when they are listed. If I rented the property I risk the tenants messing up all the new fixtures, paint, flooring, and more. I can’t wait to make repairs, because most of my flips need a lot of work and cannot be rented in the state I buy them in.
I would have to refinance the property or pay off my loans if I rented the houses as well.
After I repair the house I would have to take time finding tenants, checking references, advertising, and signing leases. Most tenants want a long-term lease, which means I would have to rent the house for a year. It takes time to repair the property and I would want to sell the property after the tenants moved out. I would have to hold the properties well over one year, probably close to 18 months to make renting work.
How much money would I save by holding these properties?
If I go to all this trouble and time to pay fewer taxes, what would I actually save? Assuming the long-term rate stays at 15 percent, I would save about 20 percent on taxes. However, there is a push to increase the long-term capital gain tax rate. I average about $30,000 in profit on each flip, which would equate to $6,000 in tax savings on each flip. That is a lot of money to save, but I am actually getting more money overall?
If I held my properties longer I would have to flip half the houses I do now. If I flip ten houses a year I would make $300,000. If I could only flip 5 houses a year, I would make $150,000 a year, but pay fewer taxes. If I made $300,000 paying 35 percent in taxes I would pay $105,000 to the IRS. If I made $150,000 paying 15 percent in taxes I would pay $22,500 to the IRS. I pay a lot less in taxes, but I don’t care how much I am paying, I care how much I am keeping. In one scenario I keep $195,000 and in the other scenario, I keep $127,500.
Not only would I make much less money holding the properties, but I would also risk the IRS saying sorry you don’t qualify since you are a dealer and I would have to pay the full taxes. I also risk the market changing and I didn’t even consider the refinancing costs or carrying costs, although rent may make up for some of that.
Can corporations lower the tax rate on flips?
New tax laws are constantly being enacted and using a corporation to flip houses may save you money. My accountant suggested I use an S corp and that is what I do. With the deductions corporations get I save money but those tax laws could always change.
Can you use a 1031 exchange on flips?
Some people say you can use a 1031 exchange to flip houses but that is a tricky situation. A 1031 exchange is meant for rental properties and investments, not fips. You most likely have to hold the property a year and rent it out but again please talk to a professional!
Conclusion
I make more money by paying more taxes on my flips because I can flip more houses. There is also less risk with the market and tenants. For some people who only flip one house a year, maybe it makes sense to turn it into a rental before you sell. Always talk to an accountant to make sure you are following the rules in these matters.
Last Updated on February 24, 2022 by Mark Ferguson
Rental properties can be a great investment if they bring in cash flow and are bought below market value. I bought 16 rental properties from the end of 2010 to the middle of 2015. I stopped buying rentals in my market because prices increased so much that it became very tough to cash flow. I bought my properties well below market value, and prices in my area (Colorado) increased tremendously. I put a lot of thought into whether I should sell the properties, keep them, or refinance them. So when does it make sense to sell your rental?
I decided to sell a couple of properties, refinance a few more, and keep the rest as they were. The reason I decided to sell some of my properties was I had $100,000 of equity in some of them but was only making $500 per month. That means I was making about 6% cash-on-cash returns on my equity (I was making much more on my initial investment since it took around $30,000 to buy each house). Even though I was making close to 20% on the money I had initially invested, I could make much more by taking my equity out and buying more houses.
Should you sell your rental properties if they are not making you any money?
My readers and podcast listeners constantly ask me when or if they should sell their properties. Many people are not making very much money on their rentals but have a lot of equity. Here is an example:
The house is worth $200,000
The house rents for $1,500 per month
The investor has a loan of $125,000 against the house
The payments are $1,100 per month
On the surface, it looks like this rental is making $400 per month, which is great. However, the investor has not accounted for any maintenance or vacancy expenses. Those expenses usually add up to 10 to 20% of the rents every month, which would equal another $150 to $300 in expenses. The investor is only making a couple of hundred dollars per month on this rental but has $75,000 of equity in the property. That is only a 3% return on your money. There are other advantages to rental properties, like depreciating the property, equity pay down, and increasing rents. However, which opportunities are the investor missing by keeping the property and all that money tied up? I think the investor should sell the property and invest the money in more houses or apartments.
If you sold this property, you would not be able to keep all the equity. There would be selling costs and taxes you have to pay unless you do a 1031 exchange. The selling costs could end up being 6 to 10% of the cost of the house. If the house sells for $200,000, that would be $12,000 to $20,000. Taxes on the sale of a rental property would most likely be 15 or 20% depending on which tax bracket you are in. You only pay the taxes on the profit you made on the property and any recaptured depreciation. We will assume the investor bought the property for $150,000 a few years ago, which means they would pay around $6,000 in taxes. That leaves the investor with about $50,000 in cash to play with if they do not do a 1031 exchange, which could reduce the taxes to nothing.
How much more money could an investor make?
Rental properties can be expensive, which is one of their downfalls. With $50,000, you could buy a better-performing rental property that generates more money. Not only could you buy a rental that generates more money, but you could also buy the property below market value, which will make up for all that money you lost selling the other property. Here is an example:
Buy a property for $100,000 that needs $10,000 in work
Put $20,000 down on the property, with a house payment around $600
Repair the property and rent it out for $1,200 per month
If you bought the property correctly, it should be worth at least $140,000
You now have a house with $60,000 in equity (almost as much as you had before). You are making more money every month. You even have $15,000 in cash leftover ($20,000 down payment, $10,000 in repairs, $5,000 for miscellaneous costs).
Some of you may not think this is an awesome deal, but you have more cash in your pocket that can be used to buy additional rentals in the future. You also have a property that generates much better income every month. If you have some extra money to buy a second property right away, the equity and cash flow would double, and the investor would be much better off. If you have a property with more equity than my example, you would buy more rentals right off the bat without using any extra cash and be way better off as well. If you are trying to decide whether you should keep or sell some of your rental properties, analyze how much cash you could get from them and how much you could make with that money.
What did I do with my rental properties?
I got really good deals on all of my rentals, and our market took off in Colorado. I had properties that I bought for $100,000, put $20,000 of work into, rented out for $1,3000 a month, and are now worth $220,000. I had properties with $120,000 in equity but were only generating $7,000 per year. I was making 6% on my money, which is good for some investors but not what I am used to from investing in real estate. I always wanted to make at least 15% cash-on-cash return on my rentals. I knew I wanted to make more money, but I was not sure how. I ended up refinancing some properties, selling a couple and keeping others as they were.
I refinanced properties because I could take cash out of them and still make money. In the example I first used for the investor with a $200,000 house, he could have refinanced as well. You can usually refinance a house at 75% of what it is worth. The investor could have taken a loan out for $150,000 on the $200,000 house and had payments around $1,100 per month after taxes and insurance. If you are wondering why that payment is the same as the payment I used for the $125,000 loan balance above, I assumed the investor had the loan for a while and the original balance was $150,000 at a higher interest rate than we have now. When you refinance a house, you have to pay closing costs again, which can add up to 3% of the loan amount, or $4,500 in this example. By refinancing, the investor would get $20,000 back in cash with a similar payment as he had before. That is not a bad deal, but I do not know if $20,000 is enough to buy another rental. If so, the investor may be better off refinancing than selling.
I had more equity in my properties than in the example we used. I was able to take out anywhere from $25,000 to $50,000 in cash from many of my rentals and still make decent cash flow. By refinancing my properties and selling a couple of other ones, I was able to get all the money back out that I had used to buy my 16 properties, and I was still making $7,000 per month from them. I sold the properties that were the least desirable to me and kept the ones I liked.
How do you buy new rental properties if there are no good rentals in your area?
The problem I ran into when I wanted to sell my properties and buy more rentals was I could not find good rentals in my market. Prices had increased, but rents had not increased nearly as much. I had to use much more cash to buy houses because prices were high, but I made less money on that cash. I decided to stop buying properties in my area and look in other markets. I went to Florida and found good rentals, but I ended up not buying any properties there. Instead, I started to flip more houses, and that is where I invested my money. I have historically flipped from 5 to 10 houses per year, but in the last three years, I flipped 12 and 18, and this year I will come close to flipping 30 houses. I want to buy more rentals. In fact, I have a goal to buy 100 properties. I am not going to buy bad investments to reach that goal, so I have switched directions with my investing. If I find the ideal place to buy rentals or my market changes, I will be set up to invest a lot of money into rentals thanks to the flipping business. You can watch the video below to hear more about investing in expensive markets.
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I have not bought any residential rental properties since 2015, but I bought two commercial properties this year and have two more under contract to buy. Commercial properties are completely different from residential ones but can be great investments as well. I bought a small shop for my flipping supplies earlier this year, and I just bought a 7,500-square-foot commercial property that I will write about later this week. Not only can you buy different types of rentals when prices are too high in your area, but you can also buy out-of-state rentals or even turn-key rentals.
Should you sell your rental property if you are not making any money on it?
Many people buy rental properties without any cash flow, hoping to make money through appreciation. Some people end up being accidental landlords when they turn a property into a rental because they could not sell it. I think, in both instances, owning a rental that does not generate any money is very risky. Betting on appreciation is tough because of all the selling costs we talked about, and if you are not making any money, it makes it tough to get a new loan on properties. I would suggest getting rid of rentals that don’t make any money and focusing on investments that do. This advice assumes you are not ultra rich and have so much money that you do not care if a property makes money or not.
Conclusion
Many investors have seen their properties go up in value over the last few years. It is tough to know what to do with all that equity. Should you leave it and let it earn a small return? Should you refinance? Should you sell? I chose to do all three, and it has worked out well. I do not want to max out the loans on every property I own because it would hurt cash flow and be risky. I also do not want to leave unused equity in my properties. I sold some properties to take advantage of the hot market and clean out some of my poorly performing assets. If you are thinking of selling some rentals, run the numbers to see how much money you would get, see what properties or other investments you could put that money in, and maybe selling will make sense. If you would like me to look over the numbers of your rental property for you, you can post them on the InvestFourMore Insider.
I bought my first rental property in 2010 when the market was much different! I bought a single-family home for $97k that rented for $1,050 a month. I know many people would love to go back to those days but the reality is prices will most likely never be that low again in most markets. While I bought a single-family home for my first rental, there are many other types of rentals and I have since bought multifamily, commercial, and mixed-use rental properties. The type of property that is best for beginners in today’s market with high-interest rates and high prices will depend on many factors.
What was my first rental property?
The first property I bought was a 3 bedroom, 2 bath, 2 story house with a 2 car attached garage. The home was built in 2005 and did not need a lot of work. I bought it in Greeley, Colorado and while prices were much lower back then, I still got a great deal. I took my time looking for properties and this was an estate sale. The home needed some paint and that was about it. It was a fantastic property for my first rental. I used Bank of America to get a 25% down investor loan which was not easy but luckily the seller was patient! While properties were cheaper then, it was much tougher to finance them and there were much fewer options for investors.
I later sold that property for $275,000 in 2019 and used a 1031 exchange to buy a commercial property for $600,000. I think buying a single-family rental was an awesome choice for me at that time. However, this property would not be a very good rental now as it is worth around $350,000 and would only rent for $1,700 to $1,800.
Are single-family rentals good for beginning investors?
I think single-family rentals are great for beginners if the numbers work out. However, with high rates and high prices, the numbers simply don’t work in many areas. There are areas of the country that have cheaper houses that are great for single-family rentals but we aren’t all in those places. Here are some of the pros and cons of single-family rentals:
Pros
Large buyer pool if you need to sell: Single-family homes are attractive to investors and owner-occupants. When buying a rental as a beginner it is smart to have an exit strategy. Maybe the property is not as good as you thought it was or you decide you hate rentals. Can you sell the property? If you need to sell a single-family home you can sell to other investors or owner-occupants. Owner-occupants will often pay more than investors and they are always buying homes even when interest rates are high. Investors may slow down their buying when rates are high.
Easy to rent and manage: Single-family homes appeal to many renters and are usually easy to rent. Tenants also have a tendency to stay in the property longer and take care of it. I have had the same renters for 10 years in some of my single-family rentals. Many tenants will even make minor repairs themselves (not always a good thing) and maintain the yards, perform snow removal, etc.
Easier to find a good deal: In most areas, there are more single-family homes than other types of rentals. Because there are more of them there are usually more for sale and you might be able to get a better deal than on multifamily or commercial where there are much fewer properties.
Easier to finance: Lenders love to finance houses, even as rentals. It is much easier to get a loan on a house than a commercial property, multifamily, or mixed-used property.
More diversification: If your plan is to buy a lot of houses, like my plan to buy 100, it can be a little safer than buying a few big properties. Each house will be in a different area, with different tenants, and one horrible situation won’t destroy all your houses.
You can house hack a single-family home which means you buy as an owner-occupant and rent out part of it while you live there or live there a year and then rent out the whole thing. Owner-occupants get much cheaper loans with less money down.
Cons
Harder to cash flow: The big con with single-family rentals, especially right now is they can be very expensive compared to the rent they bring in. The more expensive the property, the worse the rent-to-value ratio tends to be.
Houses are expensive right now: Most properties are expensive but in some markets, houses are very expensive, and the higher the price, the more money you will need to invest in them.
Tougher to scale: It is tougher to scale when you need to buy a lot of houses to meet your goals. Each purchase takes work to find the deal, finance it, and possibly make repairs. If you buy larger multifamily or commercial it can be easier to scale.
More expensive to repair: It might be more expensive to repair single-family homes than a larger building because a larger building has one roof, possibly one heating system, etc. However, that roof and heating system on the big property will be much more expensive to repair and you will need a lot more money at once, than if you are repairing houses here and there.
Are small multifamily rentals good for beginning investors?
Multifamily rentals have more than one unit. You could invest in a duplex or a fourplex or a 100 unit property. Multifamily properties can make it easier to scale because you have more units under one roof and the rent-to-value ratios may be better. These pros and cons are for smaller 2 to 4-unit multifamily properties.
Pros
Can have much better cash flow: Multifamily properties are usually valued based on the income they produce. The prices are not driven up by owner-occupants who do not care what a property will rent for.
Somewhat easy to sell: 2 to 4-unit properties are fairly easy to sell still although not as easy as single-family homes. You can still house hack a 2 to 4-unit property which means owner-occupants can buy them. There are not a lot of people looking to house hack but you can still sell to investors and owner-occupants.
Easy to finance: Again, 2 to 4-unit properties are fairly easy to finance but not quite as easy as single-family homes. You can buy as an owner-occupant or get an investor loan with many banks.
Easy to get a good deal on: There are a lot of 2 to 4-unit properties in most markets although not as many as there are single-family homes. It can be easier to get a great deal, although not as easy as houses.
Cons
Harder to manage and rent: 2 to 4-unit properties take more management and usually have more tenant turnover than single-family homes. Tenants tend to move more often, the rents are usually lower, and tenants rarely think of a multifamily as a permanent place to live.
More risk of major loss of income: If you have a few houses and one tenant decides to cook meth in the house it can destroy the house and cause major problems as well as lost rent for months. You still have the other houses to bring in income. If you have a multifamily property and that happens the whole property may need to be vacated for an extended period of time. If you have just one of each, then the risk is about the same.
More expenses: The tenant usually pays all of the utilities and performs the yard maintenance and snow removal on single-family homes. On multifamily homes, the landlord often pays for the maintenance and some of the utilities if not all of them. You may be able to charge higher rent since the landlord is paying those expenses but make sure you account for them.
More fluctuations in value: Multifamily properties are valued based on the income of the property and the expenses. If inters rates go up as they have been, they may be harder to sell or sell for less because investors have to pay less to get the same return. However, when rates go up, rents often increase as well so that could offset a decrease in value (rents would go up on houses as well).
Are large multifamily properties good for new investors?
A lot of new investors want to invest in large multifamily properties. Grant Cardone now tells people to only invest in properties with at least 32 units although he used to encourage house hacking with FHA loans. Large multifamily properties can make a lot of money but they can also be very difficult to buy due to their price and lending is much tougher.
Pros
Easy to scale: You can bring in a lot of rent with one property and add a lot of value with the right deal.
Rent to value ratios: The rent to value ratio may be better on big properties because only investors are buying them and they expect a certain return. The bigger the property the better the numbers may look because very few buyers are looking at those deals.
The maintenance costs can be lower: The costs versus the rent may be lower because you have large buildings under one roof that share the same systems.
Cons
Much harder to finance: The everyday person cannot get a loan for a large apartment building. One of the factors lenders consider is experience and they are wary of lending to new investors on big deals even if you have the down payment.
Less diversification: If there is a disaster at a large complex, you may have a huge problem with no rent coming in for months. Again, these are rare but can happen. You also may have chosen the wrong location and the property doesn’t perform as you thought (I did this with an 8-plex).
Harder to sell: There are few buyers for large complexes and they can take a long time to sell. Interest rates also impact them greatly.
The expenses come in huge chunks: While the overall maintenance costs may be lower based on the investment, they can be huge when they do come. You could spend hundreds of thousands of dollars on a roof. Having one roof is not always better. There could be more expenses as well like parking lot repaving, landscaping, common areas, etc.
They are expensive: It takes many people years to save up the money needed for a large complex. The purchase may be worth it, but while you are waiting why not buy smaller deals that build experience and a track record for lenders. The right deals will also bring you cash flow and equity which could make it easier to buy that big deal sooner.
More headaches: Large multifamily properties tend to have the most turnover, the most repairs needed, and the craziest situations. They take much more management and can have more headaches.
Are commercial properties good for beginner investors?
I bought my first commercial property in 2017 and it cash flowed much better than single-family or multifamily properties in my area and was cheaper. A lot of people see my commercial properties and want to invest in that sector right away. However, they come with more risk and are much more complicated.
Pros
Can be cheaper with better returns: In some areas, commercial properties are cheaper and have better returns but they also could be more expensive depending on the area. Small commercial properties are often cheaper than single-family homes.
Can add a lot of value: If you can add a tenant on a long term lease it can add a ton of value., I recently bought a commercial property for $865k that was vacant, then added 4 tenants. That property is now worth $1.5 million but it was not for the beginner.
Long term tenants: Many commercial tenants will stay for years and have leases that run for years. This is great of you have the right tenant but it takes longer to find those tenants. Many of the leases have built in rent increases as well.
Fewer expenses: Some commercial leases are NNN which means the tenants pay almost every expense. These can be fantastic for the landlord but not every commercial lease is set up this way.
Less headaches: Commercial tenants tend to be less needy than residential. They often take care of the property themselves and make sure it looks nice for their business. They expect the rent to increase each year and usually don’t get upset about it.
Owner occupied financing available: Yes you can owner occupy a commercial property. You do not live there, but you run a business out of the property. If you use more than 50% of the space you might be able to get an SBA government loan with 10% down.
Cons
Much more complicated: It takes time top to learn how the lease work, and the differences between NNN and gross. Properties are valued using cap rates which can be difficult to figure out because they vary based on the lease, the tenant, the property, the location, and more.
Harder to finance: Commercial properties are usually the hardest to finance. They come with risk if you lose a tenant and the lenders know this. They have shorter term loans that must be renewed every five or ten years. The lenders will want to see buyers with experience before they lend them money as well. Even the agents and sellers may not take a buyer serious if they don’t have any experience.
More expensive costs: If you have to make repairs it can cost a lot more money as rooftop HVAC, roofs, parking lots, and commercial construction often cost more than residential. The city may require more as well like fire sprinkler systems. Appraisals and inspections are more expensive as well.
Harder to sell: Just like multifamily properties, commercial properties can be much harder to sell because there is a smaller buyer pool.
Environmental issues: A big concern with commercial properties are past or current environmental issues. You may need to get an environmental report that shows there were no hazardous materials on the property or gas tanks, etc. To clean up problem properties it can takes tens of thousands of dollars or more.
Tenants might expect TI: TI stands for tenant finishes and many tenants expect the landlord to fix up the space for them. This can cost a lot of money but also add a lot of value.
If you are buying small commercial properties you may be able to avoid many of these issues but it is still good to be aware of them and especially talk to your lender about them! On some of my smaller commercial deals, I am able to get a local bank to finance them without an appraisal which is awesome.
Are mixed-use properties good for beginning investors?
Mixed-use properties can also be put in the commercial category. Mixed-use means the property can be used for residential and commercial or have both at the same time. I have a few mixed-use properties and love them but they can be tough to finance like commercial. The one benefit is you can live in part of it and work out of part of it. You may be able to get low down payment SBA loans because of this.
What is best for a beginning investor?
There are many different options for beginning investors to buy their first rental. I would be wary of jumping into huge projects without a lot of help from someone with experience. It will be almost impossible to do so unless you have a lot of cash. Personally, if single-family homes cash flow, I think those are the safest and best bet, but small multifamily can work as well.
If you want to dive into how to do all of this I have a book on residential rentals and commercial rentals as well!