Top 5 Benefits of Real Estate Investing - Build Passive Income

Hey, what's up everyone and welcome to the School of Personal Finance. In this video, we're going to talk about all of the benefits of investing in real estate, specifically in single family homes. If you've watched any of my content, you probably already know that I'm a big fan of investing in real estate. The funny thing is, is that I really don't hold any of the skills that are required to be a successful real estate investor. I'm not handy at all. Fixing toilets, that's not my thing. I don't enjoy dealing with tenants. I'm not looking to chase people down for monthly rent checks. I'm not going to rehab any types of properties. I'm not looking to go to collection agencies and dealing with all that stuff. As far as the day-to-day operations of being a real estate investor, it is not my forte. Luckily, in this day and age, there are property managers that will handle all of that stuff for you. I found a way to be able to invest in real estate where I don't want to say it's completely passive, but it's really hands-off from a management standpoint because I have great property managers that deal with all that stuff. On top of that, I live in a market that is not good for rental real estate. Where I am in New York, the taxes are very high, the home prices are very high. It just doesn't make sense as far as buy and hold rental real estate in my area. My first investment property, I learned the hard way that I didn't want to be a hands-on landlord. It was a house that we lived in that we decided to move out of and turn into a rental. I did that for a few years, but it was a lot of headaches. On top of that, I wasn't even making any money on it. I was barely breaking even. If anything happened to go wrong in the house, I was actually losing money on the month-to-month basis. It was a constant headache. I learned the hard way that that was not the way that I wanted to invest in real estate. I always knew that I wanted to be a real estate investor just because I watched people around me become wealthy. When I used to work in a bank, all of the wealthy clients, they were real estate investors. Maybe I didn't understand exactly what that meant, but I knew that that's how they had made their money. I wanted a piece of that. Having my first rental property be a home that I lived in that I knew very well, I thought that that would be a good first step into it. It took me a few years to realize that I didn't want to manage a property. I didn't want to deal with tenants. I didn't want to chase them down for rent checks. I didn't want to have to go over there and deal with the headaches like fixing a toilet or the air conditioner's not working. I decided to sell that property, and then I didn't do anything for a few years. Then I happened to stumble across a podcast a little over three years ago called Get Rich Education. It opened my eyes that you could actually buy real estate, buy single-family homes that have been completely rehabbed in locations where there is a large renter pool. Almost 50% of the population rents in these markets. They're growing populations, and the homes are very affordable. You could rent them out to blue collar individuals who have good solid jobs in a good economy, pay their rent on time, good tenants, and you could actually make money month after month on the rental income. I'm going to talk about the five different benefits that you get from owning these types of rental properties. Number one is cash flow. The only way that I'm going to buy one of these rentals and invest my money into it is if I get current cash flow from it. If it is cash flow positive, meaning after I pay the property manager, after I pay any expenses, the mortgage, the taxes, the insurance, put a little money aside for any big repairs that come up in the future, put a little money aside for any vacancy where I might have a period of time that nobody's in the home. After all of those expenses come out, I'm still left with a monthly cash flow with positive money that goes into my bank account each and every month. That is the number one reason that I'm investing in real estate, because I want that cash flow. Hopefully I could build that cash flow up big enough that it replaces the need to work for a living, where that passive income from those rental properties, it exceeds my monthly expenses. That is the ultimate goal. So now the second benefit is the loan pay down. So I am financing each of these homes with a mortgage, typically a 30-year mortgage where I put 20% down and I get a mortgage for the other 80%. So now as the tenant pays me rent each and every month, I'm using that to pay down the mortgage. So the mortgage is coming from the tenant's rent every month. That's part of the expenses that I just talked about. So at the end of 30 years, I won't owe anything on this house anymore. And the whole way through, it was paid down by the tenants. Number three is the tax benefits. The tax benefits to owning real estate are tremendous. And that goes for any type of real estate, not just single-family homes, multifamily, commercial, mobile home parks, whatever it is, the tax benefits are a big reason that people invest in real estate. So for the single-family homes, the key word is depreciation. And I'm not going to get into that in this video, but depreciation is a write-off that you could use on your tax returns that basically offsets a large portion of the income that you receive. So on a single-family home, a quick example is if I have a home that is worth $100,000, my depreciation each year, a tax write-off that I could take comes out to close to $3,000 a year. If my income from that property is $3,000 a year, then I don't owe any taxes on that income. It's almost as if the income is tax-free. It is a tremendous benefit. And there are more tax benefits. That's just the biggest one. But depreciation, tax benefits, it's a major reason why people invest in real estate. Benefit number four is leverage. Now, leverage is a double-sided sword. It can hurt you on the way down just as quickly as it can help you on the way up. But in real estate, the fact that you could buy a property, again, to this $100,000 home example, I can control and own a $100,000 home by only using $20,000 of my own money. I'm using other people's money, the bank's money, for the other $80,000 of that purchase. But yet, I get to keep 100% of the appreciation in the property. I get to take 100% of the tax deductions for the property. So this is where leverage comes in. If I have $100,000 and I don't use leverage, I could only buy one house. If I have $100,000 and I use leverage, I use the bank's money, I could buy four houses with that, including the closing costs and whatever else. So I basically could control four times the amount of assets with my $100,000 than I could if I did not use leverage. So this is the power of leverage, and there's no better place to use it than in real estate. Benefit number five is being able to do a cash-out refinance. So what do I mean by that? Let's say, for example, I buy a home and I put a 15-year mortgage on it. Let's say because my mortgage is a 15-year mortgage, the monthly payment is higher than a 30-year mortgage would be. Let's say I'm not really making any money month to month. I break even on it, so there's really no positive cash flow. Let's say I buy it for $100,000. Fifteen years go by, I really haven't made any money on my investment. There hasn't been any cash flows come out. But now that $100,000 home, let's say it's worth $200,000. I now owe no mortgage on it. What I'm able to do at that point, if I would like to, is do a cash-out refinance. So I don't want to sell the property because it's a very good performing property in a nice neighborhood, and I want to hold it basically forever. So I decide to do a cash-out refinance, and let's say I take out a 30-year mortgage on it. I'd be able to do it for up to 80% of the value of the home. That's $160,000 that I could cash out of that home now and put in my pocket, and not owe any taxes on it because it's a loan. So yes, at that point, I will have a loan payment. I'll have a mortgage payment that I'm going to have to start over and continue to pay, but my tenant is paying that off. I'm not the one paying that off. So I just put $160,000 in my pocket. My tenant's going to be paying off the mortgage, and I just started the clock over. This is a great way to pull money out of a house tax-free, and I'm actually implementing this exact strategy for college savings. So for my littlest guy, I bought an investment property with a 15-year mortgage, and I plan to do exactly that when it's time for him to go to college. I'll throw a bonus benefit in there for you as well. This one's a little bit harder to wrap your head around, but it's inflation. So with all of this debt, with these mortgages, inflation becomes your friend because I'm borrowing money at today's dollar value. So if I get a 30-year mortgage, we sit for $100,000. I'm borrowing $100,000 now, and I'm buying a house with it. That $100,000, as time goes on, it becomes worth less and less because of inflation. Just think about, you know, 30 years ago, or when your parents say, you know what I could have? I used to be able to buy a slice of pizza for a dollar, where now it costs $3 for a slice of pizza, right? The value of the dollar has gone down. The same thing happens with debt. When I'm paying back this mortgage that I'm taking out today, and I'm paying it back 25, 30 years from now, those dollars are going to be worth much less to me. So inflation is your friend when you're borrowing money. Debt is your friend. That's why the government borrows billions and trillions of dollars with long-term debt, because by the time they have to pay that money back, they will have devalued the dollar so much that it will just be a small amount. That's how they get away with all this crap. All right, so that's it for real estate investing. Hopefully, you enjoyed that video. Please hit that like button if you did. Subscribe to my YouTube channel. Hit that little button down in the corner to subscribe. Check out schoolofpersonalfinance.com. 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