Question: Why do we, as landlords, continually rent our most valuable assets to sometimes careless and ungrateful tenants, risk minor lawsuits, and then do it all over again, year after year?
Answer: Financial Independence
In this article, I not only discuss my opinions on using rental properties to build wealth, security, and financial independence, but also the importance of using that wealth for something greater.
The American Dream 2.0
Over the years, I think the once innocent “American Dream” has morphed from having a cute (paid for) house with a white picket fence into being something more; something full of greed and grandeur.
In my opinion, the dream is now for Americans to reach a grotesquely wealthy status, live in a mansion (mortgaged to the hilt) that will make the neighbors jealous, and have a car that cost more than a college education.
Though enticing, this is neither wise nor realistic for the majority, nor is it a source of happiness. Most of us will go into debt, at suffocating levels, trying to achieve this dream.
Where’s the freedom in that?
Unbeknownst to him, Dave Ramsey has been a long-time financial mentor to me. On his national radio show, he teaches about fiscal responsibility and freedom from debt. One of my favorite quotes of his is “money is only good for 2 things: security and giving away”. I couldn’t agree more.
Money is only good for 2 things: security and giving away. – Dave Ramsey
Dave is trying to change this so-called American Dream into one that can truly bring joy and satisfaction to those who chase it.
Producing a Passive Income
Landlording is one of the best ways I’ve found to create a continual passive income and pay off debt. The word “passive” is the key here – the idea of making money with little or no ongoing effort. You see, investing in real estate helps me invest in the lives of other people. (tweetable?)
Not only will this passive income help support my family now, but my estate will help support my children’s children for generations to come. It’s about building a legacy free of financial constraints and debt.
The rich rule over the poor, and the borrower is slave to the lender. Proverbs 22:7
Running the Numbers
For me, landlording brings in about $12K/month in rent – granted, most of that goes to pay mortgages, taxes, and expenses. Nonetheless, every month my renters pay off slightly more of my mortgage principle, and in 15-20 years from now, all my mortgages will be paid off.
When my rental properties are free and clear of any debt, I will have the option of either continuing to receive a monthly rent check, or I can sell these properties for a lump sum of cash. Both of these scenarios are excellent options. In real estate, this is called “Buy-and-Hold” rentals, and I’m a big fan of this technique.
As long as I can live comfortably now, and not use my rental property’s equity to live off of, I will be saving that equity for later – when it has its greatest value.
Buy-and-Hold rental properties have 2-3 times the value of any other types of properties. Over the long-term, I expect to make a 200%-300% return before subtracting expenses and depreciation.
Here’s how: the rental income you’ll receive over 15-30 years will pay off the mortgage. Then, after the property is free and clear of any debt, you can sell it for double (or more) than what you paid for the property.
In essence, a single rental property could pay for itself 3x over (1x through rental income, and another 2x through equity when you sell it). However, a portion of that will go into paying back taxes on the depreciation and the any other fees.
Overall, this is the type of return on investment that I want to leave with my family, and hopefully create a debt-free future for generations to come.
There’s One Catch
There is one catch… you have to enjoy (or at least endure) being a landlord. Landlording is not completely hands-off, and is still very much a business. Personally, I like it, and have set out on a mission to show others how great it can be.
Having a Bigger Perspective
I believe that financial independence is not the end, it’s just the means to something more. If I am striving to build up my material treasures, I am wise enough to know that I will never be able to quench my thirst.
For me, being financially independent means that I can spend my time doing things that really matter, like investing in the lives of the people around me, loving my wife, and soon-to-be adopted daughter.
Our rentals are part of a bigger plan to free ourselves of debt and day jobs. Though I have an ever-growing passive rental income now, I still maintain a full-time job that is not in real estate. One day, our rentals will be able to fully support us, and will allow me to focus relationships rather than dollars.
Remember, you can earn more money, but when time is spent it is gone forever. – Zig Ziglar