A lot of real estate experts suggest investing in rental properties as a way to generate a stream of passive income over time. While that is a good possibility, it’s not the only reason to invest in real estate.
Doug Greene, real estate investor and owner of Signature Properties , owns four properties, with plans for more, but surprisingly he’s not in it for the monthly income the rent provides. Instead, there are multiple other benefits he gets out of property ownership that he finds more valuable than an income stream.
Greene has been investing in rental properties for many years, though the first property he purchased was one he was simply moving into himself. It was a 200-year-old house that needed a lot of work. He learned, by doing much of the work himself, what it takes to renovate a property, as well as what things commonly fail and what are good investments for durability and longevity.
He also realized he did not want to be in the “fix-and-flip” business, which is just too labor intensive. He quickly asked himself, “What can I do that’s a bit more passive?” So he built a real estate business to give him access to better deals on properties that are rent-ready and in move-in condition.
One of the biggest benefits of owning rental properties, he said, is the appreciation of the property value (and thus equity), which has improved since the early days of the pandemic when there was very low inventory, followed by high home prices.
“I knew that if I could hang on to the rental properties, they would appreciate,” Greene said. “My tenant is paying down my mortgage each and every month. So that’s great.”
He anticipates that most of the properties he invests in are going to appreciate 4% to 5% a year, but on hundreds of thousands of dollars.
“Every month I get a rent check from the tenant and I pay down the mortgage over time, that is reducing my loan balance, which is just building more and more equity in the property.”
Another benefit of homeownership is the tax benefits that it incurs. “Let’s say I do a flip and I make a hundred thousand dollars and it’s a short-term capital gains tax because I bought and sold it in less than a year. There [are] a lot of different ways I can use my rental properties through depreciation [as a tax write-off],” Greene noted.
Other write-offs include the interest on the loan for the property, depreciation on the property and so on. These tax benefits may vary from state to state, however.
He also just genuinely enjoys buying real estate, renting it out to somebody and hanging onto it from a more generational perspective.
Refinancing Benefits
Another of the benefits of owning properties that appreciate in value is that it allows you to refinance a property and take out money to renovate it, or use it as a down payment on another property.
“The first house I purchased in 2017, I paid a small amount for it because the house was really run down and needed a lot of work,” Greene said. “I put a ton of work into it, but I refinanced it in 2020 or 2021 and I was able to get every dollar I put into it, in terms of renovation and down payment, back.”
This increases the value of the property, which then can go on to earn more equity over time due to the renovations.
In other words, this ability to refinance continually into the future is another source of collateral or capital as his business grows.
“So if I wanted to buy more rental properties, I could just refinance and take the cash and go buy more, or I could borrow against them as collateral on a portfolio loan or something like that.”
Advice for First-Time Investors
While owning rental properties comes with benefits, like the ones Greene just illustrated, there are some things that first-time investors need to keep in mind.
Remember: It’s Unlikely To Replace Your Income
While it is definitely possible to make a decent income stream from rental properties, Greene pointed out, “The reality is that so much can go wrong and does go wrong with being a landlord. It’s the biggest misconception out there, that it can replace your income just by buying rental properties and renting them out.”
Make Sure To Set Income Targets
Though he doesn’t seek to live off the income his properties produce, Greene does have a general target and a formula he follows to see if it will be worth his while.
For one thing, he opts for standard rentals, not Airbnb or midterm traveling nurse rentals. “I usually shoot for: ‘Does it look like it’s going to make $300 to $500 cash flow a month?’ If it does, it’s something I’d be willing to sign up for.”
That monthly income amount comes after he has subtracted out the mortgage and other costs he expects to spend on it. “Because what’ll happen is at the end of the year it’s like, OK, you’ve got to replace the furnace, or you have a month where the tenant moved out and you got to make the mortgage payment and there’s no one in there,” he remarked.
Though every market is different, and some investors may want passive income, these benefits can make the financial output of investing in a rental property worth it beyond any income the rental may produce.
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