Investing and seeking out monthly cashflow can take you down two paths. For me, one of those two paths is earning monthly dividends and selling options to generate income. Another path is to purchase rental property and rent it out, thus earning that monthly cashflow from payments.
Today I’m going to discuss the latter: Rental Property
Rental Property: What’s Your Timeline?
The first question you want to ask yourself is “what’s your timeline?”
The purchase of a house will take some time, possible a few months from opening the case to closing out on the purchase. Once you do make the purchase, you then have the time spread between putting the house in the papers until getting your first tenant. After you get your tenant, things are generally smooth sailing from there in terms of monthly cashflow. However you do have to take into account maintenance and management.
If a pipe breaks or the AC unit is broken, that generally falls on you to get fixed. You may opt for a property management service to take care of all this for you as well as ensuring the tenant pays their monthly rent. I had to deal with a property manager when I rented out a townhouse and they always took care of maintenance.
If you manage to survive through that, congratulations! As long as you have a tenant occupying your property, you will earn consistent monthly income. Over the course of your mortgage, you’ll be slowly paying off your loans and thus increasing your assets and net worth. Slowly earning equity on your house.
The monthly cashflows will be lower risk too. Tenants don’t move in and out very quickly or very often either.
Rental Property vs Stock Market
How are rental properties better than the stock market?
- For one, the amount of risk you take in is lower since you’ll almost be guaranteed a monthly payment each month
- In the long run, rental income beats out a lot of capital gains income from stocks
- You have some tax benefits from writing off depreciation from your house. If you collect rental income and your house depreciates, you earn some of that income tax free (also known as phantom cashflow).
- The housing market generally rises over time. In a sense you’re owning a stock that pays high dividends and has historically good gains.
- Even if the market drops 60% like in 2008, you will still be receiving the same monthly rent payments from your tenant.
The cons of having rental property?
- Long-term investing
- Management and maintenance fees
- The amount of capital required up front is substantially larger
- Very illiquid. If you want to sell or find tenants, it generally takes some time. If the housing market is collapsing, you won’t be able to get rid of your house that quickly. FUD plays a role too.
I have a friend in Maryland whose parents own about 7 or so rental properties. In addition to that her dad is working a high paying salary job and is very well versed financially. Her school tuition is paid for completely from the rental property income. Talk about a taste of financial independence right there. With enough rental properties, you could have enough cashflow to act as income and support two generations of families.