Why and How to get started investing in Income Properties?

You want a better life. You want to create a life that allows you to do what you want, when you want to do it. Anyone can achieve this freedom if they plan for it and take action on the plan. One element of that plan needs to be Real Estate. Why Real Estate? Because it’s one of the best ways to create passive income. You make money while you sleep. You make money every hour of every day when others pay off your mortgage, when your property increases in value over time, and when your rents go up yearly. Income property investing can be done while you’re working your day job. The biggest hurdle to getting there is staring you in the face, it's you and the fear that comes with the unknowns of Real Estate Investing.

It’s critical that you remove the hurdles that are preventing you from investing in Income Properties. One of the biggest ones is fear. The best way to overcome this is to educate yourself on “Why and How to get started as a Real Estate Investor". Let’s provide you with some context for the reasons why the wealthy invest in Income Properties. Here are some of the benefits that you need to understand the “Why” get started question we will answer in this Blog:

1). Someone else is paying your mortgage. Apartment Buildings from Duplexes on up to large apartment buildings provide housing to those that need to rent in a city near you. That rent pays your mortgage. Commercial buildings house small businesses that need a storefront or a warehouse to operate out of to take care of their customers. There will always be a need for Income properties, but I especially like Multifamily apartment buildings.

2). Property value goes up over time. Look....housing in most cities is a scarce resource. Simple economics tells you supply constraints and high demand supports pricing increases over time. There is a built in hurdle to creating more housing and that is your local municipality. They want their cut, their mitigation dollars, their environmental studies, their permits, etc. Building more housing is a pain, especially affordable housing. In addition there is always the “Karen” next door who doesn’t want that apartment building next to them blocking their view. For just these two reasons, supply will always be constrained in the areas people want to live.

3). Rents go up over time. Again, back to point number 2, it’s the scarcity of housing that supports the increase in rents over time. Inflation and interest rates also create demand because there are more renters than ever. The affordability of a single family home based on the price you pay for capital, prohibits most people these days from wanting to buy a house.

4). Property investing is an inflation hedge and is a great way to balance your investments in Equities / Stocks. If you do your research, see investopedia on what investments are the best ones to be in when inflation and interest rates are higher than historical averages, it’s Real Estate, and more specifically income properties.

5). Renters reduce risk and provide a certain level of income security. What I mean by this is, the more units you have rented, the more income streams you have that are independent of one another. In a commercial building with one tenant, you better make sure that business in your building isn’t leaving anytime soon, or you will find yourself paying a huge mortgage without a tenant and that can last years. We are seeing this with the pandemic and the current finanical crisis playing out in real time. With layoffs, remote working, and high interest rates, when leases are canceled or renegotiated for less space, office building owners suffer and or are forced to default on their loans if they can't refinance at a reasonable rate. With apartment buildings, with 4 units on up to a larger complex the diversification is built in by having many renters paying, who themselves have different sources of income, which reduces your risk substantially. One renter needs to move out, that easy. Just find another renter to fill the space while the rest continue to pay for your mortgage.

6). Real Estate works off a leveraged return which means you are making money on other people's money. Your return is based on the income you receive, but you also make money on the appreciation of the property's value. If you invest $250K as a down payment in a property worth $1M and the property's value goes by 25% over 5 years, you make $250K on your investment. A 100% return on your money in 5 years, not to mention the income you're making, and the mortgage that is getting paid off by someone else.

A real example: An 11 Unit apartment building was purchased by an LLC we set up specifically to invest in Apartment Buildings, 10 years ago. The purchase price was $1M with a $250K down payment. Today the building is worth $3M. It's a function of rents going up, hence the valuation on an income basis has gone up. Your return on an apartment building is based on what you can sell the building for not a compound rate of return on your $250K like in a stock. Hence, the we got a 8X return on our $250K in 10 years or $2M. If you invested the same amount in the S&P for a historical average of a 10% return year over year, your compounded rate of return would be worth $648K and 2.6X your original investment. Great return on the S&P, but not $2M and 8X return on putting that same amount into an apartment building.

7). You have the tax benefit of depreciation. Being able to write off the depreciation of your asset against your net income from the property reduces your taxes on that investment. See this article from Investopedia

8). Perceived Risk is a big inhibitor to investing in real estate. Many of these points I’m making are meant to remove that as a hurdle to your investing in income properties. One of those hidden protections is that you can insure the property. Fire, Flooding, Earthquakes, etc. do not put your capital investment at risk. You own Real Estate which has a building and land associated with it. There is an inherent value that will never go to zero like a stock or Bank can. (SVB and Signature went to $0 and stocks have as well)

9). You can form a corporation to further protect you, protect your investments, and to transfer that wealth in a tax advantaged way to your children when you're ready. Per my example above via an LLC, which is another layer of protection the owners have.

10). Relatively speaking, it actually takes very little time to invest in and manage an apartment building. That is what property managers do. You just get a check each month with little to worry about when your property is managed properly. Investors receive the passive income and appreciation over time that creates generational wealth through real estate. The property referenced isn't in our local area so even though we do property management I hire a property manager to do that property for us. Care free returns on my investment is what property managers provide. If you're interested, check out my blog on "How do I select the right property manager".

The point of the above is to get you comfortable and remove the biggest hurdle facing investors. Fear! Don’t be afraid. Education is the greatest enabler we have. Education got you to where you are today. You learn every day in life. Investing your time and energy in becoming educated. Do it on a plane, before you go to sleep at night, before work, at lunch, after work on the train. You have the time to educate yourself. What could be more fun than learning to get rich as part of your life’s plan that allows you to do what you want, when you want to do it?

Here is my tip on the “How” to begin your journey on that education. Read “The Complete Guide to Buying and Selling Apartment Buildings” by Steve Berges. For the beginner and the more advanced investor this book is a must read. After reading it, and several others I can recommend, you will build the confidence to assess and invest in income properties to get started as a Real Estate Investor!

Also, seek out those that have done it. Talk to them about how they did it and the results they have gotten from investing in income properties.

Ultimately, the “Why and How” comes down to removing the fear. Educate yourself, seek out partners that can help you, and then invest in an income property you're comfortable with to get started.