Many times, we'll hear people telling us that we are wasting money by renting. While that may be true for some cases, many renters are actually being financially savvy by continuing to rent, even if they do so for a long time. For example, one of my past students is significantly increasing his real estate wealth, even though he is a renter. How? By taking steps to becoming a landlord while remaining a renter. If you're considering becoming a landlord and earning your wealth through the rental property ownership, his strategy may work for you too.
My past student, Brian, is 30 years old and earns a pretty fair living as an analyst for a large utility corporation in Southern California. But rather than relying solely on his current income, he decided to supplement it with wealth earned through buying and holding real estate. Many people with this same ambition would think to first buy a home to live in and then work on the rental properties, but after doing some research, Brian took the opposite approach. He determined that the mortgage payments on the half-million dollar beach property where he wanted to live would just not be comfortably affordable. But he also discovered that renting a similar beach unit would be comfortably affordable. After all, prize beach properties do not command a very high amount of rental income compared to their high purchase prices.
He also realized that he was qualified for buying rental properties in more moderately priced areas, so Brian continued his research and located several communities where buying rental properties seemed to make a lot of financial sense. He determined that it is the lower-priced areas that actually make the best rental properties. I detailed this scenario in a past article I wrote for Zillow – Smart Investing, A Tale of Two Townhomes.
It’s not hard to guess what he then did — he bought two moderately priced rental units in decent areas that have healthy positive net cash flows. In other words, Brian skipped buying a personal residence and ended up investing the $100,000 that he had saved for a house in rental property instead. Now, that $100,000 earns him income of about $850 per month on those two units, which is roughly a 10% return on his money and a great deal for real estate rental property ownership.
In essence, he wanted to invest in real estate, but realized that buying a home in a luxury area was not a good investment for him. Instead, Brian ended up renting a nice property to live in and then allocating his hard-earned cash equity to more profitable real estate investments. And he's not stopping there. Brian is planning to buy even more investment properties! He figures that in about 10 years, he’ll have 10 to 15 income-producing rental properties and in 20 years, he will effectively be retired – at the beach, and still happily renting someone else’s million-dollar home!
The best part of Brian's plan is that it's a realizable goal if he stays committed to buying properties, although every potential investor needs to fully understand that real estate does require a lot of hard work and has lots of risk. As to whether or not Brian is wasting money renting a house at the beach, he will tell you that he certainly does not think so. In fact, he’s taking the monies he would have wasted being a personal residence owner and investing it at a high rate of return in much better performing real estate investments. Even Brian's parents are impressed. They used to tell him that he was wasting money renting, but now they agree that his decision to stay a renter is certainly on the right financial track to wealth.