Real Estate: Rental Income

Rental Income

Another way to produce residual income through real estate is as an investment property. The two biggest values of rental income are the actual cash flow from the rent and the fact that property values increase.

How to Find the Property

To use this method, you buy a property with income. By income, I mean a POSITIVE cash flow. I am sure you realize that asking the owner of the property whether it has a positive cash flow may not yield the whole truth, particularly if the answer is no! So, how do you find out the truth?

You ask them to show you the bank records for the past 5 years and the expenses for the past 5 years. If they don't have them or won't show them to you, simply walk away from the deal. If they do show you the records, you simply add up the income per year to get net income and add up the expenses per year to get the net expenses. Subtract the net operating expenses from the net income to give you the net operating income. Now subtract the debt service fees and that gives you the cash flow.

Just as in foreclosures, you need to be known as "the buyer". Get known by the CPA's, attorneys, real estate brokers, mortgage companies, refinance companies, and anyone else that may be "in the know" about rental properties before these deals get out to the general public. Essentially, you need to have these "plump" deals referred to you.

Example:

Let's take a look at a real life example. I have a friend who found out about a Co-op in the same neighborhood with the United Nations. The Co-op was 300 sq ft and going for $100,000. That is not a misprint! Trust me, this is prime real estate!

She financed $79,200 and since she had at least 20% down, she didn't have to have personal mortgage insurance (PMI). The debt service costs her $6403 per year. During her first year, she made $1107 or 4.5% return. During her second year, however, she didn't incur any closing costs, so she had $5683 or 22.9% return. As the years went along, the rental prices increased somewhat and she went from a 25.3% return in year three to a 30.6% return in year 5. Her five-year pretax average return was 22.2%!!

If you had one of these deals each year for the next ten years, you would make $7500 cash flow per year per deal. That means that after the last deal, you would have a positive cash flow of $75,000. Now, let's assume that you do not wish to be the one who maintains these ten properties. You can hire a general repairman for $30,000 and still make $45,000 with no hassles!

I hope you enjoyed this blog article.

To your financial success,

Peter Wolfing