You finally bought that first rental property. You searched for it, you closed on it and that first rent check finally arrived in your mailbox.
That first purchase may have happened weeks or months ago, so you can imagine your celebration when that first check arrives.
You probably put 20 percent down on the property when you purchased it depending on how you financed it. You probably also put down – depending on loan and structure – another three, four or five percent in closing costs. All significant outlays of cash.
Once you probably painted, put in carpet and tile and did whatever was necessary to prepare it for your first tenant you had another significant outlay of cash.
Once you had the house ready, you then started marketing it. Maybe you ran newspaper ads or, hired a Realtor or a property manager to help you find that perfect tenant for your first property – another outlay of cash.
This whole process has probably taken some time during which you have had expenses like utilities, mowing the lawn and maintaining that property as you were showing it and getting ready for that first tenant. More outlays of cash.
You can only imagine how you are feeling after weeks or months go by and you are continuing to incur expenditures on that property. When that first check comes in you are going to be excited and you should be because you worked hard to get to that point.
I can tell you from my own personal experience that excitement may disappear soon after you open that envelope with that first rent check. Once that first check comes in, technically, you turn around and pay the principal and interest on the loan for that month, plus escrowed taxes, insurance, maybe monthly HOA dues, maybe even a property manager.
You can imagine after that check is put in your bank account, how quickly that rent check gets depleted as you incur these expenses and outlays. That is where that elation and celebration can quickly disappear.
I am here to tell you do not get disappointed and discouraged as that check seems to quickly disappear.
5 reasons not to be disappointed with your first rental property
What is left at the end of the month after those expenditures is your cash flow. That can be various amounts of money depending on the property, the rent and the loan structure you have on it. You do have cash flow and that is worth celebrating, but there is more!
There are many more ways you are going to gain wealth and build wealth from that rental property outside of that cash flow. Cash flow is only No. 1 of the five ways that you are going to generate and build wealth.
There is so much more to your rental property than that one monthly cash flow amount.
No. 2 – Principal pay down
That tenant probably worked a week and half earning money to turn around and give to you so you can pay off that month’s principal balance on that loan.
It takes the average tenant about a week and a half to earn enough money to pay that rent check to you so that you can pay that loan on that property. So don’t forget you just made a significant payment on the principal on that loan and someday that will come back to you.
Look at your balance sheet each month and you can see your liabilities going down and your assets going up as that principal is reduced. You didn’t pay it down – your tenant did!
No. 3 – Appreciation
Conservatively, in the U.S., real estate appreciates about 3.5 percent to 5.5 percent per year. Of course we have ups and downs and swings in the market.
Remember you are a real estate investor. You are a long-term buy and hold investor, you are not in and out. You are buying that property for a long-term wealth building investing tool. You will weather those storms.
You are not going to realize that appreciation each month, but you will benefit from that over time when you go to sell that property at some point in the future.
No. 4 – Equity capture
Don’t forget, if you purchased the right property at the right price, ideally you purchased a distressed property and you put some money and elbow grease into it and fixed it up, you probably captured some instant equity.
You are not going to enjoy this, immediately. It is a long-term benefit to real estate ownership. If you bought a distressed property, there is a real good chance you captured at the point of purchase probably 10, 20 or even 30 percent equity. Perhaps you bought a $100,000 house for $60,000 and you put $10,000 into it, so you are $70,000 in to a $100,000 asset. Well there is $30,000 of equity capture there that you obtained at the point of purchase.
Don’t forget the value of that, over time, as you continue to hold that asset and what it will ultimately do for you when you sell in the far off future – when it makes sense. You may not realize this each month, but don’t forget it’s out there and that equity will only increase over time if you are patient.
No. 5 – Long-term tax advantages
You are not going to feel this advantage every month when you get that monthly check but don’t forget the long-term tax advantages of owning real estate. I encourage you to talk to your accountant. There are tax benefits from interest expense, tax expense and depreciation on that property. They are not in that monthly check in the envelope, but they are long-term tangible benefits to owning real estate.
My point with these five benefits, cash flow, principal pay down, appreciation, equity capture and tax advantage is if you find yourself discouraged when you open up that first rent check that first month and you begin to second guess and wonder, “What did I do? Was this a smart move?” be sure you are looking at your investment holistically across all five of these elements. If one does not excite you, perhaps the other one does. And, if you are looking at it correctly, all five will excite you!
Don’t forget long-term wealth
Stand by and don’t forget the principle – investing in real estate is not a way to get rich quick, but it is a way to successfully build wealth slowly, consistently and significantly over time. If you want to accelerate that rate, you should be motivated by that monthly check and you should think, “The way I accelerate my wealth is to buy more properties.”
Don’t become discouraged from that one initial property. That property should motivate you and help you see what you can do with rental real estate as you continue to build your portfolio over time.
That first house, that is just the first step toward you true financial reward.