I bought my first rental property more than 10 years ago, as we have discussed before.
I was a part-time investor—or, in my case, a “lunch hour” investor.
I was very excited, and I made the leap, and I purchased that first property successfully.
But here’s what you are going to experience with that first rental property
Despite what you may see or hear on reality TV or late-night infomercials, that rental property won’t be a “gusher” of immediate profits.
What that means is when you do finance your first rental property with a mortgage—which, by the way, I recommend, so that you do not tie up your capital and you are able to purchase future properties—and you factor in your monthly expenses (your principal payment, your interest payment, taxes, insurance, maintenance and repairs), your returns will be small.
I am here to tell you, as an experienced investor with many, many rental properties, that the returns aren’t what you might think. We’re not talking thousands of dollars a month, we are literally talking hundreds of dollars. It could be $200, $300 or $400 once you pay off all those expenses I mentioned.
So as you begin to cash those checks each month you may start to feel, “Hey, wait a minute, I am only making a couple of hundred of dollars a month here in cash flow after expenses.”
But be patient
The returns are constant. And they are profitable—especially over time. As with any business, if you are operating on a small scale, your returns are small-scale. And you may get discouraged by that. And that may cause you to have second thoughts about continuing on and investing in real estate. But I promise it will pay off if you don’t give up.
Here is an example
Let’s say you have a rental property financed with a mortgage and you are smart enough to know at the end of the day after all expenses, your cash flow is $300 a month.
To put it in perspective, what if in this calendar year, you have to replace the air conditioner on that property. Well, that could very well absorb the majority, if not all, of your annual cash flow or profit. That happens once, and you can get very discouraged with your investments and you could very quickly walk away from any future rental property investment opportunities.
And by the way, your friends, your neighbors, your brothers, your sisters, your parents are going to hold up that example to you time and time again. You have got to look past that and see the bigger picture beyond that first property.
I don’t mean to be too “doom and gloom” here, but it’s good to know what you are getting into. And it’s good to be aware that you are going to have to look past these realities.
Let’s say you are a part-time or weekend investor, and you buy that first (and only—so far) rental property. Now let’s suppose that property is vacant at the time you buy it, or maybe after six months or a year your first tenant moves out. Well, you are now, unfortunately, at 100 percent vacancy across your rental portfolio of one. That is always a painful place to be. When that mortgage comes due, and there is not a rent check covering it, you as an investor will have to pay it out of your own pocket.
A long walk for a short drink?
You may—with your one rental property—get the feeling, “This is a very long walk for a very short drink. I am out. No more properties for me.”
But the benefit—and the treasure—is right around the corner, and if you stop after the first property you will never see or enjoy those benefits or treasures.
I once had a boss when I was in the corporate sales world who always taught us, “Volume cures all evils.”
What he meant was that as long as we were selling a lot every day—each and every day—and we had high sales volume, we would be able to survive all the pitfalls of our business: unexpected expenses, product supply issues, customer issues, operational inefficiencies. As long as we had high volume and high sales at the end of the day, we would succeed.
It is exactly the same for a real estate investor growing his or her rental property portfolio.
The more properties you have, the better you will be able to overcome the inevitable financial challenges—the broken-down air conditioner, the tenant vacancy or non-performing tenant. Whatever you may experience with one property, you may think is very devastating. However, if you have a large portfolio—multiple properties—you will be amazed at how those other properties will step up and help you during those times when one of your properties hits a downfall.
More properties more risk?
I know this is probably contradictory to what your intuition tells you. You may be thinking—and I don’t blame you because I thought it, too— “Gosh, more properties, more problems, more risk. What is Kevin talking about?
If one property is such a risk, why in the world would I inflict more pain on myself and acquire more?”
I am emphasizing that you’ve got to take that next step. That next step is buying that next property, increasing the size of your portfolio, increasing the number of properties you own so you can survive those pitfalls.
It’s just like anything in life. When you learned to ride a bike, that first bike ride may have been painful. I bet there were tears, I bet there was disappointment, and I bet there was doubt. But you had to—and you did—get back on that bike. It’s the same as you build your rental property portfolio as a rental property investor.
Scale unlocks wealth
You’ve got to keep going and buy that second, third, fourth property.
The more properties you buy and own, the more principal you are going to gain each month as your tenants pay your mortgage for you. With one property, they are paying off your principal of $150 a month. Imagine two properties—someone is now paying off $300 a month in principal each month for you.
You are gaining equity, which ultimately is going to go into your pocket someday when you sell that property. You are increasing your cash flow—instead of $300 we mentioned earlier, now you are getting $600 a month. You can start to see how that scale—or volume—as the number of properties goes up, increases your wealth.
The more properties you buy, your other properties will step up and cover you when one of your properties falters. Let’s take that air conditioner example. That air conditioner goes out and it costs $2,000 to repair it. If that was your only property, that is a devastating hit to your annual cash flow.
But picture this: you may have three properties and the cash flow from those other two properties steps in and covers the cost of that air conditioner repair.
Granted, you don’t make as much that one month when that happens, but it sure is better when the cash flow from those other properties covers the cost of that repair. You can see how those painful repair or vacancy experiences become easily absorbed when you have other properties working for you each and every day to create cash flow and build your wealth.
The advantages of owning multiple properties
The advantages of multiple properties go on and on. They help you attract better business partners—maintenance people, lenders, insurance providers, even property managers.
When you have multiple properties and you call that plumber at 9 p.m. on a Saturday night, he is more likely to jump and take care of you when he knows you have multiple homes and you are a great customer with size and scale. You get a little better service than if you have one property and you call once a year. It applies to all vendors. You gain efficiency when you have that scale and volume.
There is no business out there that maximizes its success with just one customer.
Likewise, you won’t maximize your success with just one rental property. Grow your business, attain the scale, maximize your wealth, and you will be successful.
Don’t quit after just one.