Friday, November 13, 2009

Rental Property - Our Cash Machine for Retirement

About 4-5 years ago our family purchased our first rental property. You have likely heard the infomercials where you can pay “nothing down” and tenants take wheelbarrows full of money to your bank account every month. Isn’t being a landlord the easy path to a million dollars? In my experience, that would be a bit of a lie.

I could also tell you the down side and how this property drives us crazy with repairs and tenant issues. Landlords are commonly found with a toilet plunger in one hand or staking out their property as they wait for delinquent tenants to come home on payday. Again, this would be stretching the truth.

The reality is that being a landlord has its ups and downs. Not everyone is cut out to do it, and quite honestly I have days when I wonder why I got into property. You get an education on every reason why the rent is not available the first of the month. A few calls to the Landlord Tenant Board can also be a real eye opener. I have to admit that the first 2 years or so I routinely debated about putting a “for sale” sign on the front lawn.

So why do I still have the property? Thankfully, once you buy a rental property it is not something you can easily dump when you have a bad day. Selling your property can be a drawn out and expensive business. I say thankfully because if you buy right and you can “suck it up”, I know of no other investments where you can put so little money down and let someone else pay off your retirement plan. When I bought the property it was cash flow positive from day 1. This is the “golden rule” in my opinion. Although I didn’t make much more than my expenses initially, the property did not cost me anything out of my pocket after closing. Any pain I experienced as a landlord was more emotional than financial. Critics will say that in their areas you can’t find properties cheap enough to be cash flow positive right away. I once had that problem. We moved.

The other reason is that in spite of the challenges you might face as a landlord, and although it may not be an “easy” path to wealth, maybe it is easier than a lot of the alternatives. Preventative maintenance can cut down on your phone calls. You can also improve the property. Even if government bureaucracy limits your rent increases there is no law that says you can’t make improvements to better your cash flow. Our triplex had zero insulation when we bought it and the gas bill was murder. It was a cheap fix. Any reduction in expenses is an increase to your cash flow, and as a bonus the tenants looked a lot more comfortable too!

As net cash flow increases so does the value of your property. If you ever decided you wanted to cash out another investor would look at the condition of the property and the return on his/her investment. Every year that rents go up and every improvement you make that drives down expenses will add to the value of your property. Taxes on my net income so far have been zero thanks to depreciation. Definitely get yourself a good accountant who routinely deals with property investors. If and when we sell, we will pay capital gains tax, but this tax is a far better deal than income tax. I might change my mind, but right now I can’t imagine selling anytime soon.

Another real estate investor I know has told me that eventually you wake up and discover that the property you bought for X a number of years ago is worth way more today. The mortgages are paid off and you have a healthy stream of cash coming in each month. It’s a bit like buying an annuity, except you make only the down payment and your tenants make the rest of your contributions for you. You have gone beyond “paying yourself first”; your investment feeds itself each and every month.

So far I have limited myself to one property since I am also working very hard to eliminate personal debt (e.g. our personal mortgage). Our rental property has been a huge help on this quest as well. I also work full time and my family might get a bit annoyed if I spend all of my “off” hours handling my landlord responsibilities. These are my own personal excuses as to why I have not added any more properties to my portfolio so far.

One final point I thought I would mention. People joke about the toilet plunger when you become a landlord, but you won’t find me plunging any toilets outside of my own house. I have purchased and dropped off a plunger as a favor, but I have a clause in my rental agreement that specifies “toilet plunging” as a tenant responsibility!

Have you ever thought about taking the plunge as a landlord?

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