So please don’t make fun of me for asking this because I’m totally ignorant to this. I’m a young guy and I’d like to get into real estate but the math just doesn’t add up to me. How does the average person with just a regular job make any money on a rental property?
Most people save and work their entire lives just to own A house that they live in. How are regular people who don’t come from a rich background able to get enough money even for enough down payments to get enough rental properties to earn a living off of it?
Maybe I don’t understand because I’m young or just uneducated on the matter, or maybe the economy isn’t what it used to be. But the math just doesn’t add up in my head.
Can someone explain this to me?
Genuinely how do people make money on Rental Properties?
byu/Any-Raise4333 inrealestateinvesting
Posted by Any-Raise4333
29 Comments
Leverage. I can’t stand renting SFHs. I either own or manage 88 properties and 5 of them are SFHs. I would get rid of them in a heartbeat if I could. More maintenance. Lower return. Way more problems.
Factor in that you’ll never buy a gallon of paint, maintenance, etc on your primary home because you’ll write it all off against the rentals.
The downvotes I’ll inevitably get for this comment will be from those that do just this…knowing they just got called out.
Buying pre-covid, its a lot of work, I ended up selling most of my rentals anyway
You’ve been given a lot of great info, & I just want to add that you can buy your own home with just 3.5% down with an FHA loan, & after living in it for only one year, you can then turn it into a rental. (As an FYI, you need to have lived in it 2 out of 5 years when selling for beneficial tax purposes.)
So if you get a roommate, take on some side hustles, etc. & save more to invest, it’s a good way to get started.
Also, if you’re serious about wanting to get into RE investing, be particular about your long-term significant other. Make sure they understand the goals & are supportive of them.
I bought my 3 bd 2 bath house in like 2015 for 160,000 next to UCF. Rented spare rooms for 3 years to cover mortgage moved out and make about a grand a month on my 1,300$ mortgage
Zestimate 350,000 now
By and large, the average person with a regular job can’t make much money in RE investing. Considering the COL relative to incomes, student loans, etc., saving up the money for a down payment on a modest house alone if you have no support is wildly difficult. Social media influencers who try to tell you otherwise are all lying scammers. Most of the people who’ve made money that reference their poor upbringings are either total liars or conveniently fail to disclose that job they got through a family connection, the uncle who chipped in on the down payment, the sister who watched their kids for free.
I’m ten years into real estate investing and let me tell you something. I hate it more and more every day. It’s way more work and effort than people make it out to be. I find that you either really enjoy it or you don’t. I don’t enjoy it at all. Yes, my properties have appreciated but all the money I have put into them, I would be so much more ahead with an SP500 index fund. I also find that most people say something like you didn’t do your research or some other unhelpful advice. If your numbers aren’t pencilling, don’t buy.
RE is cyclical in US. We are in very unstable economic times. Most major markets are seeing decreases in home values.
Follow the Case Shiller Index in your market to watch prices go down or up. You’ll get a sense for how things can fall when you look at the data from a historical perspective.
Keep saving money and be ready to buy when you think we are nearing or at the bottom.
My GF and I were late 28 and 31 a few years ago. We lived in NYC metro area so our “average” salaries were 118k and 108k.
With any kind of money, we were easily able to get 25% down on 2 single family homes in much less-expensive, but growing areas. (Danville, VA and Rochester, NY). One was 132k the other was 160k and both were well-kept single family homes in decent neighborhoods.
This is actually the problem nowadays though. Practically everyone with what was our “middle class” nyc income is licking their chops at these beautiful starter homes for 200k or less in other metros. Now everyone I know is trying to buy at least one rental.
Meanwhile, our jobs had we lived in either of those places would have been paying 50k and 60k instead of low six figures each.
Use all the same numbers you’re using but instead swap in a 3% interest rate and the math will math a lot better.
It’s all about Location location and location and timing. Where are you looking?
The beauty of real estate is that it is a wealth creation engine that grows your wealth in 4 specific aspects:
1. Equity Appreciation: Your property will appreciate over time if you buy in the right market. Real estate is an asset but also a rare asset that also has utility (that being that housing is a basic human need) and so there will always be a demand for your asset as long as you buy in the right market.
2. Leverage: On top of the appreciation, real estate has financial instruments I.e. Mortgages/Loans that allow you purchase these assets at ultra high leverages. (3.5% down FHA, 10% Down Private Money Loans, More advanced OPM strategies that allow you to invest with 0 Money Down). And so that means instead of your $20k appreciation like how it would in stocks, you can leverage that $20k on a $450k house and experience the appreciation on $450k after only spending $20k. Now after the property appreciates, you can tap into that equity by getting HELOCs for example and that can be used to purchase more properties.
3. Tax Incentives: If you work a W2, the tax benefits you can get on your rentals by running a cost seg and using bonus depreciation can in some cases reduce your W2 tax burden to $0. Giving you a bunch of money that you otherwise would’ve given to the government. This helps accelerate your ability to save to purchase more properties.
4. Cash Flow: Cash flow IMO is a necessity so that you can hold your asset. I don’t really believe in the Cash is King mindset. I believe wealth is created through holding a portfolio of appreciating assets. Your rental income or cash flow is what allows you to hold the property long term so that you can experience the appreciation.
It’s not really straightforward if you just look at the cash flow aspect, but when you combine everything else and you learn how to use good debt to acquire more assets, then you can build real generational wealth in real estate in your lifetime.
Having done rentals for 35 years I have concluded that you cannot take out a loan to buy a rental and break even —let alone make money. I started by owning a duplex, living in half and renting the other unit. Oh, and it helps getting lucky with market appreciation and such!
You don’t”earn a living” for a long time. You save enough to be able to borrow money to get the house, and rent/sell it for more money than it costs you to continue owning it. If you do it long enough/big enough/with enough of a bankroll, then it becomes enough to earn a living from it.
The key to rental property starts with getting a good property and a good price. Then collecting the rents and those rents pay off the mortgage, expenses and renovations over the years.
In 1990 I bought a property with literally no money down. Just a first mortgage and a HELOC. I dropped about 80 hours and a couple thousand into it. Over the next 30+ years, I had sit professionally managed and the HELOC and mortgage got paid off. Extra money generally went for repairs and some renovations. The last few years I had it, I threw off about $5-7,000 a year after all expenses. I sold it at the end of 2023 and after all expenses walked away with $174k. Not bad considering I only put a couple thousand in it.
I’ve seen a few people in Chicago get into the landlord business on very little money, and they all did it the same way– bought a two-flat, lived in one unit, and rented the other. These were also people who were handy at fixing things. Advantage is you live on the property and you know exactly what’s going on with your tenant and your building.
Chicago does have a ton of two-flats (some of them in relatively nice and relatively affordable neighborhoods) so I don’t know if the same strategy would work elsewhere.
Time
I bought my duplex in 2021 with 3%
Bought another property in 2022 with 4.5% that came with a vacant lot next to it and turning that lot into a rental with a tiny home.
I am fortunate enough to have VA entitlements and cash-flow on my properties due to the low rates. However, with the prices of homes and interest rates today – I would not buy an investment-rental property. Unless the numbers magically had passive ROI
Most people can’t afford to do it, but there are plenty of people who make a lot of money and saving money is not a challenge to them. It’s usually people in sales, business owners, attorneys, or some other high paying job like those. As far as how they make money on it, it all depends on the types of properties they’re buying. It takes a lot of rental properties to quit your job – most people don’t use rental property income as their sole source of income. Rather, most RE investors just do it as a side hustle or investment.
Just saw a 6 plex of 1 bedroom 1 bathroom units sell for 1.2million in my area and they rent for like $1000-1200 a piece. So to answer your question, I have no idea but it’s not by buying in my area
If you buy your own single family for you and your family,that’s not it.
If you buy a rental property, some areas will cash flow a bit, others will lose a bit every month but they more than make up for it with appreciation and equity.
Excellent way to start. Longtime rental owner. If you start this way it’s likely you don’t have any housing expenses (since tenants rent will generally cover costs) and this allows you to save the money you normally would pay to live there and eventually buy your next property. Real estate investing is a slow tedious process that takes a couple decades to really make significant money but it’s also one of the most realistic opportunities for wealth for the average person. Like everything good in life it takes patience, discipline, and hard work
Buy at the right price, ideally distressed property, manage the remodel/rehab yourself. Once complete refi the property at max LTV. Then repeat until you hit 100 doors.
Moms friend started with her moms inherited house and I think used equity to buy more single family properties. She rents to rent controlled people but I think is doing pretty good for herself. At least enough to quit her job where she worked with my mom at.
Buy cheap houses with cash. That’s what I did. In 2023, I bought a one bedroom house 15 minutes outside of a major city for 35k, and just this year, I bought a 2 bedroom house on the river just 20 minutes outside of the same city for 15k. You just gotta look for the right places. And I know you probably assume they are crapholes in the sticks, but fortunately, they are not. I also would highly suggest doing private sales. Realtors don’t do too much other than cost you an arm and a leg. If the bones of the house are good and you have time to learn, you can fix anything up to look awesome. Don’t get down on yourself.
I got started with an FHA loan on a 3 unit house that costs $525k. All in, with closing costs I had to pay about $30k. Certainly a lot of money, but I was able to save it through college and buy it at 23.
For the first few years, I didn’t make any money off of it in cash flow. But, I was able to take advantage of the tax benefits to get a better refund at the end of the year.
Plus, the building appreciated and I was able to pay down the loan. That meant I had a lot of equity.
BUT, I raised the rents, and my mortgage stayed the same. So after a few years, I was cash flowing $1k+ a month.
So…now I’m making $1k/month and I had quite a lot of equity that I could pull out for building #2, to actually put 20% down on.
If you do that 10 times, you have $10k/month in income, plus with these numbers above you owe $5M+ of real estate. After 30 years, the mortgage goes away, you’re cash flowing thousands a month AND you own $5M+ free and clear
The way I’m getting into it is moving into a new home but keeping my starter home as a rental. The rent will be just enough to cover the mortgage, but won’t turn a profit by itself; on a pre-tax basis, I’ll actually be losing money. It’s the tax benefits that really push it into the black. I can take deductions on mortgage interest, tax expense, insurance expense, maintenance, etc. I can also start deducting general depreciation each year. Each of these deductions offsets other taxable income and reduces my overall tax liability. I don’t know if this is how “professional” real estate investors make money—I assume it’s part of the equation, but they are probably not as dependent on tax benefits as I am.
There is, of course, risk. I’ll lose money in year one (even on a post-tax basis) because I have to spend have the year getting the place rental-ready. I could end up with lousy tenants. Probably everything starts breaking when I start renting. Who knows. But I’m giving it a shot because (a) the tax deductions effectively shield my rental and other income from tax liability and (b) I’m hoping to capitalize on appreciation in the property value at a later point in time, as the home is in a relatively desirable area of town.
I lived in my house for eight years and then I turned it into a rental. My mortgage payment with taxes and insurance is about $1800 a month and I rent it for almost $2800 a month.
We paid $30k for a hoarder house. New roof and dumpster rental, paint, flooring. It took a year to fix up. It’s now worth $165,000 per Zillow and a few others. Saving the $30k took a while. We now have 4 total…years later.