Here Are the 3 Most Persuasive Arguments for Buying Rental Property
Indian philosopher Jiddu Krishnamurti once said, “One is never afraid of the unknown; one is afraid of the known coming to an end.” This quote perhaps sums up how the vast majority of property investors felt prior to their first purchase.
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Prior to your first purchase you knew the score every day. There was no potential for catastrophic failure involving property—no potential for something or everything to go wrong. You were safe in your familiar world. You got up, worked for your money, and repeated the process. It was all so routine, so known.
Because of this knowledge, I learned to evaluate many things not based upon what I may gain, but based upon what I stand to lose. I do not want to be afraid that my “known” world will end. I want it to change for the better. As a result, what I stand to gain is irrelevant. Why would I be concerned with positive cash flow as long as it is positive? It is what I stand to lose that matters to me.
Now before you point out the flaws in the above statement just realize my point. It is far better to evaluate a potential property, or anything for that matter, by what you are risking rather than what you may gain.
Focusing Too Much on Potential
I have known people who are willing to “put it all on one roll of the dice,” arguing that they stand to double their money rather than realizing that they also stand to lose all of the money they brought to the table. They are blinded by the potential, and do not fully grasp the understanding that the upside is only “potential” until it is realized.
This philosophy has served me well in my endeavors into real estate investments. I rarely look at what a property may be worth in the future, or may pay out in monthly cash flow, or what my cash-on-cash return may be. All of these things are just “potential” gains until they are actually earned, and all that they may be means nothing if I lose money. BiggerPockets has played a large part for me in forming this philosophy.
It is my opinion that too many investors and potential real estate investors look to the potential upside a property holds rather than what one stands to lose. However, I get it. Every investment holds some degree of risk. Just try not to get tunnel vision and only focus on the potential upside while overlooking what you could lose.
Reward vs. Risk in Rental Property
Real estate offers many opportunities to maximize that upside potential while minimizing the chance of losing money. Nothing is absolute. Money can be made and lost in real estate, but as an investment tool it has few equals. As a result, what this article will focus on is what I believe to be the three most persuasive arguments for buying, and as a result, investing in rental property.
While I may focus on what I stand to lose regarding an investment, I always keep in mind that reward never comes without risk. The purpose of my philosophy is to guide me toward investments that create the greatest potential for upside return, all the while minimizing my potential losses. This is investing 101. Additionally, I want an investment where I can make mistakes and still not “damn” my investment or investing future. Rental property, I found, seemed to fit that concept on all levels.
One caveat is that for this article, “rental property” is considered to be residential property. While rental property could cover several different genres within the real estate world, I think it is important to focus on the most common and most basic type of “rental property.”
Anyone who has read any of my articles knows that I am partners with my twin brother involving our rental properties. Furthermore, the three main reasons we decided to invest in rental properties were the accessibility, flexibility, and potential for leverage. That is, it creates the most bang for the buck. I am not going to rank these three on importance, but I do personally believe that one of the greatest all-around attributes of rental property is the accessibility of it.
Let’s dive in.
My brother and I live in rural central Nebraska in the middle of farm country, surrounded by corn and cattle. Many believe that rental property is “a big city thing” but this is far from the truth. Our most sought-after rental, out of the five we own, is in a village of fewer than 700 people.
There are many rural rentals in our area, and they can be quite lucrative. Most large farms in the area hire farmhands to accomplish the bulk of the work. Virtually all provide either a rental property for the employee as part of their pay or give the employee a stipend to pay for a rental of their choosing. Rarely a week goes by without a phone call or two from people looking for a rental in one of the small villages in our area, or in the county near where they work.
Rental property is everywhere. There are rental property owners on BiggerPockets from Alaska to New York City who experience many of the same trials and tribulations. The accessibility of rental property, and I am referring to its physical accessibility as well as an investment, is virtually limitless in the free world.
A common theme in real estate is location, location, location. In other words, where you buy really is more important than what you buy. Location does not have to mean only in a big city, or in a state where it is warm year-round, but it also pertains to areas within areas. My day job is in law enforcement. I work for a sheriff’s office that employs approximately 24 sworn deputies in a county of about 40,000 people. We experience many of the same things and see the same types of crimes as a New York City police officer, albeit on a dramatically smaller scale.
Rental property is much the same way. Rental property exists everywhere—literally everywhere—from secluded rural areas to the largest metropolitan areas. It is accessible as an investment, at least location wise, to nearly anyone and everyone. The fact that rental property exists everywhere can be its single biggest advantage to owning it. Remember, if it is accessible it is obtainable.
If accessibility is one of the greatest attributes of rental property, its flexibility as an investment is the “wow factor” of the real estate world! Residential rental property can and does consist of single-family homes, trailer houses, multifamily houses, apartment complexes, condominiums, town homes, and vacation homes, just to name some of the most common ones.
Coupled with the variety of property that can be purchased, along with the diversity that can be contrived from ownership of these properties, flexibility is a persuasive argument when one considers its investment potential. If you spend any amount of time in the BiggerPocket forums, you will find a plethora of information on why each of the above listed types of rental properties may or may not be right for you.
Many people buy single-family homes due to their accessibility and the fact that virtually any single-family home can be used as a rental. Trailer houses can be cheap to purchase and lucrative to rent in the right location and right condition. I like multifamily properties, as it is unlikely the entire property will be vacant at one time, which means consistent income. The list goes on.
Most properties can be rented on a short-term basis, whether daily such as Airbnb style, or by the week, month, year, or even longer. My brother and I agree that we do not care what we buy, as long as it makes financial sense. If you are just starting out and looking for a property to invest in, flexibility in the many types of rental properties available makes it an attractive investment vehicle.
One of the greatest obstacles a real estate investor faces is finding viable properties. When you consider the flexibility surrounding the types of rental properties available, it makes it, in my opinion, the only game in town for a new or growing investor.
3. Leveraging Dollars to Make “Sense”
See what I did there?
The third argument for owning rental property is the ability to “leverage” in order to use your funds. How many of us can purchase multiple $100,000 properties in cash? How many can purchase even one? Leverage is what levels the playing field, so to speak. I have a coworker who is fond of saying, “Work smarter, not harder.” This applies even more so to purchasing a rental property.
The ability to purchase a rental property for 15 percent to 30 percent, or even no money down, is an extremely important argument for investing in rental property. With how many investments can you buy 100 percent of the value of that investment for 15-30 cents on the dollar? On my last three property purchases, I put 10 percent down on one and approximately .027 percent down on the other two.
While there are arguments that leverage, or at least over leveraging, can be detrimental to your investment, there is no overlooking the effectiveness of the concept. As with anything, too much of a good thing is not a good thing. This applies to leverage as well.
Leverage allows one to exploit one’s financial position in a manner that may otherwise be unattainable. Furthermore, leverage comes in different forms. It may be a down payment on a property, or using equity in a home or other rental property to finance and purchase more properties. This in turn perpetuates the leverage cycle.
The Power of Equity
I have heard many times when researching real estate as an investment, and seeking financing for that first purchase, that “the first one is the hardest.” What that means is once the first property is purchased, and there is equity to be utilized in it, leveraging or scaling in order to build your portfolio goes much quicker. Now do not be deceived, it does not happen overnight, but it does happen noticeably quicker.
My brother and I are selective, and we decide what we are willing to pay based upon what we believe the property is realistically worth. We have invested no dollars out of pocket, not a single one, to purchase four duplexes and build a fifth. While we did utilize some equity in my personal residence to purchase the first one, the others were all purchased below value, and then we used some of that built-in equity to purchase another.
Some may say that leveraging in this way is not the prudent financial thing to do. I would agree if done haphazardly. However, we are comfortable with it since prices would have to drop by at least 35 percent before we would be concerned they were worth less than we owe. I am not advocating you follow what we did, but merely illustrating the “potential” of leverage.
Related: A Whole New Way to Look at Leverage
The three reasons I listed are what I believe to be the three most important arguments when considering rental property as an investment. You may, and likely do, have other arguments that are equally important.
Don’t get caught up on whether you agree with my arguments or my views. There is an old saying I remember from my childhood. It is somewhat macabre, but it’s fitting here. “It matters not, I have oft been told, where the body lies when the heart grows cold.”
I correlate that to investing in rental property in this way: It doesn’t really matter what your reasons are for investing in real estate. It only matters that you take the initiative and find a way to safely, sensibly, and correctly invest your hard-earned dollars. Accessibility, flexibility, and leverage are three benefits of moving into the realm of property investor. Remember to work smarter, not harder.
Do you agree that these are the three main reasons to invest in real estate? If not, what are your top three?
Share with a comment below!