Does long term rentals still work to build wealth?

Question

I am a married, 25 year old with a middle class salary. I have recently read several popular real estate books by Brandon Turner, David Green, and Gary Keller. When crunching their same numbers in and around my zip-code (upstate SC), I am confused on how long term rentals would ever be possible without more freed up money to begin with.

Are long-term rentals still a sensible way to build wealth? Is cash flow dead?

Nicholas L. · Answer

@Charles Bishop

yes and yes.

yes, they are still a sensible way to build wealth.  yes, 'cash flow' in the short term is much more challenging with prices and rates high.

i'm buying right now primarily for equity.  equity can be turned into cash flow in the long term.

Jeremy Horton · Answer

Firstly I'll say the last few years have probably been the hardest few years in the last 15 years. Statistically transaction volume is way down. Affordability is way down - combination of prices and interest rates.

That being said - yes you can still build wealth with long-term rentals. I think you'll be pressed to find single family houses working unless it's at scale and affordable - ie trailer park, modular manufactured homes etc. MFH will work due to the scale - the rent/cost ratio seems to be better.

In ANY case you have to buy AT A DISCOUNT. Whether you decide to flip, BRRRR, wholesale - any strategy has to be bought at a discount meaning all in for 75% of the ARV. I think SFH LTRs are going to have a low return compared to other investments (unless you can complete a BRRRR at close to 75% ARV) - best case is mediocre equity capture at the buy. Most cashflow is going to get eaten up by repairs/maintenance over time. Add in increases in property taxes/insurance and it's pretty slim.

Patrick Roberts · Answer

RE investing is no different than other forms of investing - you accumulate wealth over time. With LTR's, your return comes from the use of leverage and longrun appreciation. You put 20-25% down, but get the entire asset now by using debt and then capture appreciation on it. Meanwhile, your tenants pay off the debt for you over time. "Cashflow" is just a bonus.

Ken M. · Answer

I chose to use Creative Financing, others grind through with years long grind of being a landlord. There is a simple formula that helps make a decision.

Eric Fernwood · Answer

Hello @Charles Bishop,

Long-term rentals is the easiest and safest path to financial independence, provided you buy in a good investment city and your property is occupied by reliable tenants. The requirements.

• Investment city - The city matters most. Choose a city where rents and prices have consistently outpaced inflation. Every time you shop it costs more and more to buy the same goods and services. The only way you will have the income you will need to pay future inflated prices is if your rents increase faster than inflation. And, if prices of existing homes rise faster than inflation, you can acquire additional properties with minimal additional cash from savings using cash-out refinancing.
• Income reliability - Tenants pay rent, not properties. You need your property occupied by tenants who stay for many years and pay on time, which I call reliable tenants. Through property manager interviews, you can identify the segment(s) with a high concentration of reliable people. Then, buy properties similar to what and where they are currently renting.

Does this city and tenant segment driven process work? Below are our 17+ year results.

• We have delivered over 580 investment properties to over 170 clients worldwide. Less than 10 clients were local. All the rest lived in other states or countries. Also, we've never met 60% of our clients and a significant percentage have never been to Las Vegas.
• Our clients, on average, buy three or more properties because their properties continue to perform.
• Our average tenant stays over five years. This is due to the demographic we target which is families with young children.
• We've had seven evictions in the last 17+ years (over 1,000 tenants). This is due to the demographic we target, the skill of the property manager we work with, and the pro-landlord environment in Las Vegas.
• 2008 crash - Zero decline in rent and zero vacancies. The demographic we targeted have direct revenue producing, mission critical, or government jobs. They didn't lose their jobs so there was no decrease in rent or vacancies.
• Since 2015, the average annual appreciation and rent growth rates were 9% and 7%, respectively.
• Less than 2% vacancy rate

Where did I come up with this method? National retail chains. National retail chains have used these methods for almost 100 years and they are very good at what they do. I learned how companies like Whole Foods, Trader Joe's, Costco, Barnes & Noble, McDonald's and others select store locations and how to attract their target demographic based on offerings. I just did what they did.

Remote Investing

The odds that you live in a city that meets the requirements for financial independence are small. You need to invest where you can achieve long term financial independence. And, even if you were investing in your hometown, you need to work with an experienced investment team.

Everything you learn from books, podcast, seminars, websites, is general information. You're going to buy a specific property, in a specific location, subject to specific local conditions, and you will need local resources. An experienced local investment team has everything you need. And, you cannot duplicate the years of experience and resources a team of experts already possesses. And the best part is working with an investment team costs no more than working with any other realtor. Additionally, you get a master class on real world investing.

Summary

Long-term rentals are the easiest and safest method for achieving long-term financial independence. Millions have already done it and you can too. However, not just any rental in any city will do. You have to pick the city based on long-term performance and the tenant segment based on income reliability. Then purchase properties similar to what they're renting today.

Aaron Zimmerman · Answer

Yes they are but you may need to get creative to get cash flow. You can try rent by the room as a first option and then perhaps move towards more active strategies such as medium and short term rentals to boost cash flow as needed.

Elealeh Fulmaran · Answer

The math is definitely tight in a lot of zip codes right now—especially with retail prices, higher rates, and full PM fees. But cash flow isn’t dead. Long-term rentals still work if you adjust: widen the buy box to markets/submarkets with better rent-to-price ratios, focus on value-add to force equity and lift rents, and use creative capital (seller terms/private money) to bridge into stronger long-term financing. Be okay leaving a bit more money in or taking thinner day-one cash flow if the four pillars—cash flow, debt paydown, depreciation, and long-term appreciation—pencil over 3–10 years. If upstate SC won’t hit your numbers, go where the numbers do, run a strict buy box, and aim for solid singles instead of chasing “perfect” deals.

Nicholas L. · Answer

@Andreas W.

eventual rent increases

selling a property and using the proceeds for something else

selling a property and using a 1031 exchange

tax benefits

Andreas W. · Answer

@Nicholas L.

What do you mean by equity now and cash flow later?

Nicholas L. · Answer

@Charles Bishop

the 1% and 2% rules have been misinterpreted.  all they do is help screen out properties.  you would never, ever buy a specific property because it met a "rule."  but if you have 100 properties to analyze, you could quickly screen certain ones out and narrow down to, say, 10, or 5.

i don't use the rules at all because all i do is look at specific deals.

it generally makes sense for new investors to start with a house hack.  the purpose of a house hack is to build equity.  then once you're in a stronger financial position, you can look into rentals.

Does long term rentals still work to build wealth?

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