On today’s podcast I talk about understanding financial freedom, the velocity of money and how these concepts are both related to your mindset about money.
If you could buy a rental property today for $100,000, that was rented to a tenant that paid you $1,000 per month in rent, and your cost to maintain that property was $1,000 per month would you buy it?
Unfortunately, for most new investors, the answer would be no. Would you feel like you were not getting a return on your money if the property was just breaking even? Most people would feel that way. And that is because they don’t understand the velocity of money.
Let’s look what would happen with that same property if you had a 15 year fixed rate mortgage. In just 15 years, the property would be paid off, and you would own it free and clear (with no mortgage). 15 years later, not only would the value of the property double to $200,000, but the rents would double as well (from $1,000 to $2,000). And if you owned that property free and clear most of that $2,000 rent would be going directly into your pocket.
How many properties like that would you need to own in order for you to be financially free? If you owned just 5 properties, then in 15 years you would have $10,000 per month coming in.
And you would have enough income to replace the income from your job so you would not need to work (if you didn’t want to).
Look at it another way. How would you save up $200,000 and create an income stream of $2,000 a month if you did not buy that rental property? Also keep in mind that the above is before you take into account the tax benefits of owning those rental properties. Each property that you purchase, will lower the amount of taxes that you pay. The reason for this is because the property taxes, insurance, maintenance, repairs, and depreciation are all tax deductible. So even though the property is ‘breaking even” as far as taxes are concerned it is losing money. A large part of that is because of depreciation. And that means that you will pay less taxes.
So the real question is not “can you afford to buy a rental property”. But rather can you afford to NOT buy a rental property?
You work hard at your job and right now you have taxes taken out of your paycheck and you have no control over your tax situation. Owning just one rental property would change that since you would now be able to deduct the expenses related to that property.
If you add up the benefits of the increase in the value of the real estate, increase in rental income and tax deductions, then you will see that investing in rental properties is one of the easiest ways to create financial freedom.
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