When it comes to different types of investments, real estate is one of the most popular choices aside from stocks and mutual funds. There are a lot of different ways to invest in real estate. Some of the options involve owning and managing the property yourself. Others, like REITs and crowdfunding, allow you to invest without the responsibility of managing any property or tenants.
My wife and I have been investing in real estate for about 6 or 7 years, but only through methods that don’t force us to deal with properties. However, if you’re willing to put in a little more work, income from rental properties can be a game-changer.
A good rental property will provide cashflow each month, as well as appreciate in value over time. This is one of the most proven ways to grow your net worth.
I recently had the opportunity to interview a successful real estate investor about his approach to rental properties. Andrew and his wife own several rental properties that have had a huge impact on their financial position. They’re still in their early 30’s and have been able to increase their net worth by more than $1 million in just 5 years!
This interview focuses on rental properties, but Andrew and his wife have also flipped houses and dabbled in wholesaling real estate. If you’re interested in learning more about real estate, I’m sure you’ll enjoy this interview, and you should also be sure to visit Andrew’s blog Wealthy Nickel.
- Renting vs. Buying a Home: Advantages and Disadvantages
- The True Costs of Owning a Home
- Real Estate Crowdfunding for Non-Accredited Investors
Income from Rental Property: A Realistic Side Hustle
Now, here is the interview with Andrew (I’ve added the bold and italic text to emphasize some of Andrew’s points).
Can you tell us a little bit about yourself?
My name is Andrew. My wife and I are both in our early 30s, and we have two kids, a 1-year-old boy and a 3-year-old girl. We live in Dallas, TX which is a great place to be in the winter, but not so much in the summer!
What do you do full-time?
I work for a large engineering company in a business/financial role. I’ve had a lot of different positions within the same company since graduating college in 2006. My degree is in electrical engineering, and I used that for all of 6 months or so in my career.
I rotated through engineering, operations, and finance and eventually decided I liked the business side of things best. I went back and got a masters in Economics (paid for by the company of course) which still doesn’t really apply to what I do, but I wasn’t really interested in going the MBA route, and I’ve always enjoyed economics.
When did you buy your first rental property and what was your motivation? What is your long-term goal with this side hustle?
My wife likes to say that I tricked her into becoming a real estate investor. We got married in mid-2012 and had never really talked about real estate other than where we would personally live.
A few months after we got married, I got hit with the real estate bug and I started looking to find a property that would work as a rental. I’ve always had a little bit of an entrepreneurial drive, and knew I wanted to find something that would get me out of the corporate world sooner rather than later.
In late 2012, after seeing quite a few properties and putting in some offers, we found a duplex that was on the market as a foreclosure. One side was in decent shape and already had a tenant in place, and the other side was a disaster that needed a complete overhaul.
We put in an offer of $130,000 and by some miracle we barely beat out several other investors who were offering cash whereas we needed financing, and the bank accepted our offer.
Little did we know, that was only the beginning of the roller coaster ride with this property. We learned a lot about estimating rehab costs, managing contractors, and finding tenants. What was supposed to be a $40k rehab quickly spiraled into close to $80k. Part of this overage was due to our first contractor disappearing with almost $15k (lesson learned: always make sure you’re paying for work already performed and not getting too far ahead in payments).
Our long-term goal with this side hustle is to eventually have enough passive income coming in to pay the bills, so I can quit my day job and pursue other entrepreneurial ventures. The way we plan to accomplish this goal has changed slightly over the years, as I realized I don’t really want to maintain a single-family rental empire. We are happy to have a handful of houses at a time, and are constantly looking to buy or sell to capture equity gains and move that money to other investments.
How many rental properties/units do you have, and how much money do you make with this side hustle?
We had as many as 9 units (7 single family houses and 1 duplex), but we sold 2 of them this past year to lock in some equity gains and reduce the management overhead a bit.
After all expenses are accounted for, we generally look to take in $300 per month in cash flow per unit. This does not include gains from appreciation or mortgage paydown.
Real estate is a capital intensive business, and there are a lot of expenses that I don’t think novice investors take into account. A lot of people will quote highly inflated numbers when you ask how much money they make. If someone tells you the house rents for $1500 and the mortgage is $1000, so they make $500 a month that’s a huge red flag that they are either brand new to the game or trying to deceive you.
Once you account for vacancy, repairs, capital expenditures (replacing the roof, HVAC, plumbing, etc. over time), property management, taxes, and insurance, a general rule of thumb is you’re left with 50% of the rent to pay the principal and interest on the loan and whatever is left over is your cash flow.
So how much money do we actually make? I took a long detour to get to this question, but I think it was important to note HOW we calculate our profit. Last year over the 7 units we had, we cash flowed about $31k. You can see a much more detailed breakdown in our annual side hustle income report.
That number doesn’t include a lot of intangibles such as principal paydown on the loan, equity gains from appreciation, and the tax write-offs we get from owning real estate.
While it was not all through rental properties, we added almost $1M to our net worth over 5 years through real estate. That would be hard to duplicate in any