There are so many reasons to love real estate rental properties as an investment.

However, here are three reasons I love it specifically as a passive income investment

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Today I have a post from my buddy @scaredycatguide. If you have a risk-averse mindset and struggle to pull the trigger on deals, check him out!

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#1 – Leverage The Rental Property Mortgage

When we use financing to acquire a property, we are essentially controlling an asset that is worth five times the money invested.

The best part is – five times is achieved when putting twenty percent down, which is considered conservative in real estate compared low money down loans.

Here’s an example:
You want to acquire a property that is worth $100,000. After getting a mortgage and putting down the $20,000 as the twenty percent down payment, you now control a $100,000 asset with your $20,000.

Let’s now think about it in terms of percentage return. If the property increases by 10 percent it is now worth $10,000 more. However, if you were to invest that $20,000 in say a stock and it went up 10 percent it would be worth $2,000 more.

See the difference?

#2 – Rental Cash Flow

This one is likely the most obvious. If you are looking for passive income, then cash flow from a rental property is essentially that!

Of course, you need to make sure to buy a property that will indeed cash flow. There are ways to do this and using a property calculator to run the financials of a property is the first step.

On my blog, I talk about “Buying Right.” To buy right, you run the financials of a property and only buy when you see positive cash flow will be produced after deducting all of your operating expenses from the rental income, and yes, allocations for maintenance and vacancy should be included in the expenses.

If you do not have a property calculator feel free to download mine from scaredycatguide.com

#3 – Rental Mortgage Principal Pay Down

With a rental property, your tenant(s) pay your mortgage for you.

Using the rental mortgage example from above:
If you buy a $100,000 property and put down 20% you will have an $80,000 balance to pay off. Who is actually paying this off? It’s not you, it is your tenants. The rental income goes toward paying the mortgages, taxes, insurance, etc.

We build equity in the property even if it does not appreciate since we are not coming out of pocket to pay off the mortgage.
When the loan is paid off even if the property is still worth the same $100k, you will have the $20,000 invested into it and have $80,000 in equity!

Is Rental Property Income Really Passive Though?

I know what you must be thinking, are rental properties really a passive investment? Won’t I have to deal with tenants and maintenance issues?

Well no, not exactly. If all you want to do is make investment decisions then hire property management to handle all that stuff. Doing that means you just deal with an occasional phone call just like you would from a financial advisor.

Just be sure to factor property management into your calculations when deriving potential cash flow.

Conclusion

Those are the three main reasons I like investing in rental real estate.

Best part, these are not the only ways real estate can make you money.

It’s also one of the more tax-friendly investments as depreciation and your upkeep costs are written off against your gains.

Thus a lower tax bill on profits compared to things like stocks.

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