Statistics purport that more millionaires in America achieved their wealth through real estate than any other endeavor. The magnificent rally of real estate in the last several years serves as yet another testament of the power of property. However, with the plateau and fall of prices, many investors wonder if real estate is still a savvy portfolio holding. Flipping homes for an easy profit is no longer lucrative in a buyer’s market. However, for the long-term investor, the answer is indeed profitable.

“Flipping” homes over a decade

Since the 1960s, home prices have boomed almost every ten years, spiking in the 1970s, late 1980s, and of course, in the latest real estate rally. With history in mind, investors can expect to see growth in their real estate holdings – as long as they are held over the long-term.

During this long-term hold, savvy investors employ renters to pay down the mortgages, increase the equity in the property, and, of course, generate passive income.

Using renters to build your equity

Inherently, there will always be renters and landlords prevalent in the United States. The low rate of savings in this country means that many families will never look to own a home. Subsequently, you can use renters to build the equity in your property.

When you are looking for potential rental property investments, the key is to ensure that the rent charged would appropriately account for your mortgage payments and costs; in the current market, foreclosures are an excellent means of finding discounted properties to turn into rental income.

There are several steps to evaluating if a real estate investment property would be a viable outlet for passive income derived from rent:

• Assess the market value of rentals: Creating passive income from rental properties requires you to choose a property where the demand for rentals is high. Simultaneously, high demand leads to lucrative rents. Typically, highly populated regions with a younger, transient population, such as college areas, make for great rentals. On the other hand, if you would like to charge premium rents, then choose an area where professionals must travel frequently. For example, professionals from around the world must travel to Los Angeles to work on films, and thus, owning rental property in the Hollywood Hills can prove to be highly lucrative.
• Compare your true costs vs. rent: Certainly, it is critical to ensure that the amount of rent you can charge will cover your mortgage payment. However, there are other factors to consider, such as the cost of your mortgage insurance, property taxes, maintenance and repairs, insurance, and vacancy losses. Will you pay for the gardening and pool services, as well as any of the utilities? These costs quickly add up, and you want to ensure that the rental is generating passive income to be worthy of your time. Generally speaking, you may want to pay for the services that will maintain the value of your home, such as the landscaping service and subsequent water bill, while passing the consumer-expendable utilities of electricity and gas costs onto your tenants.
• Consider your timeline: How long you plan on holding the home makes a difference in your evaluation of the potential property. If you only want to hold the property for a few years, then you may want to choose a home that does not require significant remodeling in order to make it an attractive rental property. On the other hand, if you plan to hold the property for 10 – 20 years, then finding a great fixer-upper bargain and renovating the home can be a great investment. Keep in mind that the more years you hold the property, the more repairs and maintenance costs you will have to bear.

Long-term passive income turns into equity

With the right rental property structure, you not only enjoy the benefits of passive income, but over the course of time, your renters pay your mortgage and build your equity. In the early 1980s, my father purchased 10 different rental properties for approximately $100,000 each. Holding them over the course of 20 years, he generated significant passive income through renters, while they nearly paid off all of the mortgages. In the most recent real estate boom, he sold all of these properties for half a million each, pocketing a nice $5 million in equity – on top of the passive income he generated for 20 years.

Clearly, using renters to generate passive income and build your long-term equity is the way to generate significant, low-risk wealth.

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