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What is Passive Real Estate Investing?

May 18, 2023 by Marco Santarelli

What is Passive Real Estate Investing?

Passive real estate investing is a way to invest in real estate to augment income considerably well without having to necessarily stress out one’s self. You are not actively involved in generating profits or income from real estate; you are a passive investor.

  • Passive real estate investing is when you hire or contract a real estate company to help you in finding and manage investment properties for you.
  • Also, passive real estate investing is defined as a process where investors contribute to real estate-related mutual funds and Real Estate Investment Trusts (REITs).  This reduces the burden of running about to find properties and who to sell them for. You hire the firms to get the work done for you and then you pay them after the whole process.

‍There’s more to real estate investing than just buying distressed properties and flipping them for a profit. You need to consider the long-term value of the properties you are buying and the capitalization rate of return that is expected from your real estate investments. If you are serious about this type of investing, then you need to understand how to improve your chances of success. This article will provide some great tips so that you can make money in the real estate industry.

There are two basic ways to make a profit in passive real estate investing; one of them is direct income from rentals. Once the income surpasses the expenditures, then you are on the winning side.  The other way you can benefit is by increasing the value of your investment property and mining the equity that you generate. You either can take low-interest loans against the equity or sell your investment property for a profit and reinvest by buying more investment properties.

5 Passive Real Estate Investing Tips to Help You Make Money

1. Research is key

Many people will only venture into real estate after they have already discovered that they enjoy it. However, the research phase needs to be done very early on in order to have a high chance of success. If you are just going to throw money at a project, it is unlikely that you will get very far. You will probably lose money even if the property appreciates in value by a factor of 10. Most real estate investment ideas will require some level of research in order to make sure that you are getting good value for your money.

2. Know the Market

As mentioned above, some of the best real estate investments are in areas that are experiencing strong growth. If you are buying a foreclosure or a bank-owned property, then you will most likely find that there is a large pool of potential tenants. If the rental market is strong, then you could potentially make a nice profit by taking advantage of low vacancy rates to fill a property. If the market is weak, then you could potentially lose money if you are not careful. I

It is best to know the market well in order to make sure that you are getting good value for your money when you invest in real estate. The market is always changing, so it is important to know what has been going on recently in order to make informed investment decisions. The best way to do this is to get on the ground and see what is happening in the local real estate markets.

3. Know The Different Types Of Real Estate Investing

There are many different types of real estate investing, and it is important to know which ones are best for you. There are three main categories when it comes to real estate investing: fixed assets, discretionary, and real estate investment trusts. This is because these are the main types of real estate that you will find in most residential and commercial real estate projects. What differentiates one type of real estate investing from another is the amount of risk that is associated with each type.

Investing in REITs

You can invest in REITs in a variety of different ways, including purchasing shares of publicly traded REIT stocks, mutual funds, and exchange-traded funds. REITs generally own and/or manage income-producing commercial real estate, whether it's the properties themselves or the mortgages on those properties.

You can invest in Retail REITs, Residential REITs, Healthcare REITs, Office REITs, and Mortgage REITs. REITs will provide you with high dividend yields along with moderate long-term capital appreciation. They can become an excellent addition to your diversified investment portfolio. You must find companies that have done a good job historically in giving dividends to investors.

Real Estate Crowdfunding

The New Opportunity for Passive Real Estate Investing is in Crowdfunding. Since 2012, over 100+ real estate crowdfunding sites have come into existence. Websites like RealtyShares allow investors to access different real estate projects. Investors can get access to different property types and locations across the country. You can invest in real estate alongside thousands of savvy investors. Through RealtyShares, you can invest as little as $5000 and choose over 1500 funded deals.

Investing In a Turnkey Rental Property

Investing in a turnkey rental property is one of the wisest investment decisions you can take today if you are in search of how to make passive income in real estate. A turnkey rental property can be competently managed through a property management company. Therefore, your investment in turnkey rental properties is relatively safe, secure, and hassle-free. In turnkey property investing, everything is done for you.

You would simply purchase an investment property, let the professionals oversee it, and collect your monthly cash flow income, while your tenants would increase your equity or pay off your mortgage. After purchasing the property, you leave every other thing to a turnkey property management company and expect your monthly passive income to flow into your bank account. In addition, the firm ensures that your property never remains vacant.

Finding good tenants on your own can be a big hassle. A good tenant will take care of your property and pay you to rent on time. A bad or disgruntled tenant can cause havoc on your property in many ways and leave it in ruins. Another way of going about passive real estate investing is to hire people who are trustworthy to help you in locating properties in good neighborhoods.

Then, call on a good and experienced contractor to help you renovate the property and do every other necessary repair so that the property can become very attractive before you put it on market for rent. Now you can contract a trusted property management company for collecting rent, handle repairs and maintenance, addressing complaints of your tenants, and sending money to your bank account every month. Isn't it an easy way to generate a passive income?

Click on the link to know all the benefits of investing in turnkey rental properties, which is one of the best ways of passive real estate investing. As much as passive real estate investing looks very good and attractive in theory, it requires time, dedication, and most importantly, taking the right steps before it starts yielding profits.

4. Find The Right Property For The Right Transaction

You will never know if you have all the right properties to invest in and the right people to partner with. It is best to find a real estate partner with whom you are comfortable sharing some of your hard-earned money. You can’t just throw money at a project and hope for the best. If you want to make sure that you are getting good value for your money, then you will need to work hard to find the right project for the right price.

In many cases, you will have to do some serious research in order to find the right project. It is also important to remember that no two real estate transactions will be identical. There might be a market that is oversaturated in a certain type of property, and you may have to look in another location. The important thing is to find a project that you can relate to. If you aren’t feeling 100% comfortable with a certain type of deal, then don’t invest in that type of project. Stick to projects that you are familiar with, and feel safe with.

5. Be Aware Of Capitalization Rates

You will almost certainly make money over the long term when you invest in real estate, but you also need to consider the long-term value of the properties you are buying and the capitalization rate of return that is expected from your real estate investments. While flipping real estate, you will most likely be purchasing properties that are under renovation or have been abandoned.

These types of properties are at risk of being taken advantage of, so it is important to understand the capitalization rate of return that is expected from these types of investments. The capitalization rate of return is the percentage that you are expected to pay back on your investment. In many cases, the property will appreciate in value over time. In other cases, the property may decline in value, in which case you will need to pay back your capitalization rate of return.

This is very difficult to predict, so it is important to understand the capitalization rate of return that is expected from your real estate investments. There is no way to tell whether a project will appreciate in value or not, so it is important to understand what you are getting yourself in for. You can find out more about real estate capitalization rates in this article.

Conclusion

A passive income is defined as the income that you receive regularly which involves little effort on your own part. That is, while some other persons do the herculean part of the job, your own involvement does not really count but you get a huge part of the gain at the end of the whole process. You are certain of the inflow of money on a regular basis, but you don’t participate in the running of the business.

So, passive real estate income is the income you get regularly from real estate investment without playing an active role in the whole process. You get paid every month, quarter, or year but do not participate in the management or contribute work in the investment. Even though passive real estate investing is one of the most lucrative investments people can consider doing, the truth is that the investment requires a little bit of your attention in order to succeed as intended.

You have to be kept abreast of the activities of the firm you’ve invested your money in so as not to be jilted investor. However, if you are certain of the firm you are dealing with; you can always relax and attend the periodic meetings if there are any. Real estate is a great way to make money if you are willing to put in the effort.

There are many different types of real estate investing, and it is important to know which ones are best for you. If you are interested in real estate, then it is smart to get on the ground and do some research in order to make sure that you are getting good value for your money. There are many different types of real estate investing, and it is important to know which ones are best for you.

There are three main categories when it comes to real estate investing: fixed assets, discretionary, and real estate investment trusts. The capitalization rate of return is the percentage that you are expected to pay back on your investment. In many cases, the property will appreciate in value over time. In other cases, the property may decline in value, in which case you will need to pay back your capitalization rate of return.

This is very difficult to predict, so it is important to understand the capitalization rate of return that is expected from your real estate investments. There is no way to tell whether a project will appreciate in value or not, so it is important to understand what you are getting yourself in for.

Filed Under: General Real Estate, Getting Started, Passive Income, Real Estate Investing Tagged With: Passive Real Estate Investing, Passive Real Estate Investing Tips

18 Best Real Estate Investing Books For Beginners 2023

May 18, 2023 by Marco Santarelli

Best Real Estate Books on Investment

Best Real Estate Books

Real estate investments can provide excellent returns if the proper steps are taken, but many new investors lack the necessary skills and education. I wanted to discuss the significance of real estate education through books. This article will present the 18 best real estate investing books to get you started in 2023. If you read all of these books, you will gain a lot of knowledge and learn from the case studies of top investors who have had great success in real estate investing.

Are you a real estate investor? Are you planning to invest? Real estate investing is an ever-evolving industry. Real estate is regarded as one of the best investments that a person can make. But why do so many people struggle with it? The first step is to prepare your mind and habits for success. You will also require adequate real estate education to assist you along the way.

Why Should You Read the Best Real Estate Books as a Beginner in Investment?

Well, real estate investors disagree on many topics, but one that nearly all agree on is the necessity of investing in yourself. There are literally thousands of books out there that deal with real estate investing, and I've probably read a lot of them! These are my choices of good books on real estate investing for this year. What about you?

Reading books is one thing, but where do you start? To be successful as a new real estate investor, you need to learn but it can be hard to sift through all the books to choose from. Finding a good real estate book can be difficult, especially if you don't read a lot. So I've created this list and I felt I would give it to you in a way that breaks it down into several categories.

I want it to break it down into the following areas, mindset, finance, and investing real estate investing for beginners, which is really from beginners to intermediate level investors, and then real estate investing books to grow your business. So once you've gotten started just continue to grow and scale books on property management and books on taxes, or more specifically on how to save and minimize your taxes.

So that's essentially six categories. Now, keep in mind, this is not an exhaustive list. There are literally hundreds, if not thousands, but hundreds of books on real estate. In fact, if you don't believe me, just go to amazon.com and type in real estate investing or even just real estate. And you will see there are a lot of books and that's the problem. There are just too many books to choose from, and it's really hard to know which ones are good, great, or bad. And believe me, there are many bad books out there.

The other thing too, to keep in mind is that if you don't like reading, or if you're a slow reader, you can get the audiobook version of most, or probably all of these books that I have on the list today. So whether it's print or audio, there's something for you today. In fact, you could actually have both. You could read when you have the time to read and listen to the audiobook in the car, or when you're doing stuff around the house or going for a walk.

And last but not least, I will edit and continue to edit and add to this list from time to time. So it's a living, breathing dynamic list. It's not static, it's not a one size fits all list, but I wanted to pick what I felt were the best books for this list at this time. So with that, let's start with the first of the six categories and that is the mindset.

So I've tried to keep it to about anywhere from two to four books per category or section, it's probably an average of three books per section. And what I'm going to do is just tell you the book and give you a brief description of that book and what you can expect from it. And then you can just decide on your own, whether it's something you want to listen to or read. So the three books that I picked for mindset start with a classic, a perennial classic, and most people would think I'm going to say, Think and Grow Rich.

That is a great book. And I do recommend reading the classic, the original book, not the revised edition of it. If that's a book that you haven't read or it's been a long time and you probably should go back to reading it because Napoleon Hill's come out with a lot of great books and a lot of great content because he had access to some of the wealthiest people in the country back in the day.

18 Best Real Estate Investing Books For Beginners 2023

Below, you will find 18 of the best real estate investing books for beginners recommended by entrepreneurs and investors. Read these real estate books in 2023 to become successful in this business. These books are vital to get success in real estate. They will form the backbone of your success for years to come. These books are not just real estate specific, they will also help you develop a winning mindset.

1. The Richest Man in Babylon

Best Book To Read On Real Estate Investing

But my first pick is The Richest Man in Babylon. And again, this is the original edition that I'm referring to, not the edited or revised edition for the 21st century. Get the original text. The Richest Man in Babylon is based on Babylonian parables, and it has been hailed as the greatest of all inspirational works on the subject of thrift and financial planning, and personal wealth in simple language, these fascinating and informative stories in the book set you on a sure path to prosperity and it's accompanying joy.

So these are just great stories. It's not really a how-to book. It's more of a storybook than anything else, but it is a celebrated bestseller. And it often offers an understanding and a solution to most people's personal financial problems, whether they know it or not, it identifies what your problems are, but revealed inside of the book are the secrets to acquiring money, keeping the money, and making money, earn more money for you, which really parallels perfectly with what I talk about all the time.

And that is the three categories, buckets, or areas of creating wealth. And that makes money, grows your money and protects your money. So anyway, stick to the original edition. It is the original uncensored version of the book, the language of the content, and the message from the author. George S Clason, I believe that's how you pronounce his last name.

2. The Compound Effect: Jumpstart Your Income, Your Life, Your Success

Best Real Estate Investing Books to Read in 2021

And this book was actually written in 1926. So it's way back there. In fact, it's even before Napoleon Hill's Think and Grow Rich. Now, fast-forward to the recent past as in the 21st century, the next book I'm sure many of you are familiar with, but probably most of you are not a book by Darren Hardy called The Compound Effect: Jumpstart Your Income, Your Life, Your Success.

This book reveals the core principles that drive success and The Compound Effect book contains the essence of what every super achiever needs to know practice and master to obtain those extraordinary results, extraordinary success. So in this book, they talk about things like how to win almost every time, the number one strategy to achieve any goal and triumph over your competition.

It really is a book to help separate and differentiate yourself. It talks about eradicating bad habits and we all have bad habits. And often those derail your progress. It talks about the real lasting keys to motivation, kind of like what Tony Robbins talks about, but more so. And that is how to get yourself to do things you don't feel like doing.

And I know we're all there at various times of the day, the week, the month, how to capture that elusive awesome force of momentum. Because once you get going, you feel like you want to keep going. You don't want to stop because once you get going, it's almost hard to stop, and talks about many other things and something he refers to as the acceleration secrets of super achievers.

So The Compound Effect has a great title because small successes compounding on small successes lead to larger successes, which continue to compound on themselves. And so once you have that momentum, it continues to grow. But if you're serious about living an extraordinary life, then read this book. It will help to create the success that you desire.

3. High Performance Habits

Best Real Estate Investing Books to Read in 2021

My third book pick here is from Brendon Burchard, someone who I had on the show, not too long ago, I think it was about a year, year, and a half ago. Great guy. In fact, our interview went so long. I had to split that episode into two parts. So you could look for that episode. And I believe it was called High-Performance Habits, which happens to be about the book that he wrote.

One of his last books is called High Performance Habits. How extraordinary people become that way. So 20 years ago, or so Brendan became obsessed with answering three questions. He wanted to know why do some individuals and teams succeed quickly more quickly than others, and actually sustain that success over the long term. You wanted to find out of those people who actually pull it off, why are some miserable?

And then the other group are consistently happy on their journey. And thirdly, you wanted to know what motivates people to reach for higher levels of success in the first place. And then what practices help them improve the most. So after doing some extensive, original research that he does in his own company, and after a decade, as the world's leading high performance, coach Brandon found the answers to these three questions.

And it turns out that just six deliberate habits give you that edge. Now he says that anyone can practice these habits. And when they do extraordinary things happen in their lives, in their relationships, in their careers, it really is a good book. It is definitely well worth reading regardless of what you do in terms of your job or career, business, or practice. It really is a book on becoming a high performer. And to become a high performer, you must seek clarity.

Clarity is so critically important. You have to know how to generate energy. You have to know how to raise necessities, increase your productivity, develop influence, and then lastly demonstrate courage. And this is what he talks about in the book. So it's really the art and the science of how to do it all. And that's what you're going to learn by reading this book or listening to the audio.

So those are my three picks and believe me in this category about mindset, literally, there are over a thousand books. I mean, there is so much out there from Brian, Tracy to Tony Robbins and you name it. But these three are, I think very, very fundamental. In fact, I would argue that they are cornerstone books, The Richest Man in Babylon, The Compound Effect, and High-Performance Habits will improve and change your life. Okay. That's the first category.

The second category is finance and investing. And again, this is one of those sections where there are literally hundreds of books. And again, it's hard to narrow it down, but it wasn't too hard for me to pick. What I feel are probably the three cornerstone books, regardless of how experienced you are how much, you know, how seasoned you are, or how wealthy you are.

Because the fundamentals and the principles found in these three next books are great as a refresher. I'm sure you're going to read it. And there are things that you never knew before, and it's just great additional knowledge.

4. Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!

Best Real Estate Books 2021

So the first one is probably no surprise to anybody. I'm sure most of you have read this at some point in the last 22 years, it's been that long, but many of you know of it. So it is Rich Dad, Poor Dad, what the rich teach their kids about money that the poor and middle class do not buy. Obviously, Robert Kiyosaki, this book has since become the number one personal finance book of all time.

It's been translated into dozens of languages and it's been sold all around the world. I'm not even sure how many millions of copies this book has sold, but it has become a modern-day classic finance classic. So Rich Dad, Poor Dad is Robert's story of growing up with two dads, his real father and the father of his best friend, his rich dad.

And it talks about how both of these men, his fathers shaped his thoughts about money and investing. So the book explodes the myth that you need to earn a high income, to be rich and explains the difference between working for money and having money work for you. And that's a key distinction.

And a lot of the book builds upon that concept, but the book is great because it challenges the belief that your house is an asset, which most people still believe to this day. It is not, it is a liability. And if you don't know why to read the book, it shows why parents rely on the school system to teach their kids about money and why that's a mistake in that.

Doesn't actually work. It defines once and for all, what an asset and a liability truly are. It makes simple definitions for this stuff. And it teaches you what to teach your kids about money for their future. So if you're a parent listening to this and you want to help your children become financially literate and increase their financial IQ, this is a foundational book. It's one of the starting books if you will.

5. Rich Dad's Cashflow Quadrant: Rich Dad's Guide to Financial Freedom

Real Estate Books

So the second book, no surprise is going to be the second book in what is essentially a three-part series of the Rich Dad series of books. These are the three foundational books, but the second book is Rich Dad's Cashflow Quadrant: Rich Dad's Guide to Financial Freedom. This was the second book. So rich dad's cash flow quadrant is a guide to financial freedom.

It picks up where the last book left off first book, rich dad, poor dad. So as the second book in the rich dad series, reveals how some people work less, earn more, pay less in taxes, and learn to become financially free. So cash flow quadrant was written for those people who are ready to move beyond what they feel is job security.

And I say that in air quotes and enter the world of financial freedom. It's for those people who want to make significant changes in their lives and take control of their financial future because this is more of the how-to Rich Dad, Poor Dad was more of the foundational book, kind of laid out the principles and the concepts and some of the definitions that you need to know such as a profit and loss statement, a balance sheet, how money flows and all that, this builds on top of that.

Robert believes that the reason most people struggle financially is that they've spent years in school, but we're never taught about money. And Robert's rich. Dad taught him that this lack of financial education is why so many people work so hard. All their lives it's to work for money, instead of learning how to make money work for them, they basically just work for money.

So this book will change the way you think about your job, your career, owning your own business. And hopefully, it will inspire you to learn these rules of money that the rich use all the time to build and grow their wealth.

6. Rich Dad's Guide to Investing: What the Rich Invest in, That the Poor and the Middle-Class Do Not

Best Real Estate Books

The third book again, no surprises. It's not going to be a shocker. It's really the third book in that rich dad series. And these books work well together. They're built to be stacked on top of each other. So the third book is Rich Dad's Guide to Investing: What the Rich Invest in, That the Poor and the Middle-Class Do Not. So investing obviously means some different things to different people.

And there is a huge between passive investing and becoming an actively engaged investor. And one is not better than the other. There's no right or wrong. We're both at different times in our lives. And it also depends on what we're actually doing. We're always going to be active or passive investors.

Usually, we're both, but you just need to understand the distinction there, becoming an active investor means you're an engaged investor. And so there's a lot of power in that. So rich dad's guide to investing is one of the three core titles in this series. And it covers the basic rules of investing, how to reduce your risk in investing, how to convert that earned income you get from your active job or career, and turn that into passive income.

And he talks about something he refers to as rich dad's 10 investor controls. And this is where he gets into the weeds gets deep into the concepts of investing. So the rich dad philosophy makes a key distinction between managing your money and growing it and understanding the key principles of investing is the first step towards creating and growing wealth.

So this book delivers guidance. You need to help begin that process of becoming an investor and stay on that road till you get to that point of financial freedom. It's really more of a guide. In fact, the title says it is all rich dad's guide to investing. All right, well, those are the three books in the finance and investing category, and it's really the trio, the three rich dad series books, the initial or the original books.

7. The Ultimate Guide to Passive Real Estate Investing

Best Book on Passive Real Estate Investing

Now let's talk about real estate investing for beginners. So this was a little bit challenging for me. In this category, I ultimately decided on four bucks instead of three for this now keep in mind, even though I'm calling it real estate investing for beginners, these books apply to almost everybody. Even if you are a seasoned or an experienced investor, there's a lot of stuff you can learn from these books.

If not every chapter, certainly some of the chapters in these books and the first one is really not a book at all. In fact, it is my ebook that has been a free download on our websites for the last probably 10 years, which has been downloaded literally tens of thousands of times. And I wrote this 40, 42-page ebook as a primer for people to understand the key concepts and key components of investing in real estate, leaning towards passive investing, meaning buy and hold, not flipping real estate, or to actively involved.

It's really about building a portfolio, creating wealth, creating passive income, and learning the fundamental key pieces. So it is really a great primer. So you read it, it's a great starting point, but then you build on top of it with these other books. So The Ultimate Guide to Passive Real Estate Investing the free download on our website is really about the most powerful way to accumulate wealth.

This guide that I wrote has been written to help educate all real estate investors, regardless of their experience level. And again, it's a primer. It talks about the advantages of income-generating real estate, how to analyze properties, key metrics, cash flow returns, what to look for in the quick test to see if a deal is worth even pursuing.

So it's kind of like the smell test, if you will, how to choose some of the best markets and neighborhoods. I try to pack it all in there. There's no fluff. It's just crammed with good information. So if you haven't downloaded a copy or read it, go ahead and do so. I'm going to be updating that soon to kind of a version 2.0, so I'll expand on it a little bit. And I'll just tighten up a few things in there based on today's economy and environment, but not much has changed because principles don't change. All right.

8. How to Invest in Real Estate: The Ultimate Beginner's Guide to Getting Started

Best Real Estate Investing Book

The second book in the real estate investing for beginners series here is How to Invest in Real Estate: The Ultimate Beginner's Guide to Getting Started. This book was written by Brandon Turner. He's got several books. I've picked a couple of his and this book is great if you're starting and good if you're a moderate level investor.

So everyone knows that real estate investing can be a powerful way to build wealth and achieve true financial freedom. But because each person's journey is going to be a little different knowing the first steps to take is challenging for some people. So what this book does, it becomes a manual of sorts on getting started in real estate investing.

It gives you essentially an insider's look at the many different niches and strategies that exist. So it's not all about passive real estate investing. It's got a little bit of everything and it just kind of help to paint pictures. In other words, it shows you the landscape and then you can choose your path.

So what you can do is find which strategy and path work best for you, and then help you build the resources and the goals around that. Unlike most real estate books, this one won't tell you that there's any one secret path, okay. It is considered by many one of the best books on real estate investing.

9. The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits, Most Investors Miss

Best Real Estate Books

There's more than one path to success in real estate, but it has more than 40 real-life stories in the book from other investors on how they achieve success in real estate investing. And I'm sure you're going to be able to relate to many of those stories. There are a lot of similarities, but there are differences between every person and every story.

All right, the next book, the third book, if you will, is The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits, Most Investors Miss. And this is by one of the rich dad advisors, Ken McElroy. He is a sharp guy. You know, I've talked to him in the past. I've had him on the show at one point and you know, I like his content. Now he's really a big real estate guy.

He's focused primarily on big multi-family apartment complexes, but he did start with, you know, small real estate, single-family homes. And that doesn't mean that there's a migration path here. Some people will start with, you know, multi-units and apartments and work their way down to single families, duplexes, and fourplexes, and other people do the other way around.

And while other people just stick with one and stay with it. So you can create wealth and passive income with every size and type of real estate. But with his book on the ABCs of real estate investing, he kind of geared it more towards the people who are just getting started in the beginners and just real estate investing.

Think of it like real estate investing one Oh one, but he talks about things on achieving wealth and cash flow using real estate. You know, what a property is potential is how to unlock the myths that float around real estate for people who are seasoned, how to negotiate deals, evaluate properties and the purchase price, how to increase the income on a property, and ways to properly manage a property.

10. Long-Distance Real Estate Investing

Real Estate Investing Books

Now he doesn't get into property management in any depth in this book, it just touches upon it. He actually has another book on that topic, which I'll talk about here in a minute. And then the fourth, if you will, fourth and last book in this category is Long-Distance Real Estate Investing. Now I love that title. He doesn't get too deep into it, but it is a good book. It's by David Green.

It's one of the bigger pockets series books. But you know, what he talks about is living in a hot market or a market that's not suited for buying hold investing because it's just unaffordable too expensive. The numbers don't work, whatever the case is, but he poses the question. Well, how do I take advantage of building wealth in real estate? When I live in a market that I can't invest in, it's impossible, or how do I avoid, you know, market fluctuations or the next market crash.

So we know real estate investing is one of the greatest vehicles for creating wealth, but you need to understand how to choose markets and be able to be nimble and agnostic. And this is stuff I talk about on the podcast all the time, and this is what he talks about in the book. I just wish he would get more deep into the concept of done for you and rent, ready properties, and turnkey properties.

He touches upon it. But to be completely honest with you guys, I have always found since the beginning of bigger pockets in 2007, they've always had a bias towards turnkey, real estate investing, and passive real estate investing in general. They are certainly of the active, real estate investing flavor. They certainly believe in buying, fixing, and creating value on properties.

It seems that to me, that most, if not all of their content, either excludes conversations about turnkey investing, buying properties that are essentially rent-ready. So you don't have to do any fix-up or renovation work. They're all about putting in sweat equity to create value. That's fine, but that's not for everybody. And we all know that a lot of us are busy. We don't want to go down that road.

We just want to invest in real estate and build a portfolio and let it grow over time. So I'm not knocking the book. The book is good. I just wish he had more on the topic of passive real estate, investing, turnkey, real estate, investing, and done for you models instead of hiring a team outside of your local market to essentially do all the grunt work, swinging the hammers, and everything else, that's fine.

But I think he glosses over a little too much. In fact, all the “Bigger Pockets” books gloss over the turnkey space. So in this book, real estate investor and police officer David Green, shows you how he's built a multi-million dollar portfolio through buying, managing, and flipping out of state properties. So keep that in mind when you read it, but he does share tips, tricks, and systems that he's put in place over the years of his real estate investing experience and journey and what he's done to essentially succeed and avoid making mistakes along the way, but just realize that's the perspective.

Anyway, the bottom line with this book, and what I like to talk about all the time is to don't let your location dictate your financial freedom, learn how to succeed regardless of where you live and where you invest, choose the right markets, the right neighborhoods, the right properties, and have the right team around you. And that will be a secret if you will, or a formula to your success.

11. The Millionaire Real Estate Investor

Best Books For Real Estate Investors

All right, the next category is real estate investing to grow. So this is kind of the next level up. One of my favorite books that I read in real estate investing is The Millionaire Real Estate Investor by Gary Keller, Gary Keller well-known author. He is obviously the founder of Keller Williams, the real estate brokerage nationwide real estate brokerage. So he is a real estate investor and a very good one.

Anyone who seeks financial wealth first needs to learn the fundamental truths and models that drive it. And this is what he talks about in the book. So the millionaire real estate investor represents the collected wisdom and experience of over a hundred millionaire investors from all walks of life who have pursued financial wealth and achieved it through real estate.

And so what he did is he basically created this book in a straightforward, no-nonsense way that reveals the strategies that these hundred millionaire investors have used to create financial freedom, independence, and a lifestyle that works for them. So this book essentially is a handbook that has tried and true financial wealth-building principles and models built around real estate that reward your patience and perseverance, and he lays it out.

So some of the things he talks about are the myths about money and investing and especially the ones that hold people back and really how to develop a mindset of a millionaire investor, which goes back full circle to where we began about mindset. You know, even when he talks about this in the beginning part of the book, he talks about how to develop sound criteria for identifying great real estate investment opportunities, how to zero in on key terms and parts of transactions and achieve the best possible deals when you're putting a deal together or looking for a deal.

He also talks about how to develop your dream team, which is something I talk about often proven models and strategies that millionaire investors use to track their net worth understand finances. It's not a very complex or complicated book. It's not going to put you to sleep or cause your eyes to glaze over.

12. The Book on Rental Property Investing

Best Book on Rental Property Investing

I think it's extremely well-written. So again, it's one of my favorite books. It's a blue and white book. The next book in this category on real estate investing to grow is The Book on Rental Property Investing. Again, this one is the second one by Brandon Turner. So in this book, he discusses practical strategies that investors around the world use to build significant cash flow with their rental properties. So this is getting a little bit more into the weeds, a little bit more tactical if you will.

So in this book, you'll learn how to build an achievable plan, how to find good deals, how to analyze those properties and those deals build your team, finance, the rentals, and a whole bunch more, and basically everything you need to become successful at rental property investing. Again, it's a book there's only so much you can put in the book, but it does a good job of laying it out. This is one of the best books on real estate investing. This book will feed what you need to succeed in rental property investing.

13. Advanced Guide to Real Estate Investing: How to Identify the Hottest Markets and Secure the Best Deals 

Best Guide on Real Estate Investing 2021

Okay. So again, think of it like a, a, a practical guide. So there's a lot that he covers in this book, but you know, he starts with why real estate investors fail and how you ensure that you don't. And he talks about four easy-to-follow strategies that you can build your real estate portfolio on creative tips to find those deals, how to achieve success by avoiding property management, which, you know, we all love actionable ideas on financing.

Those rentals. Now, obviously, there are limitations there, but for the most part, it's going to be cheap financings like conventional loans and a little bit of advice on keeping your wealth by deferring and eliminating your taxes, which you know, is really not an extensive part of the book, but essentially something we'll talk about here in a minute last but not least. I included another book by Ken McElroy, and this is the Advanced Guide to Real Estate Investing: How to Identify the Hottest Markets and Secure the Best Deals.

So if you're interested in the real estate investing space, you may have noticed that this part of real estate doesn't get covered much. And when it does the mainstream media focuses mostly on, you know, stocks, bonds, mutual funds, and that kind of stuff. And they don't really talk about real estate as an investment, all that much. It's really about homeownership.

And even when they do talk about it, it's like, Oh, it's like this one, nebulous bob, they refer to as the housing market, but they don't really talk about specific markets unless you're listening to your local news channel, but that's because financial publications, TV, radio, um, they make the bulk of their money from advertising paid by the very companies who provide the mainstream media and those channels with financial services, the advertising, the marketing, all that stuff.

But real estate investment is something that you can do on your own without a large amount of money upfront, as we all know if you just learn how to do it and pick the right markets to do that. So what Ken did with this book is he picked up where he left off in the first book, the best-selling book, ABCs of real estate investing.  And he reveals the next essential lessons and the information that you need as an investor to succeed and continue to scale and grow your business.

So he built on the foundation of the first book, which is kind of like real estate investing one-on-one and he talks more about how to think and operate like a real estate mogul. How do identify and close expert deals, you know, differences between single multi-family property surrounding yourself with the right team to maximize your money, avoid paying thousands in taxes, by structuring property sales wisely? This is a kind of asset protection and tax strategy combined, and last but not least important projections about the future of real estate investing. Now, this book is a few years old, so, you know, I'm sure some things have changed.

14. TheABCs of Property Management: What You Need to Know to Maximize Your Money Now

Best Real Estate Book on Property Management

I don't think Ken was expecting the amount of appreciation that we would have seen over the last two, three years and the lack of inventory. So it kind of compounds what he talks about. The next section is about property management. And so again, Ken wrote a third book on this subject because this is where he actually started his real estate career as a property manager.

And so his book is The ABCs of Property Management: What You Need to Know to Maximize Your Money Now. So as you start to invest and you build your portfolio, the question comes up, you know, how are you going to make it as profitable as possible? And how will you maximize its potential and make it grow in value? And the one word he has for this is management.

Now that doesn't mean you managing the property, although you could, if you want it to, there's nothing wrong with that. And it's probably good to understand how to manage your property, but if you're managing your managers, this is good information. So this book can reveal the key to his success, and that is exceptional property management.

So he teaches you the most important principles and the keys to achieving success, where other people fail, which is often in the management of their properties. So he talks about things like how to decide, you know when to manage your property and went to hire someone, to do it, how to implement the right systems.

If you're doing it yourself structures for your investment, how to manage and maximize cash flow, you know what to expect, essentially it's the life of an owner-manager and how to find the right property manager and avoid the wrong ones. So I think this is a good book as a frame of reference, whether you manage or you don't.

15. The Book on Managing Rental Properties

Best Real Estate Book on Managing Rental Properties in 2021

The second book is if you choose to manage your own properties, it's another book by Brandon Turner called The Book on Managing Rental Properties,  a proven system for finding, screening, and managing tenants with fewer headaches and maximum profits. This is definitely a book for a do-it-yourself. So if you want to manage your own properties, even if it's just one or you already manage your properties, this might be a good supplement to that.

So no matter how great, you know, you are at finding real estate deals, if you, I don't want to manage your properties well or correctly, you're obviously leaving money on the table, or you're not maximizing your returns. Brandon likes to say that being a landlord can be fun, but only if you do it right. So learning to effectively manage your tenants means that you end up with more freedom, less drama, higher profits from your real estate business.

And it just ends up looking good, feeling good. So Brandon's a, you know, an experienced property manager, he's been managing his own properties for a long time. And what he does in this book is essential takes you on an insightful tour of their management business there as in, you know, him and his wife. So you can learn how they've been able to maximize profit, minimize their stress.

He says that he has a blast doing it. So I guess you can learn how to do that too. But he talks a lot about his personal stories of the mistakes that they've had, and that you can learn from. And he talks about the different tools and tricks and systems that they've put in place over the years. And the book probably will change the way you think about property management altogether.

So there's a lot of stuff he covers in the book. I think it's more than a beginner's book. It's certainly a primer, but it has some advanced content. So overall I think it's great. And last but not least taxes, you know, the thing we want to defer or eliminate as much as possible. So I have three book picks here. There are many books out there on taxes, but I think these are great fundamental books.

And really what I've tried to do again, is boil it down to the best two, three, or four books in each section that will give you everything. You need, the nuts bolts strategies, tactical plans, and not leave you hanging. So the three books I chose for the area of taxes is first and foremost, the book by Tom Wheelwright, another one of Robert Kiyosaki's rich dad advisors, great guy, super smart. I've had him on the show several times. Always have great episodes talking to Tom, but his book, which he just revised recently.

16. Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes

Best Real Estate Books on Taxes

So it's the newly revised version, but it's called Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes, what a great title. So I will say that this book is slanted a little bit more toward business owners and entrepreneurs, but it applies to anybody and everybody because if you pay taxes in any way, shape, or form, you're going to learn something or you can learn something from this book.

So tax-free wealth is about tax planning, concepts, and how to use the tax laws to your benefit. So Tom explains how the tax laws work and how they are designed to actually reduce your taxes, not increase them. The key here is to understand how taxes and tax law works. So the book explains how to use the tax laws to your advantage, and in ways that will support your vision and growth plans, not only for your company or your business, but you know, for your investing empire as well, however, that is structured and you know, more specifically real estate.

17. The Book on Tax Strategies for the Savvy Real Estate Investor

Best Real Estate Book on Tax Strategies for the Savvy Real Estate Investor

So once you understand the basic principles of tax reduction, then you can immediately reduce your taxes to the point where eventually you may be able to legally eliminate and contactless and drastically reduce your taxes overall. And he talks about this in the book. So it's about minimizing, eliminating, and deferring your taxes.

Those are the three things he talks about in the book. Now, once you get through that, there are two books specifically on real estate investing, as it relates to taxes. And the first one is The Book on Tax Strategies for the Savvy Real Estate Investor. The subtitle to this book is powerful techniques.

Anyone can use it to deduct more, invest martyrs, and pay far less to the IRS. The book was written by Amanda Hahn. She actually lives in Orange County here, not too far from Ireland. And what she talks about is ways to maximize your deductions for your real estate business.

18. The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors

Best Real Estate Book on Cracking the Code for Savvy Real Estate Investors

And they also talk about practicals on how to minimize your taxes, not only for this year but in future years, as well as ongoing strategies that will make your next tax season that much easier. So what they want to do is basically help you save thousands of dollars by having great tax strategies in place.

So they talk about creative methods to maximize your deductions, clever ways to write off your kids' strategies, to write off every penny on your travel tips and tricks to cut down on bookkeeping time, and simple procedures that will protect you from IRS audits. So that's their first book, the foundational book, there's a lot in that book, but then they wrote a sequel to it, which is my third book in this category of taxes again by Amanda Hahn.

And this is The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors. And you know, what they say is that when it comes to taxes, it's not about how much money you make, but how much money you actually keep. So if you're tired of working hard all year, just to lose, you know, the largest chunk of that money that you earned to the IRS, then, you know, obviously you want to learn as much as you can about taxes, you know, believe it or not.

The US tax system is filled with loopholes designed specifically to benefit real estate investors. And this actually got better in 2017 with the new tax act that was put into play under the Trump administration. So what was great as far as tax benefits for investors and real estate investors actually got even better with that tax act. So this book is a comprehensive follow-up to the book on tax strategies, which was a best-selling book by Han and Matthew McFarland.

And this just brings you more strategies to slash your taxes and turn your real estate investments into a tax-saving machine. And, you know, again, this book just goes deeper into a lot of the stuff from 10 31 exchanges to taking advantage of opportunity zone, tax benefits, how to supercharge your nest egg with self-directed investment strategies, steps to use your rental properties to legally wipe out your taxable income.

What else did they talk about in their ways to take advantage of the tax reform benefits that came about with all your real estate deals, accelerating your depreciation, and even common retirement and investment tax traps, and really how to avoid those? So, you know, people sometimes make the mistake of investing in their retirement account and then only find out that, you know, they've made a mistake. They don't have any tax benefits or maybe are not liable for tax penalties because they did it wrong.

Here's another blog that you can read – 12 Books to Read if You Want to Get Rich.

Filed Under: General Real Estate, Getting Started, Real Estate Investing, Selling Real Estate Tagged With: Best Real Estate Books, Best Real Estate Investing Books, Real Estate Books, Real Estate Investing Books For Beginners

13 Tips For Buying a Rental Property in the US 2023

May 18, 2023 by Marco Santarelli

Looking to purchase and profit from a rental property? In this article, we're going to give you some important tips on how to buy a rental property. These are the steps every budding property investor should take to pick a good cash-generating rental property. By following these steps, you’ll be well prepared to buy your first rental property. As a form of real estate investment, buying a rental property is considered to be a very good one.

You should buy a rental property if you want to diversify your holdings beyond stocks and bonds. The biggest advantage of buying a rental property is that it's a passive investment that required very little day-to-day management from owners or landlords. The other advantage is that you start earning a return on your capital investment immediately in the form of rent. Imagine this – After you make the down payment and pay all closing costs, the renter pays off your mortgage. How good is that?

However, it requires due diligence, on your part, to ensure you get the best return on your investment. Just like any business, purchasing a rental property to earn monthly income can be a bit risky too. Remember, choosing the right property, maintaining it, dealing with tenants—all that takes work. Investing in a rental property is not as easy as investing in stocks. From the first decision to get into the landlord's biz to buying a building, the idea may be daunting for the first-time investor. Real estate is a tough business so you need careful planning before putting down your money in rental properties.

Finding good rental property deals can be a difficult task to accomplish. A bad rental property deal will make you no profit or even worse, it can lead to a financial loss. Therefore, as a naive real estate investor, you should opt for buying off-market rental properties from turnkey real estate companies. A rental property should be turnkey and rent-ready. A good rental property is fully refurbished or a new construction residential property. The property must be in growth markets and must produce a positive cash flow. The property must have a good appreciation potential.

Norada Real Estate Investments helps take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, they help you succeed by minimizing risk and maximizing profitability. Our investment properties for sale are at or below fair market value – which means there is a potential for more returns on your investment.

For beginners looking to invest in a rental property, it is frequently placed in the category of income sans work. However, it’s not like that at all. Although it qualifies as passive income, that doesn’t mean you’re not going to buckle down. If you choose to manage the property yourself, you must know that unlike stocks it is not hands-off management. You will be required to do a lot of work for managing the rental property as well as your tenants.

Making money in real estate is not necessarily as easy or as simple as you’ve been told. Even if you hire property managers to help you manage your rental properties, you still have to manage them. Buying rental property is not for everyone. It should be an investment option you consider only once you’ve achieved a certain level of financial independence. If you do it right, you can put yourself on the road to success with cash regularly flowing into your bank account.

13 Tips On How To Buy Your First Rental Property

tips for buying a rental property

When seeking to buy a rental property, you must tread cautiously. This will help you to avoid common risks in rental property investing. Investment real estate, although a highly profitable business, is also equally a very tricky one. There’s a lot to be wary of including con agents and dealers, substandard properties, and exorbitant charges among others. It’s just important that you exercise caution before buying anything. Here are the 13 tips that you must follow when buying a rental property for passive income generation.

1. Buy Rental Property In The Best Location

As you already know, “Location, Location, Location” still rules and remains the most important factor for profitability in any form of real estate investment whether it is “fix and flip” or rental property investing. Before you get your heart set on a specific location, bring your rental property’s location into serious consideration.

  • Find out what is the crime rate in that location.
  • Are there schools close by and how are they rated?
  • How far are the amenities like parks, supermarkets, transport hubs, and restaurants?
  • How good is the rental property market in that location? What are the comparable rents and purchase prices?
  • How is the economic development of the area?
  • How the locality is expected to evolve over the investment period? If the area develops, the rent price will increase and so will your income and vice-versa.

2. Choose The Right Rental Property Markets

When choosing a rental market, it is always best to select one that is best aligned with your investing goals. For example, an investor who only wishes to go in it for the cash flow (and not appreciation) should probably opt for a more stable market. These markets won't fluctuate upwards or downwards, and they won’t be growing at a very rapid pace. The strength of the overall economy significantly impacts the real estate market. With the population, jobs, economy and industries, and mortgage availability moving upwards, the growing markets are always booming.

In growing markets the number of properties available to the population will be less, hence the demand for housing will increase. The increased demand leads to a rise in home prices. Strong real estate markets and increased job growth go hand in hand.  Demand for all types of real estate increases with the number of local jobs, as during periods of economic development or boom. Additions to the local labor force tend to drive rents and prices upon rental properties in the vicinity. So, you get both a good property appreciation and a rent increase.

Population growth is also an indicator of a strong real estate market. When people from out of state move in, the rental property market gets boosted. Such increases in the population of renters and employment trigger a rise in the demand for housing. The market entered into a phase that favors sellers and it takes many years for supply and demand to become balanced again. Now as a rental property owner it means that you have an opportunity to capitalize on a unique investment opportunity.

Our picks are affordable and growing markets like Houston, Dallas, Oklahoma City, Memphis, Dallas, etc. However, it’s difficult to tell whether a given market is wise to invest in, and there is certainly no guarantee that anyone can give you. Timing a rental property market is also important. When it comes to buying rental properties, location is important but so is timing to a certain extent. The general rule is – Buy in a Buyer's Market. Sell in a Seller's Market. You should not buy near the top of the housing market cycle and see the value of your property fall and then wait several years for the market to rise again.

3. Buy Rental Property Using Leverage

tips for buying a rental property
Credit: Andrea Piacquadio from Pexels

As important as location, location, location is to buying, so is leverage, leverage, leverage. *David Reiss, a Professor of Law at Brooklyn Law School believes understanding the mortgage market helps keep costs low and reduces market cash flow uncertainty. Having a mortgage can also free up cash for repairs if needed for your potential investment. He goes on to say consulting a professional can save you time and money. Caveat Emptor. When going for leverage to finance rental properties, no lender will lend you money with no money down, and no seller will carry a note without you putting some money down even if it’s a promise to do money in the future.

There is no such thing as no money down in any type of real estate investment because the money is going to come from somewhere. In regards to buying investment properties with no money down, one of the best options you can try out is that of borrowing. There is a good deal of banks, financial firms, and private lenders out there who can readily loan you the amount you need to buy a rental property.

Importance of Leverage – If you do it right, you will be able to add more and more rental properties to your investment portfolio. If you wanted to buy $100,000 worth of stocks, you need to invest $100,000 out of your savings. But, if you want to buy a rental property that costs $100,000, you can use other people’s money to make this purchase. A bank or other lender will generally give you 80% of the purchase price. You just need to make a down payment of the remaining 20%. In this way, you can save 80% of your savings through leverage.

4. Choose a Single-Family House When Buying a Rental Property

Single Family Rental Property
Photo Credit: Binyamin Mellish from Pexels

New real estate investors should start with single-family rental homes. Why? Upkeep is easier as you only deal with a single tenant. Should something break and needs repair you only have to fix the problem once. Wear and tear on your investment are also reduced with single-family tenants. Following the housing market decline in 2007, single-family real estate investing became a favorable option for investors, saving on construction or refurbishment prices. The quick turnaround for an owner to rent out their property means cash flow is almost immediate.

Single-family rental homes have grown up to 30% within the last three years. Almost all the housing demand in the US in recent years has been filled by single-family rental units. The overall supply of single-family rental homes is flat, though demand isn’t. That is why rental rates were steadily increasing in 2019. Affordable rentals or those renting for 75 percent of the median rate saw rents go up 4 percent in 2019. That is due to the low supply of single-family rental homes in that price range. Given the growing price of land and materials, developers choose to build more luxury homes and condos than cheap affordable homes.

The higher-end single-family rental homes renting for 125 percent of the median rate only appreciated 3 percent in 2019. The growing returns for single-family rental investment have led investors to flood in, snapping up foreclosures and properties in need of major repairs. While fix and flip are popular on TV, fix, and rent out is a standard way to acquire discounted single-family rental investment properties. It has also forced real estate investors to compete with other investors for fixer-uppers.

5. Screen Tenants For Your Rental Property

Do a background check of your tenants before signing up for a lease agreement. Check their court records, credit rating, historical landlord-tenant disputes, etc. Doing so ensures you have a qualified tenant for your rental property. Failure to do so can cause a multitude of expensive problems and personal stress to name just a few. Landlords need to thoroughly vet their tenants to be on the safe side. Finding and screening tenants, doing paperwork, and ensuring low vacancy rates is not an easy job. This leads to losses especially if such rental property was your sole investment. The losses add up more if you have bought the rental property through a mortgage.

6. Learn About Short Term Rental Restrictions

Welcome to the world of VRBO and Airbnb. These short-term rental companies can turn buying a rental property into a nightmare. Some cities have legislated short-term restrictions on rentals. Roh Habibi, the Founder & Principal of TheHabibi Group suggests potential investors need to be aware of HOA and condo laws that may apply to your purchase. Before buying, you need to be sure it can be used as a short-term rental.

7. Do the Math For Your Rental Property

Why overcomplicate your life? Ask yourself this, will the rental payment cover your monthly mortgage cost? Maybe even make you a few hundred dollars. Experts believe that inexperienced investors should let the numbers speak for themselves. If you meet your mortgage payments, you probably have a good deal. Overanalyzing when buying a rental property is a complication you don’t need. The cost of borrowing money might be relatively cheap, but the interest rate on your rental property will be higher than traditional mortgage interest rates.

The 2% rule says that for a rental property investment to be “good”, the monthly rent should be equal to or higher than 2% of the purchase price. For a $100,000 property, the monthly rent collected needs to be $2,000/month or higher to meet this guideline. You need a low mortgage payment that won't eat into your monthly profits too significantly. If you live in a city like San Francisco or Los Angeles or Seattle, rent will likely be your biggest monthly expense.

It may eat up a good chunk of your paycheck. Follow the 50% rule for operating expenses on your rental property. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses. Operating expenses on your new property will be between 35% and 80% of your gross operating income. The normal operating expense ratio range is typically between 60% to 80%, and the lower it is, the better.

8. Buy Rental Property With A Good Rate of Return

profitable rental property
Image by PublicDomainPictures from Pixabay

Owning rental properties can provide investors with steady rental income or capital gains when sold for a lump sum profit. Profit is made on investment as a percentage of the cost of the investment. A cap rate of 7% or north of that number is considered very good for a profitable rental property. Generally, the average rate of return on investment is anything above 15%. When calculating the rate of return on a rental property using the cap rate calculation, many real estate experts also agree that a good ROI is usually around 10%, and a great one is 12% or more.

Amazing deals can be found by wise investors. To do so involves shopping the areas for what houses are selling for. Areas that are expected to transition to a more gentrified neighborhood should be prime investment targets. The biggest disadvantage of buying a rental property that you could face is the lower yield. While not always the case, most rental properties are priced much higher than the fair market value in that neighborhood, and that is because of the convenience they offer since they are already renovated and come with a tenant in place.

9. Consult Real Estate Finance Professionals

When buying a rental property, it’s important to deal with recognized professionals. Opportunity cost and leverage are needed to be known, in the financing world. These experts will help you understand the cost benefits and potential opportunity costs when using all cash. They will advise you on the actual revolving cost and true margins on the financial side of things.

10. Get A Written Lease Agreement For Your Rental Property

lease agreement for rental property
Image by Gerd Altmann from Pixabay

When renting your new property, having a proper lease is very important. With one in place, you can eliminate potential misunderstandings between you and the tenant. Some of these include rental payment and due date, termination fees, are pets allowed, insurance, ensuring the living space is clean, and even the heating temperature setting in winter.

When you have a written lease agreement, if there is a dispute at a later date, it can help clarify what was agreed to by both sides. On the other hand, if there is no lease agreement, then there is no authority for the landlord to make any deductions from the tenancy deposit – no matter how dreadful the condition of the property when the tenant moves out.

If he tries to make any deductions, any challenge made by the tenant will succeed at adjudication. Fortunately, when you have a lease agreement in place, there are several steps you can take as a landlord to mitigate any further damage and even cover the expenses to repair them.

11. Outdoor Space is a Bonus

outdoor space in a rental property
Image by Gretta Blankenship from Pixabay

And an appealing outdoor space helps a rental property attract and retain tenants. To rent to good tenants, consider buying a rental property with outdoor space. Most renters will enjoy having family and friends over for backyard BBQs, relaxing, and just spending time outdoors. If the area is private that’s a big plus to consider. Renters can then add personal touches to make the space an outdoor oasis to enjoy.

Outdoor space is desirable to prospective tenants, even if it is a patio, balcony, or fenced backyard. A usable outdoor space can be used for the kids to play or for pets to run free. If you can provide a small space to enjoy the sunshine and some fresh air, you'll be able to attract more tenants and select the very best. Having an outdoor space is always a bonus when it comes to renting.

12. Balance Your Risk

People will still need places to live even in a flat economic cycle. Your rental can be a steady income generator during a downturn. Choosing the correct rental property helps balance risk. Areas with a high demand for rentals will continue to generate income even when the economy is in a downturn.

13. Buy What You’re Familiar With

Like all your major investments in life, buy what you know. When buying a rental property, use your life experience to help you gain a competitive edge. Experts suggest looking for investment properties near your college campus. Another life experience to mine would be retired military near a military base. Properties near hospitals can provide rental opportunities for nurses. Your real-life experiences can make you a good investor.

Let Us Help You In Buying Your First Rental Property

The American Dream used to include real estate investing. If chosen carefully, real estate investing is likely to give steady returns in the long run. Buying a rental property, like most things in life, once you know the rules of the road it’s not as difficult as you first imagine. Fortunately, experienced real estate professionals or advisers are either a referral away or after some sleuthing on your own, added to your preferred supplier list. Go for reputed turnkey real estate companies and buy rent-ready properties.

A turnkey rental property is a great option for investors searching for passive income that requires as little active management as possible while still accomplishing a modest return on investment. Then, hire a good property management company that would find qualified tenants as well as manage the property on your behalf. When shopping for expertise remember, there are no stupid questions. But lots of stupid answers.

Consult with one of the investment counselors who can help build you a custom portfolio of turnkey cash-flow rental properties in the various growth markets across the United States.  All you have to do is fill up this form and schedule a consultation at your convenience. We’re standing by to help you take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, we help you succeed by minimizing risk and maximizing profitability.


References For Further Reading:

  • http://www.fitsmallbusiness.com/buying-your-first-rental-property-tips
  • http://www.sdfcapitalllc.com
  • http://www.thehabibigroup.com
  • http://www.losangelesemploymentattorney.org
  • http://www.caponeforyourhome.com
  • http://www.freddybaezcalderon.com
  • http://www.roomtobreathe.us
  • http://www.homeunion.com
  • http://www.aehomegroup.com

Filed Under: Getting Started, Real Estate Investing, Real Estate Investments

The Rich vs Poor Mindset: Which Mindset Do You Have in 2023?

May 18, 2023 by Marco Santarelli

What is the difference between the rich vs poor mindset? How do the successful differ from the rest of us? So many people do not obtain financial freedom because they do not have one thing: the right mindset. Everything starts with how you think about money, wealth, and success. It is not a matter of luck, birth, or connections.

The biggest differences between rich and poor people can be traced back to mindset, outlook, and behavior. The rich and the poor don’t only differ in how much they have in their pocket, but also in how they think. Rich people have a way of thinking that is different from poor and middle-class people.

They think differently about money, wealth, themselves, other people, and life.  By doing so, you will have some alternative beliefs in your mind from which to choose. In this way, you can catch yourself thinking as poor people do and quickly switch over to how rich people think.

A positive attitude, focusing on doing the right thing overlooking good, becoming a continual learner and careful risk management are all differences between the rich and poor. This reduces their odds of becoming poor after disaster strikes, and it helps them achieve their financial goals over the long term.

A rich mindset will tell you to be self-sufficient & build multiple streams of income. It will tell you to build a team of smarter people than you to leverage the efforts of talented people. The mindset of the rich is the most decisive reason why “the rich keep getting richer, while the poor get poorer.” Bill Gates has been quoted as saying, “If we weren't still hiring great people and pushing ahead at full speed, it would be easy to fall behind and become some mediocre company.”

So, which mindset do you have? Let's examine twelve startling differences between how rich people think and how poor or middle-class people think.

Rich vs Poor Mindset

1. Rich People Believe “I Create My Life”

rich vs poor mindset

Poor mindsets believe “Life happens to me.”

If you want to create wealth, it is imperative that you believe that you are at the steering wheel of your life; that you create every moment of your life, especially your financial life.

Instead of taking responsibility for what's going on in their lives, poor people choose to play the role of victim. Of course, any “victim's” predominant thought process is “poor me.” And presto, through the law of intention that's literally what they get; “poor,” as in money, me.

Here's some homework I promise will change your life. For the next seven days, I challenge you not to complain at all. Not just out loud, but in your head too. I've given this little challenge to thousands of people and several hundred have personally told me that this exercise completely transformed their lives.

2. Rich vs Poor Mindset: Rich Play the Money Game to Win

 

Poor mindsets play the money game not to lose.

Poor people play the money game on defense rather than offense. Let me ask you, if you were to play any sport or any game strictly on defense, what are the chances of you winning that game? Most people agree; slim and none.

Yet, that's exactly how most people play the money game. Their primary concern is survival and security, not wealth and abundance. So, what is your goal? What is your real objective? What is your true intention?

Rich people's big goal is to have massive wealth and abundance. Poor people's big goal is to have “enough to pay the bills…” on time would be a miracle! Again, let me remind you of the power of intention. When your objective is to have enough to pay the bills, that's exactly how much you'll get; just enough to pay the bills and usually not a cent more. You get what you truly intend to get.

3. Rich Mindsets Are Committed to Being Rich

 

Poor mindsets are uncommitted to being rich.

Most of us have good reasons as to why it would be wonderful to be rich, but what about the other side of the coin? Are there reasons why it might not be so great to be rich or go through the process of trying to get rich?

Each of us has a file on wealth in our minds. This file contains our personal beliefs including why being wealthy would be great. But for many people, their file also includes information as to why being rich might not be so great. These people have mixed internal messages around money and especially wealth. These mixed messages are one of the biggest reasons that most people never become rich.

The #1 reason most people don't get what they want is they don't know what they want. Rich people are totally clear they want wealth. They are unwavering in their desire. They are fully committed to creating wealth. They will do “whatever it takes” to have wealth as long as it's moral, legal, and ethical. Rich people do not send mixed messages to the universe. Poor people do.

I hate to break the news to you, but getting rich is not a “stroll in the park.” It takes focus, expertise, 100% effort, and “never say die” perseverance. You have to commit to it, both consciously and subconsciously. You have to believe in your heart you can do it and you deserve it. If you are not fully committed to creating wealth, chances are you won't.

4. Rich vs Poor Mindset: Rich People Think Big

 

Poor people think small.

We once had a trainer teaching at one of our seminars who went from a net worth of $250 thousand to over $600 million in only 3 years. When asked his secret he said, “Everything changed the day I began to think big.”

Another way of understanding this is to answer the following question: How many people do you serve or affect?

For instance, in my business, some trainers enjoy speaking to groups of 20, others are comfortable with 100, others like an audience of 500, still others want 5000 people or more in attendance. Is there is a difference in income between these trainers? You bet there is.

Who are you? How do you want to live your life? How do you want to play the game?

Do you want to play in the big leagues or the little league, in the majors or the minors?

Will you play big or play small? It's your choice.

But hear this. It's not about you. It's about living your mission. It's about living true to your purpose. It's about adding your piece of the puzzle to the world. It's about serving others.

Most of us are so stuck in our egos that everything revolves around “me, me, and more me.” But again, it's not about you, it's about adding value to other people's lives. It's your choice. One road leads to being broke and miserable, the other leads to money, meaning, and fulfillment.

It's time to stop hiding out and start stepping out. It's time to stop needing and start leading. It's time to start being the star that you are.

5. Rich Mindsets Are Bigger Than Their Problems

 

Poor people are smaller than their problems.

Getting rich is not a stroll in the park. It's a journey that is full of obstacles, twists, and detours. The simple fact is, success is messy. The road is fraught with pitfalls and that's why most people don't take it. They don't want the problems.

Therein lies one of the biggest differences between rich people and poor people. Rich and successful people are bigger than their problems while poor and unsuccessful people are smaller than their problems.

Poor people will do almost anything to avoid anything that looks like it could be a problem. They back away from challenges. The irony is that in their quest to make sure they don't have problems, they have the biggest problem of all… they're broke and miserable.

The secret to success is not to try to avoid or shrink your problems; it's to grow yourself so you're bigger than any problem.

It's just an everyday occurrence, like getting dressed or brushing your teeth. Whether you are rich or poor, playing big or playing small, problems do not go away. If you're breathing, you will always have so-called “problems.”

What's important to realize is that the size of the problem is never the real issue. What matters is the size of you!
Remember, your wealth can only grow to the extent that you do! The idea is to grow yourself to a place where you can overcome any problems that get in your way of creating wealth and keeping it once you have it.

Rich people do not back away from problems, do not avoid problems, and do not complain about problems. Rich people are financial warriors and when a warrior is confronted with a challenge they shout: BRING IT ON!

6. Rich vs Poor Mindset: Rich People Focus on Opportunities

 

Poor people focus on problems. Rich people see an opportunity in every situation and work to explore it. 

Rich mindsets see potential growth. Poor mindsets see potential loss.

Rich mindsets focus on the rewards. Poor mindsets focus on the risks.

We're not merely talking about “positive thinking” here, we're talking about a habitual way of seeing the world. Poor people come from fear. Their minds are constantly scanning for what's wrong or what could go wrong in any situation. Their primary mindset is “What if it doesn't work?” or, more bluntly, “It won't work.” Rich people, as we discussed earlier, take responsibility for creating their life and come from the mindset, “It will work because I'll make it work.”

In the financial world, as in most other areas, the risk is directly proportionate to reward; generally, the higher the reward, the higher the risk. People with rich mentalities are willing to take that risk. They work to exploit opportunities even when they don’t have the expertise for it.

Rich people expect to succeed. They have confidence in their abilities, they have confidence in their creativity and they believe that should the “doo-doo hit the fan”, they can always make their money back or succeed in another way. They look for ways to educate themselves to be better prepared for the task.

On the other hand, poor people expect to fail. They lack confidence in themselves and their abilities, and should things not work out, they believe it would be catastrophic.

You have to do something, buy something, or start something to succeed financially. You have to see profit opportunities all around you instead of focusing on ways of losing money.

7. Rich Mindsets Always Focus on Positive Attitude

 

Poor people lack a positive attitude.

Poor is a mindset. It is a lack of hope.

Dave Ramsey, the national best-selling author, once explained the difference between broke and poor is attitude. The broke have no money right now but have a positive outlook; they believe they can do better and can do better when they work toward doing something better. They think they’re doomed to remain in poverty. The little man can’t get ahead. The poor are oppressed by the rich.

They can’t save money because they think it will be taken from them, and they waste money they do save or receive as a windfall on pleasures because they don’t think they can do better by doing anything else. For example, when you think you can’t do better, you won’t finish that challenging degree program or take a second job to get out of debt because there is no point.

Or they think they can’t be wealthy because they believe the lie that most millionaires inherited their wealth and class. The truth is that 80 percent of the rich are the first generation, and less than 3 percent inherited enough to become millionaires.

A negative attitude can hinder those with even a good income. A classic case is being afraid of investing, so you leave money in savings or CDs and earn less than the rate of inflation. Another is seeing money as immoral, so they give it to charities and “needy” friends and family.

They have nothing themselves, ensuring they have no savings for their emergencies or retirement. This is why long-term financial success requires a positive mental outlook. Setbacks like unemployment or massive medical bills are seen as temporary and then worked through.

8. Rich Mindsets Do Not Flaunt Their Wealth

 

People with rich mindsets lead frugal lives.

The public perception of the rich is that they flaunt their wealth. We are lied to when they show “the rich” wearing designer clothes, taking fancy vacations they brag about, and having lavish parties. In reality, a very small number of the truly rich ever live this way, and most who do live this way are high-income earners who have almost nothing saved.

Once the windfall of a signing bonus or record contract is used up, they have nothing. Unfortunately, this image is compounded by marketing efforts to say you have to spend money this way to become rich. Yet wasting money on fancy cars, expensive trips and other trappings of success prevents you from doing so.

That perpetual 500 dollars month car payment and the largest house you could afford to prevent you from becoming wealthy. Most real millionaires live in a house they can afford, and they prioritize paying off the mortgage. They own their cars for years and avoid car payments, though they may buy a used luxury car and keep it running for ten years.

They are content with what they have while they build their businesses and portfolios. And they earn their money honestly. There is a popular myth that most millionaires are liars and cheats. One lie is that the rich don’t pay their taxes, though the top 1 percent pays 40 percent of the taxes.

Another lie is that the rich are dishonest scammers, that they only got wealthy by hurting others. In reality, surveys show that the number one trait of millionaires that they consider key to success is integrity. You can’t stay in business if you’re known for scamming customers or being sued for fraud all the time. Nor can you create the quality relationships that are necessary to build a business network if you’re a liar or cheat.

9. Rich Mindsets Understand The Value of Education

 

Poor mindsets are oblivious to the importance of constant learning or education.

Rich mindsets learn and update their skills throughout their lives.

Education remains a major determinant of lifetime income. Note that this doesn’t mean you have to go to an expensive private college or earn an advanced degree. However, you nearly guarantee you’ll be poor if you don’t finish high school.

One difference between the rich vs poor mindset is that the rich understand the value of knowledge. They’re not part of the 40 percent of adults who don’t crack open a book after graduating high school. They’re reading industry publications to learn more about their field and excel at work.

They’re reading about money management and personal development so that they do better in life. They’re constantly learning. They’ll ensure that they keep up their certifications, and they’ll proactively earn additional certifications to qualify for raises and promotions.

10. Rich Mindsets Are Better At Risk Management

 

Poor mindsets often live in fear of taking new risks.

The rich aren’t gambling with their money, whether it is taking trips to the casinos or taking big risks with penny stocks. They are careful to manage risk. One way they do this is by having the right insurance coverage. They have life insurance, health insurance, and disability insurance so that a personal disaster doesn’t wipe them or their families out. They won't just start a business or investment without analyzing its profitability.

They have emergency funds with several months of savings so that they can cover a major unexpected expense without having to go into debt. They prioritize protecting themselves over spending money on wants. This doesn’t mean they don’t invest in stocks or real estate. It means they do their homework before investing money.

They research the properties and the costs to rehab and sell them before they buy. They research stocks or mutual funds before putting in their money. Educating themselves about various subjects reduces their risk level. And that is why one of the differences between the rich vs poor mindset is that the poor often live in fear of catastrophe, while the rich expect to be able to weather the storm.

11. Rich vs Poor Mindset: Rich People Build Multiple Streams of Income

 

Poor people have one stream of income – their job. 

Poor people put all of their eggs in one basket by being dependent on one stream of income.

The wealthy are known for their work ethic, but there are plenty of people who work hard but remain in poverty. There are several ways the rich work differently. One is that they devote time to planning their financial future. They save for retirement so that they have a passive stream of income before they have to retire from their job.

They aggressively pay down debt and avoid taking on new debt so that their income goes further. They dedicate time to handling their investments while investing every month, whether it is in a 401K or rental properties. If they own a business, they capitalize on it to generate additional income.

It might be licensing intellectual property or renting out one of the suites to generate additional revenue. They may hold a day job but teach or consult on the side to earn additional income. This can be a form of risk management, too, since it gives them a head start if they lose their job or simply want to start their own full-time business.

12. Rich Mindsets Believe in Saving, Investing, And Multiplying

 

Poor mindsets splurge on materialistic things. 

Poor people end up saving nothing to invest.

Rich mindsets save, save, save. They save 10% to 20% of their net income every year. The rich are intentional. They don’t put off saving for the future. They start saving with every paycheck, and they choose not to splurge so they can make that next 15 percent contribution to retirement.

They don’t say they’ll pay off the debt later. They create a plan to pay down debt and follow it, month after month until they’re debt-free. According to “The Millionaire Next Door” and Chris Hogan’s follow-up book “Everyday Millionaires”, most millionaires by net worth either follow a budget or deliberately send a set percentage to savings and live off the rest.

In short, they devise plans and follow them. They set goals, and by focusing on them and constantly working toward them, typically achieve them. Note that it isn’t just money. This is why the wealthy are less likely to be overweight, too. If you’re already used to consistently working toward financial goals, an exercise and diet plan is just one more plan to follow.

Remember, for anyone to cross the line from poverty to wealth, you need to have a change of mindset. If you want to get rich, then you need to change your mindset and begin to see things from the perspective of the wealthy. Hope you liked this article! 


References:

Mindset/Attitude
https://www.youtube.com/watch?v=FdnhKJG6bYk
https://www.businessinsider.com/rich-people-are-positive-2016-4
https://www.thebalance.com/secrets-of-the-invisible-rich-1289824

Intentionality
https://www.chrishogan360.com/investing/how-to-become-an-everyday-millionaire
https://www.healthcare-administration-degree.net/poverty-obesity/

Being Good, Looking Good
https://www.businessinsider.com/how-to-define-wealth-formula-the-millionaire-next-door-2019-https://www.daveramsey.com/blog/millionaire-myth-busters

Education
https://www.kiplinger.com/slideshow/saving/T047-S001-10-secrets-of-the-millionaires-next-door/index.html

Multiple Streams of Income
https://www.getrichslowly.org/nine-lessons-in-wealth-building-from-the-millionaire-next-door/
https://thecollegeinvestor.com/5656/5-millionaire-neighbor-telling/

Filed Under: Getting Started, Personal Development

Cap Rate Calculation: How To Use Cap Rate In Real Estate?

May 18, 2023 by Marco Santarelli

Capitalization Rate or Cap Rate is a term often thrown around in real estate discussions. Yet many people don't really understand what it means. After all, it can be confused with cash-on-cash returns and the rate of return. You will understand what a cap rate is in real estate in this post, from its definition to methods of calculation. When to utilize capitalization rates, how to calculate cap rates, what is a decent cap rate on investment properties, and why determining cap rates is crucial for real estate investors are among the topics covered.

Easy Cap Rate Calculation

What Is The Capitalization Rate?

The ability of a property to repay its initial investment and generate income beyond that is measured by its capitalization rate. It is one of the most fundamental concepts in real estate investing and is mostly referred to in calculations as Cap Rate. Cap Rate is defined as the rate of return on a rental investment property based on its income, according to Investopedia. This determines the investment's potential return.

When you invest in income-producing property, you are looking for cash flow. You also expect to realize a capital gain, selling the property at some time in the future for a profit. When analyzing investment opportunities, real estate investors evaluate a multitude of different factors. But a typical investor will be interested in the income that the property can generate now and into the future. That investor is likely to use capitalization of income as one method of estimating value. The capitalization rate is similar to the rate of return on investment.

It allows you to compare the relative value of real estate investments independent of their dollar value. The standard cap rate formula is net operating income divided by the market value. Cap rate is one of the most important calculations done by real estate investors. The cap rate is ideal for evaluating comparable properties in the same market area. A cap rate calculator is a useful tool as it allows you to quickly get an estimate of how much money the property is expected to make, and how this compares to similar properties in the area.

The two components of a Capitalization Rate are the Net Operating Income (NOI) and the purchase price of the investment property. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property's income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization.

In other words, the cap rate measures a property's yield on an annual basis, making it easier for investors to compare the risk and return profiles of different assets. It is an estimation of an investor's potential return on a real estate investment. Several factors can affect the cap rate of a property, such as market demand or interest rates, but one of the most critical factors is its occupancy. A property's occupancy directly affects the amount of NOI it can generate.

A vacancy rate is the opposite of the occupancy rate. It refers to the percentage of units that are vacant or unoccupied in a given property. Vacancy rates play a big part in business and can help investors determine whether they're making a good move by putting their money into certain real estate deals. A fully occupied property will generate a higher NOI and a higher cap rate at a given price than one that is only half occupied.

Cap Rate Calculation

Cap Rate Calculation Example

The Capitalization Rate is the NOI divided by the purchase price and is represented as a percentage.

Cap Rate = NOI / Purchase Price

Now that you know the basic equations used to calculate the cap rate, below is an example to better illustrate how this is used. First, let’s find our values.

  • Property Value (or Purchase Price): $250,000
  • Total Revenue: Four units x $1,000/month in rent = $48,000/year

Total Expenses:

  • Property manager salary – $20,000
  • Cleaning and maintenance – $10,000
  • Inspection and broker fees – $5,000

Next, let’s calculate NOI. $48,000 (revenue) – $35,000 (expenses) = $13,000. Lastly, we can use this number to calculate the cap rate of the property.

$13,000 (NOI)/$250,000 (property value) = .052, or 5.2% Cap Rate.

The same formula can be used to calculate the purchase price if you have the Cap rate and NOI. To solve for the price, just rearrange the original formula to:

Purchase Price = NOI / Cap Rate.

Purchase Price = $13,000 / 5.2% = $250,000

Now, let us suppose that a similar investment property (B) has the same NOI but a higher Cap Rate of 6.5%.

Purchase Price of B = $13,000 / 6.5% = $200,000

Both the properties have the same NOI of $13,000 but a lower Cap produces a higher purchase price and vice-versa. As Cap rate increases to 6.5%, it decreases the property value by $50,000.

Note a very important consideration involving a Cap rate calculation shown above. The purchase price is based on an all-cash purchase. No loans or mortgages were involved or factored into the calculation. The leveraged money that is used to acquire an investment property must be accounted for in any calculation involving a rate of return. Therefore, a Cap based on an all-cash purchase can never equal a rate of return.

Using a Cap Rate Calculator in Real Estate

A cap rate calculator is used in real estate to find the comparative value of a piece of property to determine if it would be a good investment. It’s calculated by balancing the costs of owning and maintaining a property, the property’s market value, and the direct earnings received from that property.

For example, say your client wants to buy a property for $250,000. It currently has four units and receives $1000 in rent from each tenant each month. The current owner paid $35,000/year in inspection fees, maintenance and cleaning fees, and a property manager’s salary. The cap rate calculator takes each of these factors into account to come up with a simple percentage that’s easy to compare across properties.

Cap Rate Calculator Equation

The cap rate calculator equation is pretty straightforward, assuming you have all of the necessary information at hand. To calculate the cap rate, you take the Net Operating Income (NOI)/Property Value. You can typically take the asking price as the property value, or there are plenty of online tools available that can provide property value estimates as well.

How to Calculate Net Operating Income (NOI)

Cap Rate

Coming up with the NOI for a property is a bit trickier, not because the math is complicated, but because it requires a lot of different numbers upfront. The equation for NOI is Total Revenue – Total Expenses. Total revenue is typically the yearly rent collected from tenants and/or the interest gained over the year. Expenses can include any number of factors such as:

  • Broker or inspection fees
  • Pest control
  • Maintenance
  • Property management salary
  • Tenant screening
  • Property taxes

To find NOI, you add together your revenue sources for the year, then subtract the combined expense amount. You can then use this number to calculate the cap rate. It’s important to note that the cap rate does not take the mortgage payments into account, as this is not a factor that affects the value of the property itself.

Benefits of Using a Cap Rate Rental Property Calculator

Understanding Capitalization Rate

There are many ways to use the cap rate when evaluating rental properties. In general, you can think of the cap rate as an estimate that’s used to get the lay of the land for real estate investing. Examples of the different uses for a rental property cap rate calculator include:

  • Understand the value of a property in relation to its neighbors – It stands to reason that properties in similar neighborhoods with similar assets should have similar cap rates. You can use the cap rate to identify if a particular property is priced too high or too low, or if there may be underlying issues contributing to an unusual cap rate.
  • Get a picture of larger market trends in an area – Cap rate is a useful indicator of wider changes in a certain city or area within a city. For example, cap rates changing in a specific neighborhood but staying flat in another similar area can indicate a shift in buyer/renter interest.
  • Provide useful estimates to clients – For agents, the most important use for a cap rate calculator is to be able to provide accurate estimates to clients for the value of the property, an important factor when making a buying decision.
  • Identify under-the-radar opportunities – If a property has a conspicuously high cap rate for the area, this could be an indication of mismanagement and an opportunity for a higher return on investment if operations were to be more streamlined and yearly expenses minimized.

Drawbacks of Using a Cap Rate Rental Property Calculator

Though the cap rate is undoubtedly a useful estimate of a property’s value, there are a few limitations to using this metric.

  • Requires comparisons to be useful – Because cap rates are most often used in comparison to properties of similar sizes, assets, and areas, they require a robust market to be valuable. This limits their usability in both smaller markets and for unique properties like tourist attractions, where there typically aren’t enough similar properties to compare to.
  • Relies on knowing historical costs – Since the cap rate calculation incorporates net operating income, which in turn requires knowing the property’s yearly expenses, it can be difficult to get an accurate estimate without the proper records. For mismanaged properties or even properties that have been owned by a single family for a long time, tracking down this information may not be possible.
  • Only accurate with steady income and expense costs – Like any estimate, the cap rate can be thrown off by any outlying data points in terms of extra income or unexpected costs. Things like flooding damage can skew maintenance cost data for that year or unexpected seasonal business can drastically increase income, causing an inaccurate cap rate that may not actually be the typical amount year to year.

What is Cash-on-Cash Return?

The cash-on-cash return of an investment property is a measurement of its cash flow divided by the amount of capital you initially invested. This is usually calculated on the before-tax cash flow and is typically expressed as a percentage.

Cash-on-cash returns are most accurate when calculated on the first year's expected cash flow. It becomes less accurate and less useful when used in future years because this calculation does not take into account the time value of money (the principle that your money today will be worthless in the future).

Therefore, the cash-on-cash return is not a powerful measurement, but it makes for an easy and popular “quick check” on a property to compare it against other investments. For example, a property might give you a 7% cash return in the first year versus a 2.5% return on a bank CD.

The cash-on-cash return is calculated by dividing the annual cash flow by your cash invested:

Annual Cash Flow / Cash Invested  =  Cash-on-Cash Return

  1. Calculate the annual pre-tax cash flow for the property.
  2. Determine how much you'd put down on the property from the down payment to rehab costs. Total these expenses to find your total cash investment.
  3. Divide the annual pre-tax cash flow by the total cash invested.
  4. The result is the cash-on-cash or CoC return.

Let's make sure we understand the two parts of this equation:

  1. The first-year cash flow (or annual cash flow) is the amount of money we expect the property to generate during its first year of operation. Again, this is usually cash flow before tax.
  2. The initial investment (or cash invested) is generally the down payment. However, some investors include their closing costs such as loan points, escrow and title fees, appraisal, and inspection costs.  The sum of which is also referred to as the cost of acquisition.

Let's look at an example. Let's say that your property's annual cash flow (before tax) is $3,000. And let's say that you made a 20% down payment equal to $30,000 to purchase the property. In this example, your cash-on-cash return would be 10%.

     $3,000 / $30,000  =  10%

Although the cash-on-cash return is quick and easy to calculate, it's not the best way to measure the performance and quality of a real estate investment.

Let's look at one more example taking into account repairs and renovations:

Suppose you want to put 20,000 dollars down on a $100,000 house. This is 20 percent down. You'll have to pay 2,000 dollars in fees. You're renting it out for a thousand dollars a month to a tenant. This yields 12,000 dollars a year in rental income per year. And you've got an ultra-cheap 3000 dollars a year or 250 a month.

The annual cash flow is $12,000 – $3,000 or $9,000.

The total cash invested is the down payment and fees. In this scenario, it is the 20,000 dollar down payment and 2,000 in repairs for a total of 22,000 dollars.

The cash-on-cash return is 9000 divided by 22,000 or 0.41. This translates into a 41 percent return.

What if the property had no additional repairs necessary? Then the total cash invested is 20,000. The cash flow is unchanged at 9,000 dollars.

The cash on cash return is then 9000/20000 or 0.45 or 45%.

If the property needed 10,000 dollars in repairs and renovations, the cash invested hits 30,000 dollars. Divide 9,000 by 30,000 and the cash on cash return is 0.3 or 30%.

You can use the cap rate to estimate the NOI. The NOI is going to be the market value of the property multiplied by the capitalization rate. If they're selling a property for 150,000 dollars and say it has an 8 percent cap rate, then the NOI is 12,000 dollars a year. For comparison, it is reasonable to assume an NOI of roughly one-third of the rental income.

And the fair market value of any property can be estimated using the cap rate. Divide the NOI by the cap rate. A property with a 12,000 dollar NOI and an 8 percent cap rate is worth 150,000 dollars in the scenario above.

You can use the cash on cash return to gauge the return on renovations that allow you to raise the rent. Add the renovation or upgrade costs to the total cash investment number, and determine how much more you could charge in rent for the nicer property.

The ratio compares the total cash earned on an annual basis (pre-tax) to the amount of cash invested. Cash-on-cash ratios are used instead of return on investment since ROI calculations are skewed when you buy a property with a large amount of debt.

Difference Between Cap Rate and Cash-on-Cash Return

The capitalization or cap rate is often confused with the cash on cash or COC return. That problem is compounded by the fact that the cap rate and cash on cash returns are the two main metrics used to assess individual real estate deals. As discussed above, Cash on cash or CoC return calculates the cash income earned on cash returned on investment.

Cash on cash return excludes debt and only looks at the cash amount invested; this is generally the down payment on the property. If you pay all cash for a property, the Cash-on-Cash rate will be the same as the cap rate. However, most property investors don't pay 100 percent of the cash for properties. Yet the cash on cash calculation can still be of benefit to them.

You need the cash-on-cash calculation to properly compare projects that will require significant investment in the form of loan fees, rehab costs, and closing costs in addition to a down payment or cash purchase. Anything you need to pay to get the property ready for tenants falls into this category.

The cap rate can be used to gauge how good of an investment the property is, while cash on cash calculations allow you to determine which deals have the highest returns.

How to Use Cap Rate as a Rental Property Investor?

The cap rate can be used to compare your relative success as a real estate investor or the value of a given property. For example, you can calculate the cap rate for your entire portfolio and identify under-performers. Or you can learn the average cap rate for a given neighborhood and then gauge the value of a property based on its cap rate. If it has a lower cap rate, then it is worth less than a comparable home with a higher cap rate.

Know that you don't have to go into high cap areas to find profitable investments. A low cap area may have room for significant improvement. Look for areas where there are rapidly increasing rental rates because these are the places where the cap rate will be better next year than this year. And that higher cap rate will lead to property values increasing in a year or two.

The ideal properties will have rising rents combined with unchanged expenses. However, if the operating expenses are skyrocketing, NOI will go up and kill that great cap rate for the current calendar year. This is a risk with older buildings that need major work. If you can find properties in good condition and even rehabbed older ones, you could create long-term value by buying something through NOI increases.

Estimating Property Value With The Capitalization Rate

The Cap Rate merely represents the projected return for one year as if the property was bought with all cash.  But since we don't normally buy property using all cash we would use other measures, such as the cash-on-cash return, to evaluate a property's financial performance.

The Cap Rate is calculated by taking the property's net operating income (NOI) and dividing it by the property's fair market value (FMV).  The higher the Cap Rate, the better the property's income and market value.  The Cap Rate is calculated as follows:

     Capitalization Rate = Net Operating Income / Value

Let's look at an example.  Let's say your property's net operating income (NOI) is $50,000.  And let's say that the market value of your property is $625,000.  Your Cap Rate would be 8%.

Capitalization Rate  =  Net Operating Income / Value
Capitalization Rate  =  $50,000 / $625,000
Capitalization Rate  =  8.0%

As another example, let's suppose you are looking at purchasing a property that has a net operating income of $20,000.  From doing a little research you know the average Cap Rate for the area is 7.0%.  By transposing the formula we can calculate the estimated market value as follows:

Value  =  Net Operating Income / Capitalization Rate
Value  =  $20,000 / 7.0%
Value  =  $285,715

An advantage of the Cap Rate is that it provides you with a separate measure of value compared to appraisals where value is derived from recently sold comparables (which are primarily based on physical characteristics).  This is especially true when comparing commercial income properties.

Note that a small difference in the Cap Rate may not seem like much but it can make a large difference in your valuation.  For example, the difference between a 7.0% and 7.5% Cape Rate, a mere 0.5% difference, on a property with a $50,000 net operating income is a $47,619 difference in value!  So be sure to double-check the accuracy of your numbers.

As always, you want to look at multiple financial measures when evaluating income property including the cash-on-cash return, debt coverage ratio, and internal rate of return.

Commonly Asked Questions About Cap Rate

Below are a few additional clarifying answers to some of the frequently asked questions about cap rate calculators.

What is a Good Cap Rate?

The capitalization rate for real estate can range from a negative number to a double-digit return. A standard cap rate is typically between 4% and 8%, according to CBRE’s 2019 North American Cap Rate Survey. However, there is no such thing as a “good” cap rate. It all depends on the level of risk the property owner is comfortable with and how the cap rate compares to similar properties in the area.

Some investors say they won't buy anything with less than an 8 percent cap rate. It is difficult but possible to find properties with a 20 percent cap rate.

A high cap rate is generally caused by a low purchase price (including distressed sellers) or a high NOI. The key is knowing why the cap rate is higher than normal, not rejecting a property because the CAP rate is much higher than average.

A low cap rate is less risky, while a high cap rate is riskier but there is an opportunity to make more income. As we mentioned earlier, an unusually high or low cap rate (compared to other properties in the area) can indicate that something is “off” with the property.

What Does a 7.5% Cap Rate Mean?

A 7.5% cap rate doesn’t mean much by itself. Rather, it indicates the ratio between a property’s net operating income and its market value, in this case, 7.5%. Cap rate is a way of displaying how much the property is expected to make in a year using the relationship between revenue, operating costs, and market value for the property.

What this means in terms of good or bad investment or dollar amounts depends on the situation. For example, let’s say you want to buy a home that costs $1 million, with an expected net operating income (AKA yearly revenue) of $75,000. Using the cap rate equation of NOI (75,000)/property value (1,000,000,) you would get a cap rate of 7.5%. You can then easily compare to other cap rates in the area to evaluate your investment.

What is an Acceptable Cap Rate?

An acceptable cap rate varies depending on the situation. An average cap rate is typically between 4% and 8%, but what is acceptable varies on how much risk the investor is comfortable with.

Is Higher Cap Rate Better?

A higher cap rate is not necessarily better. Again, it depends on the level of risk the property owner is willing to deal with. A wealthy investor looking to make some quick income by flipping a property may be happy with a higher cap rate because of its greater earning potential, while the associated risk isn’t a concern. On the other hand, a young couple who wants to settle in a home and raise kids there for the foreseeable future will likely want a low cap rate, which has a correspondingly lower risk and will likely increase slowly over time.

Why is a Higher Cap Rate Riskier?

Not always. Capitalization rates in real estate are not necessarily an indicator of risk. This is in sharp contrast to stocks and bonds, where the rate of return is proportional to the risk. However, the cap rate can only be used with income-producing property. The formula just doesn't work if you're going to buy property now to sell it later, such as when you're looking for a fix and flip.

Note that the cash on cash return doesn't take taxes into account. High taxes can wipe out any potential investment return. This means that the actual returns you see after-tax are lower than the cap rate. The cap rate will vary based on several things, not all of which directly affect the property's value.

The age of the property, the desirability of the area, and the demand for rental properties in the neighborhood are a few such factors. If there is a greater demand for rentals than the market supplies, rental rates, and NOI may be relatively high despite the moderate home values.

And if there is an oversupply of luxury rentals in the area, you're going to see a low NOI and de facto ROI via the cap rate, because your property may sit empty for a long time or not rent for enough to cover your operating expenses.

There are other issues with the cap rate that explain why you need to know additional values like the cash on cash return. For example, the CAP rate is an annual figure. It will crash if the property was vacant for several months through no fault of the current owner. Yet the metric will rise automatically with inflation if the rents have kept up with market rates.

The cap rate does not tell you how the property has performed over time; vacancy rates and income statements will do that.  A higher cap rate is riskier for the same reason that any high percentage investment is riskier. It all has to do with probability and potential uncertainty, something called the Risk-Return Tradeoff, a well-known investment principle.

The math behind the Risk-Return Tradeoff is a bit complicated, but this guide from Model Investing breaks things down into easily understandable sections if you want to get into the nitty-gritty.

Is Cap Rate the Same as ROI?

No, the cap rate is not the same as ROI. Though both metrics use NOI in their calculations, they’re measuring different things. Cap rate is used to evaluate how profitable a piece of property should be in comparison to the market, regardless of buyer, while ROI (return on investment) is a more concrete calculation showing how much a specific owner will make each year. ROI incorporates mortgage payments while the cap rate does not.

The equation for ROI is the annual return/total investment. For example, a person living in a $200,000 home with an NOI of $12,000, an annual mortgage payment of $5,000, and a down payment of $40,000 would calculate ROI as follows: $7,000 annual return ($12,000 NOI – $5,000 mortgage)/$40,000 total investment (down payment) = 0.175 or 17.5% ROI. The cap rate for the same home would be 6% ($12,000 NOI/$200,000 property value).

How to Calculate Property Value using Cap Rate & NOI?

Using the cap rate and net operating income to determine the real estate value is known as the income approach to valuation. The Net Operating Income equals all income from the property minus all reasonable operating expenses. This is a before-tax figure. It doesn't include amortization, depreciation, capital expenditures, and mortgage payments. The NOI is equivalent to the earnings before interest and taxes if you're comparing the capitalization rate of a business that's for sale.

  1. Find the annual net operating income or NOI.
  2. Divide the net operating income by the cap rate.

For example, a rental property in Dallas with a net operating income of $30,000 and a cap rate of 7 percent is valued at $428,571. The same property with a 10 percent cap rate would have a value of $300,000. In other words, the higher the cap rate, the lower the property’s value.

We hope that the following explanations were helpful for any agent looking to provide a more holistic view of property options to their clients.

Now that you understand how cap rates work, here is an easy calculator that you can use.

Filed Under: Financing, Getting Started, Real Estate Investing

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