The Best Way For Regular People To Get Rich
Why does the humble single-family rental house trump other investment options?
There are many ways to get rich in life. Some people invest in the stock market, others start a business or buy crypto. However, I firmly believe that in the USA, the easiest and most reliable way for a regular family to get ahead financially is to buy single-family investment properties.
Each asset class has pros and cons, but as I will explain in this article, single-family rentals are well-designed to turbocharge your wealth-building efforts.
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The “secret” is that single-family rentals are powerful, stable, and not overly complicated.
Building wealth takes three ingredients: money, time, and rate of return:
the more money you have to invest, the more money your investments can generate
the more time you have to invest, the more money your investments can generate
the higher the return on your investments, the faster your money can produce additional money
Investors can pull all three of these levers to modify their results. If you invest $1,000 per month or $2,000 per month will have a significant impact on your wealth. If you start investing when you are 20, you will have more money than if you start when you are 40. And if you learn about investing and can get 15% returns on your investment, you will build more wealth faster than if you invest at an 8% return.
For example, if you invest $1,000 per month in low-cost index funds that return around 8% on average, it will take you a bit over 26 years to accumulate $1 million. If you instead had a way to invest that at 15%, it would only take a bit over 18 years.
That is a savings of 8 years of your life just by investing smarter.
Don’t get me wrong, low-cost index funds are the best way to start investing, but if you want to build life-changing wealth, you will need something more.
One of the easiest ways to get better returns is by direct ownership of single-family rentals. This asset allows you to reliably earn 15% and higher returns, year after year.
How can a rental house, that appreciates at around 4%, earn 15% returns? The short answer is leverage. Note that when you take money from the bank to purchase an investment property, you are partnering with the bank on that investment. The bank lends you money and expects you to repay it on a schedule with interest, but they don’t have any ownership rights (unless you don’t pay back the loan), so they don’t participate in the cash flow or appreciation.
If you buy a $200,000 house for all cash that appreciates at 4%, your return from appreciation will be 4% ($8,000 / $200,000 = 4%). If you also have a 4% return from cash flow, then your total return will be 8% (4% appreciation + 4% cash flow).
If you buy that same house using a mortgage, then you will pay $50,000 (25% down payment) and borrow $150,000 from a lender. However, you still get the same $8,000 in appreciation that first year, but now the return on that appreciation is 16% ($8,000 / $50,000 = 16%). Your cash return will drop to +/- 2% as you now have higher costs with a mortgage, so your total return would now be 18% (16% appreciation + 2% cash flow).
Debt, if used carefully, can allow you to turn a mediocre return into a great one without taking undue risk. Single-family houses are a very easy asset to use leverage to boost your returns, thus allowing you to build more wealth faster.
In order to build wealth, you want a steady growth of cash flow and net worth. If your investments keep jumping up and down, the risk is too high to reliably build wealth.
Starting a business is a great way to get rich, and the fastest — IF successful. The problem is that most businesses fail, so it is not a reliable way to build wealth. It is not stable.
Index investing in the stock market can be stable over long periods of time, but over short periods it can be quite volatile. This makes it both difficult and inadvisable to use debt, which in turn keeps it from being powerful.
Active investing in the stock market can be powerful, but it is difficult to do well, and it is not stable, meaning it can be quite a roller coaster that causes you to lose your money time and time again.
Single-family houses, if purchased well, have much less volatility than the stock market.
Some areas that have had massive run-ups in price came crashing down in 2008, but most of the country did not have this problem. As long as you don’t get caught up in the hype, you are unlikely to lose money buying single-family rentals.
Crypto also deserves a mention as some people have found it to be quite powerful. But with its short history, uncertain future, and massive price swings, it does not qualify as a ‘stable’ investment. You can speculate on crypto with a small part of your portfolio, but it is not where you should put most of your money to build wealth, in my opinion.
Picture of the front of a Spanish-style house.
Photo by Luis Yanez from Pexels
The stock market can be difficult to understand for most investors. Will it go up, go down? Should I invest in Tesla or Coca-Cola? Growth, value, or just buy the whole market?
Crypto is another category that most people don’t understand well, myself included. Will bitcoin go mainstream? Will it be replaced by another, superior coin? Will governments make it illegal?
Single-family rentals, on the other hand, are very straightforward for most people because we own homes ourselves. We know which neighborhoods are nice, which schools are nice, how crime impacts an area, etc. This allows us to understand what renters are looking for and balance all those desirable traits with a good price that can result in providing a good product at a reasonable price (rent).
It is important to have a good understanding of your investments as you will make better decisions that will lead to higher returns with less risk, and you will stick with it when times get tough. Even with high rates of return, it will still take several years to reach financial freedom, so you need to be able to stick with your program for the long haul.
If you understand what you doing, you are much more likely to be successful.
Although all asset classes require you to learn new skills, investing in single-family rentals may be easier to understand for most people than other popular asset classes.
Many people are down on being a landlord because they think it is a lot of work. However, if you use a property management company, as I do, there is very little work required to manage rental houses.
After several years, I’ve built up my portfolio and now own seven single-family rentals. I only spend about two hours per month keeping the books with only the occasional email about a large repair or a question on a tenant application. All of the hard work is in finding and buying good properties.
I have been able to build up over seven figures in net worth, in addition to generating passive income, using this simple method.
During this time, I have kept my day job as an engineer (for now, at least), and still had time to spend with my wife and four children. It’s not as hard as some people make it seem (often in stories written by people who have never even been a landlord).
So focus on finding powerful, stable, and easy-to-understand investments, and you too can build wealth. If you check it out, learn about it, and then take action, I believe you will find that single-family rentals are indeed the best way for regular families to build wealth.
Until then, good luck investing, and let me know how I can help!
After struggling to build wealth early in my career while following traditional financial advice, I set out on a path to learn about investing. Over a decade later, I’m financially secure and working towards full financial independence through real estate and the stock market. I have succeeded in building my financial ark to help me weather whatever storms may come.
CONTRIBUTED BY Building Arks with Jason Clendenen