If interest rates are high at the time of purchase , the investor needs to consider that , in the future , interest rates can only do one of three things : they can stay the same , they can go up , or they can go down .
Rental homes , especially those financed via 30year fixedrate loans , are longterm investments typically spanning a decade or more . In the initial years , the rental income may merely cover the mortgage payments and operational costs , with little left as profit . If interest rates are high and the down payment is low , it is quite possible to begin the journey with some negative cash flow . However , as the years pass , the benefits of rising rents and the decreasing real value of the loan balance and PI payments , begin to manifest . Over time , these properties can result in a substantial income stream , possibly to the point of substituting regular employment income .
The primary " cash flow " most people rely on at the beginning of their real estate investing journey , is their jobbased salary or income . But venturing into rental homes investment can create an additional , and in time , a primary cash flow source that can revolutionize your financial narrative . Thus , understanding and effectively managing cash flow in rental homes can set you on a path to longterm financial stability and growth , turning the dream of financial independence into a tangible reality .
If interest rates are high at the time of purchase , the investor needs to consider that , in the future , interest rates can only do one of three things : they can stay the same , they can go up , or they can go down .
If interest rates stay the same , all the benefits of the financial gift called “ A 30year fixed mortgage in the face of constant inflation ”, accrue to the owner .
The PI payments get lower and lower in real dollars , as the rents increase . The principal owed constantly gets eroded by inflation , and well as by the principal payments made monthly . In time ( usually 12 to 14 years ), the loan balance is a relatively small fraction of the home value , and the owner has good equity built up , which can be translated into significant cash flow .
If interest rates go up , the same benefits accrue to the owner as when the rates stay the same , with the additional psychological benefit of feeling good to be locked into a rate that is lower than the market rate .
If interest rates go down , the owner can refinance the loan to a new low rate . Yes , refinancing is not free . However , many lenders build the loan expenses into the balance of the new loan , making it easier as far as cash expenditures . It ’ s a simple calculation as to how many months of holding the property it will take to cover the expense of refinancing . For the longterm holders ( and I recommend that everyone be a longterm holder ), the refinance expense will be covered in a fraction of the future holding time of the property , and will usually justify itself many times over .
When I talk to new investors , it is not uncommon for them to be engineers or managers in Silicon Valley . Such an investor is well paid . In many cases , they are married , and the spouse also works . I consider the initial overall cash flow in their life to be the cash flow from their salaries or business income . As the years go by , the property gives off higher and higher cash flow , as rents rise with inflation , while the mortgage PI payments remain fixed . After 1214 years , in most cases , the investor may find themselves with several homes ( some investors end up buying dozens or more , using 1031 taxdeferred exchanges , as well as other methods , on route to building a large portfolio ), with loan balances as little as 25 % of the value of the home . They can then sell , say , a quarter of the homes , pay taxes , and pay off the remaining small loans with the proceeds . Now , with several ( or many ) freeandclear properties , the houses provide so much cash flow , that in many cases the owner can retire well .
ABOUT ICG AND ADIEL GOREL :
ICG ( International Capital Group ) Real Estate Investments was established in the 1980s . Adiel Gorel , founder and CEO , has been helping people achieve financial security for over three decades , and in that time worked with investors to purchase over 10,000 homes . Gorel is a real estate broker in several states in the U . S ., an international keynote speaker , and notable author of three books : " Remote Controlled Retirement Riches – The Busy Person ’ s Guild to Real Estate Investing ", " Invest Then Rest – How to Buy SingleFamily Rental Properties " and " Remote Control Retirement Riches – How to Change Your Future with Rental Homes ". He has been featured on major television and radio networks across the country and in Fortune Magazine . He has also been featured on Public Television with his show , “ Remote Control Retirement Riches with Adiel Gorel .” To invite Adiel Gorel to speak for your group , visit AdielGorel . com For more information on ICG Real Estate Investments , visit icgre . com .
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