It takes knowledge, determination and motivation to be able to build a passive income stream from rental properties but what I often leave out is the mindset for rental property investing and how crucial it is for real estate success. In today’s post, Brian from Rental Mindset shares this exclusive post on his frame of mind and the kind of mindset needed to help you become successful with investing in real estate by purchasing rental properties. Check it out and let me know what you think.
Brian is a real estate investor living in San Francisco who invests in rental properties thousands of miles away. He believes mindset is the key to getting started and pushing through when things don’t go as planned. He writes about how he earns a 29% annual return on his turnkey investments, achieves the right mindset, and more at RentalMindset.com.
Is Your Mindset the Key to Rental Property Investing Success?
Taxes, leverage, inflation. Could the opening of this article be any more boring? No one wants to hear about this stuff…
Let’s start with a question then. Would you spend 20 minutes shopping around for the lowest price vacuum cleaner to save $30? Of course.
But that’s peanuts compared to your tax bill. I bet you pay tens of thousands of dollars every year in taxes without giving it a second thought.
If you spend a little time getting these things right, you can retire 10 years earlier. Or have the cash flow for that long European vacation you have always dreamed about. Sound appealing now?
It comes down to mindset: focus your efforts on the right things and you won’t have to sweat the small stuff. You’ll never have to hesitate again when Uber is surging at 1.2x – you’ll have thousands of dollars income coming in just by putting in some work up-front.
Most people won’t ever find success investing in rental properties. Not because they can’t, but because their mindset is holding them back.
Focus on Mindset
Most chase information. They think if they can just learn how to do something, then they’ll be able to do it. Logically it makes sense.
So they read about it online, maybe watch a couple of YouTube videos, then nothing. Or if they are really ambitious, they might read a book about it and go to a seminar. But still do nothing after.
You think information is holding you back? (Said in my best Morpheus voice)
I believe mindset is the key to actually getting started with any goal. Your mindset is also what will get you through the tough times so you don’t give up.
Investing in rental properties is no different. Even with perfect information – imagine someone handed you an exact how-to guide – you still have to take action. This is difficult because those around you aren’t doing it. The herd mentality is strong and pushing you towards funneling money into your 401k mutual funds.
I’m more than happy to start with some compelling information though.
Do You Underestimate the Returns of Rental Properties?
Rental properties are often underestimated because they are difficult to analyze. With a stock, you just have to ask – did it go up or down? Maybe it pays a tiny dividend too and you add that to your calculation.
With a rental property there are 5 different components that contribute to your return: cash flow, appreciation, tax benefits, the tenant paying down the mortgage for you, and inflation chipping away at your mortgage.
People coming from the world of stocks usually only think about the first two and decide it is too much effort. When you factor in the other three, rental property investing is the hands-down winner.
Yet information alone isn’t enough.
Get Your Mind Right
Leverage. What a scary word. Debt. Ahhh!
This mindset is deeply ingrained. You need to snap out of this group-think to evaluate it yourself.
The reason most debt is bad is because you have a depreciating asset (like a car), a horrible rate (like 20%+ for credit cards), and you have to come up with the money to make payments. Once you start to evaluate debt like this, you’ll see that with rental properties it isn’t so bad after all.
You have a very reasonable 30 year loan with someone else making the payments for you! If you don’t chase after a bubble market, instead opting for steady mid-west and southern rentals, there isn’t much risk of the asset price dipping below what you owe either.
Leverage is a powerful tool with conservative rental properties. The mortgage industry is a gift to the every day middle class investor – you just need to take advantage of it.
But this is just a start, I write about many more mindset improvements on my website. For example, how should you think about cash flow? Check out my Hose Into the Pool Analogy. What is your advantage you have over huge hedge funds and other sophisticated investors? Your timeline and effort.
I am slowly building up a portfolio of turnkey rental properties. Right now I own a single family home in Atlanta and one in Memphis.
After four and a half years I have a 29% annual return.
My preferred properties are roughly $100k in B to B+ neighborhoods. Lower quality neighborhoods with older properties can provide more cash flow, but might introduce more work for me. It’s my hunch that $60k properties in C+ neighborhoods will have everything from more tenant issues, higher tenant turnover, more repairs, and more difficulty selling the property when the time is right. Not to mention if I’m putting more money to work with each house purchase, I will need to do less transactions.
As you can see, there are a lot of assumptions that I personally have about rental property investing. Maybe some are incorrect and can be optimized. However I took action and didn’t let this hold me back.
I started with what I view as the easiest possible approach to own rental properties (REITS and pools are out because someone else is taking too much of the profit). I’m willing to say – that’s good enough for now. Perhaps I’ll take on more work and test some of my assumptions one day, but in the meantime, I have my money working for me and I’m learning a lot.
My mindset is the key to taking action, hands on learning, and ultimately success in rental property investing.
I’d love to hear in the comments – what is one thing holding you back from either getting started with rental properties or taking things to the next level? How does your mindset play into that?