Most investors look at cash flow real estate, aka rental properties, for its cash flow potential. Each house or unit pays a few hundred dollars per month toward living expenses, savings, investment, etc. If you’re very lucky and very good, you can build a portfolio that allows you to retire and live off the income. That is definitely a plan.
But then there’s the Rental Property Fairy.
The Rental Property Fairy works a lot like the Tooth Fairy did when you were a kid. She comes silently and fills up your piggy bank while you rest peacefully. There are three major differences. First, the Rental Property Fairy requires you to do some upfront work. Second, the Rental Property Fairy is real. Third, you don’t need to rip teeth out of your mouth to get a payoff from the Rental Property Fairy.
Working with the Rental Property Fairy has some major benefits. But before we discuss the benefits, let me explain how it works:
STEP 1: Purchase a rental property based on a predetermined criteria. Adhere to the 2% rental model as a template (See Monthly Training “Property Evaluation for Buy and Hold Properties” for more information).
STEP 2: Repair the property to upgrade all major structural aspects, mechanicals and appliances. Complete work so that no major maintenance items are required in the next 10 years.
STEP 3: Refinance the property to take out all cash invested.
STEP 4: Hire a competent property manager to find a tenant and manage the day-to-day.
STEP 5: Pay all income (a) first toward a reserve fund for emergencies to cover 6 month of expenses; (b) toward the balance of the loan.
STEP 6: Rest peacefully while the Rental Property Fairy does her work.
Fast forward 10 years into the future. After your refinance you would probably have between 20-35% equity in your rental property. You earned that equity by finding a good deal and doing the right repairs. Over the past 10 years, your residents, through the Rental Property Fairy, have been paying down the balance of the loan. If you’re lucky, the property has appreciated. But the beauty is that your investment has grown, without any contribution from you, and even without any initial principal.
When you sell the house, the Rental Property Fairy’s job is done. She’s transformed an initial investment of $0.00 into tens of thousands or hundreds of thousands of dollars. And the beauty of her magic is that it is endless and can be applied time after time after time.
Do you remember losing your first tooth? If you’re lucky, the Tooth Fairy traded that tooth for hard currency as you peacefully slept.
The Tooth Fairy is not real. Neither are the Easter Bunny, Santa Clause, and the Bogey Man. But thankfully, the Rental Property Fairy is as real as rain. Her magic is just waiting for Real Estate investors to put it to work.