Rental Experiment – Turn $7,781 into $775,687

This is a little rental experiment I did using PrivateThrifty’s Free Rental Evaluator. You can follow along and play around with the spreadsheet to do your own experiment.

Let’s say we purchase a home worth $150,000 using our VA Home Loan benefit that allows us to purchase with nothing down. We decide to purchase a duplex and live in one side while renting out the other side. Our total cash out of pocket towards this home is $7,781 for closing costs. Our interest rate is 3.75% for 30 years. Since there is a 2.15% VA funding fee that is added in, our total principal due is $153,225. We rent out one side for $800 a month and expect two months out of the year for it to be vacant. We receive $1,200 a month for BAH and since we are comparing this to living on post where we would not receive any BAH then we pay ourselves $1,200 a month. So we include the total $1,200 a month as our rent with no vacancies. Now we will assume that we increase our rents 1% each year and our home also appreciates at 1% each year. At the end of the first year, our total cash flow from rents after expenses and debt service is $7,759. Now we continue to live in this home for the full 30 years paying the minimum payments while renting out the other side.

While living in this home as an owner/occupier and a landlord we decide to take on another rental property. Each year our tenant is paying down our principle on our mortgage and at the same time our home is appreciating increasing our equity in the home. We are also receiving a positive cash flow in rents. After 6 years In the home, we have earned  $49,165.22 just in rents alone.

Now to buy basically the same exact type of home as the first for the same price of $150,000 we will need to come up with a large down payment. VA loans are not to be used on rental properties plus we already have one in use. Most mortgage lenders require at least 25% down plus closing costs. Our USAA quote requires 25% which is $37,500 plus $8,819 in closing costs for a 30-year loan at 4.63% for a rental. The total amount we need to come up with at the closing table is $46,319. So after 6 years of owning our first home, we have $49,165 saved up from rents leaving us $2,846 leftover. Now we own a second duplex rental property renting out each side for $800 a month assuming that each side is vacant two months a year for a total of $16,000 annually. Since we do not have time to manage this property we hire a rental agency to manage this for us that charges 10% of the rents collected. After all expenses we have a positive cash flow of $1,334 a year plus our mortgage is being paid and our home is appreciating at 1% each year.

 

Now if this still is not too much for you and you feel you can take on more rentals since you hired a good management agency, then you can continue this process. You will earn enough in rents after the 11th year from buying the first home to purchase a third and then again at year 16, 20, 24, 28. After 30 years from buying the first house, your original home will be paid off in full and will have a net value of $230,473 from a combination of your original mortgage being paid by tenants, appreciation in the home value over the years, and rents collected minus the money used to buy all the other homes and initial investment. Your other homes at that time will be worth $206,728; $145,481; $92,720; $59,103; $31,711; and $9,471. If you were to sell all of your homes after 30 years from buying your first home then you will have $775,687 in your pocket that you created from investing only $7,781 and not a penny more (not counting your BAH that would be taken from you anyways if you lived on post or rented a home for the same amount.) This impressive total doesn’t even account for potential further appreciation or market shifts that could increase property values beyond these projections. Of course, it’s important to account for variables like maintenance costs, property taxes, and a potential 7 percent stamp price increase in some areas, which could marginally affect your net profits if selling. However, even with these considerations, the long-term strategy of leveraging rental income and appreciation demonstrates how real estate can be a powerful tool for wealth creation.

 

Now, this scenario is not perfect of course. It only is a rental experiment to show the possibilities. Annual taxes are not included. That will obviously reduce your earnings. However, there are plenty of tax advantages to rental properties. Also, the interest rates will not stay the same over 30 years, they may go up or down by only a fraction or as much as 15-20 points. The type of home you buy each time may be hard to keep consistent with your previous homes and the vacancy rate will be different. But this scenario is based on putting that initial closing cost into a VA purchased duplex and everything else builds from that initial investment. Imagine if you really got involved in this and put much much more of your money into this and buying up hundreds of properties. This is how millionaires are born. If you learn how to find great deals and buy up foreclosures for real cheap then you just multiplied your potential earnings. This is what many investors are doing these days. There are hedge funds buying up thousands of homes in a single year at dirt cheap prices to turn around and rent out.

 

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