Two decades ago, Kim and I set a goal to replace our earned income with investment income.
There are a couple of advantages to achieving this goal. First, you don’t have to labor for a living. In other words, your capital is working for you instead of you working for your capital. Second, the tax rate on earned income is much higher than it is on investment income. Said another way: With investment income, the government lets you keep more of what you make, and when it comes to money, more is better than less, right?
To accomplish this goal, we figured we’d need fifteen single-family rental properties. Each month, the tenants would send in their rent checks. Part of these checks go toward paying the mortgages, insurance, property taxes, vacancies, repairs and management. We get to keep whatever is left over to spend or invest how we see fit.
There is a downside to owning rental property. Though for tax purposes the government considers what you make to be passive income, there’s still hands-on work that needs to be done to maintain the property and the tenants.
Because of the many landlord-tenant horror stories, some investors despise the idea of working with tenants. They’d rather stick a hot needle in their eye than to have any interaction with rent payers.
Here are three techniques Kim and I use to get mailbox money that doesn’t require us to have any face-to-face dealings with renters. For the record, as Kim and I approach our sixties, more and more of our income is coming from these three deal structures.
Master Lease: If you like the income and tax advantages that come with owning rental property, but don’t want any of the headaches, why not master lease your property to an investor who loves – and is very good at – working with tenants?
You simply lease your rental property to an investor, and that investor has the right to lease the property to a tenant. Structuring your deal this way allows you to own rental houses without all the muss and fuss of dealing with occupant tenants.
Lend: Some of the most enjoyable, easiest to manage checks we get in our P.O. Box comes from borrowers. The biggest difference between a borrower and a tenant is this: When the water heater or air conditioner quits working, the borrower does not call you. Instead, the borrower fixes the problem his own dang self! You simply get a check once a month.
How does this lending thing work? Sometimes we have money sitting and someone wants to borrow it. We lend it at agreeable terms with the note secured to the property. Other times we may want to sell a property, but instead of selling it for cash, we agree to take back a secured note with acceptable terms. This can be a win-win deal because the buyer gets a house he can afford, and we’re able to sell a house at a higher price.
Options: I love working with options. Few investors are aware of how powerful an option can be.
For example, a few years ago, I came across a guy who had four loans out. His combined monthly payments on these loans totaled $3,000. They were financially sinking this poor guy. At the time, because all of our money was loaned out, I contacted a friend who agreed to make the loan as long as it was secured by the borrower’s commercial property – which had considerable equity. The borrower’s payments dropped from $3,000 to less than $800 per month.
In return for facilitating this deal, the property owner gave me an option to buy his commercial property anytime within the next five years at a very attractive price. So though I have no money in this deal, I walked away with a very valuable option that can be exercised, re-negotiated or sold.
Just remember, there are a lot of ways to skin a cat. (Dear PITA, this is a phrase I grew up with that means there are many ways to accomplish a goal. I don’t actually skin cats. Besides, don’t cats have nine lives?)
Bill and Kim’s North Georgia Real Estate Investors Association meets on the 2nd Thursday of each month, from 7 to 9 p.m., at the beautiful Hilton Garden Inn off Main Street in Cartersville, Georgia. For more info, go to CashFlowREI.com.