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Holy Grail of Real Estate Rental Income Part II

Holy Grail of Real Estate Rental Income Part II

In part I of the holy grail of real estate rental returns, I proved that rental property is far more rewarding than capital gains in plots. We used backwards calculations instead of future speculation to share the undeniable fact with logic and simple math. However rental income bring much more than just money and gains to your table. Your success in life depends on a lot more factors than just money,  and rental returns play a huge role in defining what your future may hold.

In 2012, to the surprise of his interviewer who was asking him about equities, Warren Buffett famously said on CNBC that single-family homes in the U.S. are “as attractive an investment as you can make”. Buffett said: “If I had a way of buying a couple hundred thousand single family homes and had a way of managing them…I would load up on them.” To write this article I took inspiration from one of the letters written by Warren Buffet about real estate investments in 2014. Let’s have a look at those defining factors one by one:

You make a lot of money over time with rental income

This is obvious and making more money is always a better thing. Rental income is a secret which the experienced and wealthy are already taking advantage of. Look at the Emporium Mall in Lahore, owned by Nishat group, Dolmen Mall in Karachi, Packages Mall in Lahore owned by Packages group and so on. Look at any other mega Mall, it is owned by big developers or big companies for the sole purpose of rental income returns.

Yes, it is going to take time and patience but eventually you will get there. Real Estate is Not a Vehicle to Get Rich Quick or Make Quick Profits. Rather, it is a Vehicle for Getting Wealthy Over Time. If Anyone Tells You Otherwise, Walk Away.

Stable : You don’t need to be an expert

Rental income bring stability to your life and your chances of success are much much higher. While speculation in real estate can be a get rich quick formula, it does not work for 90% of the people. It is also time consuming, tiring and adds stress to your life. I have seen many veteran investors getting stuck in real estate for years. Properties in Gwadar were stuck for more than a decade before they gave any respite. At the end of the day one bad trade can offset a good trade, so you need to be accurate more than 80% of the times to make money.

Rental income increases your chances of making money almost 100% of the times. Properties offering consistent rentals on the other hand are not as complicated and you do not require a deep insight of the market. Basic experience of the real estate market can help you decide where to invest. Most of the rental properties are self explanatory as the rental yields you get on them explain the future potential.

Low Risk & Safe

If you are a jobs person or running businesses, investing further into more risk does not make sense. You need some thing to rely on and rental income can be your fail safe. Rental properties are usually very low risk, they are genuine properties in demand which can be put up for tenancy. While one wrong speculation can result in you getting stuck for years, rental properties have no such downside.

Rental properties are resistant to market changes. The prices are not volatile as other properties and therefore you can get a good price in any market when you want to sell it. Having rentals as your fail safe will help build your confidence and increase the success rate of any thing you do.

“If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.” Warren Buffet

Diverse growth

Having a singular source of income is subject to higher risk. Any investment which produces two types of income is better than the investment which produces singular source of income. The reason why “Buy to rent” works so well is that you are getting two different kind of returns.

  • Rental income
  • Capital gains in property

When you buy a plot for capital gains than you are only hanging on to capital gains. However in terms of rental properties you enjoy rentals over and above the capital gains. During the property cycles when properties usually keep giving consistent rental returns even if there is no appreciation in the property price. You are always getting atleast one and usually both rental returns and capital gains on your property.  This diversification is the main reason that in long run rental properties outperform plots.

I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.” Warren Buffet

Cash flow and liquidity

Opportunities or emergencies may arise at any moment in your life. Having cash flow and liquidity is a much needed ingredient for successful management of your investment portfolio.  If you invest long term in plots, 100% of your money is stuck for as long as you hold the property. As the property cycles pass, the only profit or loss you make is in papers until you decide to sell it out. However, in the case of rental properties, you start getting a return in your pocket day, 1 and every year you get repaid up to 5 to 7% of your property value through rentals. In addition,  in case of emergencies you can always take advances from the tenants and can raise some extra funds if need be without taking loans.

This extra cash you get gives you a lot of options, you can further reinvest it if you do not need it. In our part 1 our we found out that if you reinvest you can actually make atleast 4 times the value of the property from rentals alone. Besides that there is a long list of ways you can use this money such as:

  1. Reinvest it in your businesses if you need extra cash flows.
  2. Use it for kids education, marriages, medical emergencies etc.
  3. Reinvest it in property and use it later when you have enough to buy yet another rental property.
  4. Use the money to improve your quality of life. After all we all have one life, so spend it if you feel like it.

Developing a passive source of income

We have done a complete article on passive income and why it is so important. Passive income can help you in many ways and the impact can be felt much more than just a source of income such as:

  • Passive income gives you the freedom of time.
  • It reduces your stress, anxiety and fear of the future.
  • It allows you to pursue doing the things you love rather than what pays the bills.
  • It gives you the ability to live and work from anywhere.
  • It provides a platform for financial stability and growth.

True potential of rental income is only unlocked in managed properties, where you do not have to be actively involved in managing it. However even an actively managed property will give you great returns in terms of cash.

Where can I get the Best Rental Income?

It’s best to do some serious research before you invest or trust a respected realtor who knows your chosen area inside out. I am not in favor of houses on rent as they are greatly effected by depreciation.  Generally luxury apartments, Commercial plaza or upscale retail units offer some of the best returns on your money. Why?

  1. Upscale apartments tend to attract more long term renters, with more cash reserves in difficult times.
  2. New luxury developments are the most likely to increase in value more quickly.
  3. It’s not in the interest of well-known brands to move their premises, thus commercial retail centers are a great option.
  4. Large developments are easier to get renters as their management will do the initial advertising.
  5. Purpose built corporate offices with amenities to support them, offer a great rental income solution for investors.

 

Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1616160 ( WhatsApp)

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Fawad Khan

I dont agree in rental returns specially in big projects .Reason being even as passive investor if you do some home work you can easily get return from 15% to 75% CARR (cumulative Average Rate of return) .Now rental income excites people bcas they see an other source of income but in reality considering Pakistani market where frauds are common its better to separate the rental income equal savings and invest lets say for 3/5 year for 3/5 Years .So if you are able to make good returns you can easily offset rental returns which is mostly 4% .6% exceptional… Read more »

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