So, let me ask you a question…are you interested in long term wealth? I’m not talking about some number like $1,000,000 or $10,000,000 or something like that. That is what most people consider long-term wealth.

The question I am asking is if you are interested in having the type of wealth where the amount of money you have coming in every month exceeds your monthly expenses whether you work or not. This is my definition of true wealth…because it gives you FREEDOM. This is also called residual income.

I am sure when you read that question you thought to yourself, “Self that is a stupid question that Andy is asking me. Of course I am interested in long-term wealth. Who isn’t!”

Well the reason that I’m asking this rhetorical question is to get your mind thinking about wealth not in terms of dollars (ie. $10 MILLION etc.), but rather in terms of cash flow and residual income.

You see truly residual income is money that comes in while you sleep, while you are on vacation, whether it is Tuesday or Sunday or a sunny day or it’s raining. In the world of real estate the vehicle for this is rental properties.

Now I know many of you may be thinking “why would I want to focus on owning rental properties and make $200/mo in cash flow when I can flip or wholesale it for thousands and even tens of thousands?”

This is a legitimate question and here are my thoughts. Although the big hits that you receive from wholesaling and from fixing & flipping are great, they are a one time occurrence. By this I mean they are a “one off”. The money that you received from that flip or wholesale is a one time event. If you want to make money again you have to go out and find another deal.

In comparison a rental property that pays you TRUE, after ALL expenses cash flow of $200/mo keeps paying you over and over again. Month after boring month, year after long year. And, although the $200 isn’t much initially, when you start adding more properties to your rental portfolio this number can grow quickly. This is patient money but one where the turtle beats the hare in the race every time.

Another HUGE advantage of rentals over flipping and wholesale is taxes. Both fix and flips and wholesale deals are treated as either fee income (wholesale) or short term capital gains (flips). Either way you are paying taxes on the income earned on both of these at your individual tax rate. For some that could mean over 40% of those earnings are gone to Uncle Sam. That sucks!

Rentals on the other hand have the possibility for ZERO taxes until you sell. The reason for this is depreciation. The IRS allows you to “depreciate” the property on your taxes over a certain life of the property. At the same time you get to expense all of the normal things like mortgage interest, maintenance, repairs, taxes, insurance etc. The depreciation makes it so that in many cases you pay no tax on the $200/mo.

On top of that when you go to sell the property you will be taxed at long-term capital gains rather than short term. This is a HUGE difference. Think 20% instead of potentially 40%. And all the while you were able to cash $200/mo checks and let appreciation work its magic…giving you an even bigger pay day!

Now, I’m not saying to not flip or wholesale! Clearly those are things that I do and encourage all of my students to do every day. What I am saying is if you ever want to be truly wealthy and stop having to work so hard chasing the next “deal”…begin allocating some of your funds to rental properties. You will be glad you did.

Next week I will talk more in depth about the long-term magic of rental properties. Now go flip a house (and take some of those profits and put it toward a rental)!