The combination of low vacancies, increasing rental rates, and affordable properties makes this the perfect time to own rental real estate. In today’s market, you have the potential for strong and long-term cash flow combined with the promise of future appreciation.
If you’re thinking about acquiring properties to hold as rentals, here are 7 suggestions and precautions:
- Buy in areas you know. Don’t guess about an area or purchase in a location someone suggests; know your market. Pick two or three nearby neighborhoods with good schools and convenient shopping. Areas you know are the best for keeping up with statistics such as crime, property values, rental and vacancy rates.
- Own properties near where you live. This makes filling and maintaining properties much easier. You want something near because you’ll be driving by, especially when vacant, to check on the property, to put out signs when marketing, to meet potential tenants and, if you plan to manage it yourself, possibly to do repairs.
- Buy three bedroom / two bath or larger. It’s hard to find a tenant anymore who is satisfied with only one bathroom. Even single residents prefer at least an additional half bath for guests. And two bedrooms are much harder to rent than three. Most of your potential clients will have children, and even single people or couples without children want extra space for guests or to use as office, storage, or exercise space.
- Make sure your property will cash flow at least $200 per month. Before you purchase, know all of your costs to own the property and be sure you can get at least $200 more than that for your rent. $200 “profit” per month won’t make you rich today. That money is to cover your costs of owning such as: new hot water heater; new roof; new carpet and paint when a tenant moves out; etc.
- Don’t buy unless it cash flows from the day you purchase. One of our mottos, “Never bet on the future.” Don’t buy because rents will go up in the future. They may, but that doesn’t help you out at all today. Don’t buy because the house will be worth more in the future. It may be, but that kind of speculation hurt a lot of people over the past five to seven years. There are plenty of great deals out there that will cash flow from the day you purchase. If you’re looking at one that won’t, move on.
- Don’t tie up a lot of cash in a property you’re planning to hold onto. This is for beginners. As investors, we recommend that investors flip any properties they have a lot of cash in, and use that cash from one property to buy several additional properties. This is such a wonderful time to acquire rentals at great prices and to allow tenants to pay down the mortgages over time. Especially when looking at distressed properties (properties that need a lot of fix-up), buy those at enough discount to allow for the necessary repairs and resell at a quick profit.
- Recognize that wealth in real estate comes over time. As stated earlier, you won’t get wealthy today from the cash flow off your rentals. What will create long-term, lasting wealth is having all the mortgages paid down over time, getting the tax write-offs rental properties provide, and increasing cash flow as you owe less year after year while rents continue to increase.
Landlording may not make you rich today but, over time, it is probably the number one wealth creator in this country.
Here’s to your success and let me know any questions I can answer for you.
Jul 9th, 2012 / 10:55 am
Peter:
There are so many options on how to spend your million dollars. In fact, I know a number of million dollar investors who invest in flips while, at the same time, loaning funds to receive regular cash flow in the form of interest payments (without the worry of any properties or tenants)!
We never believe in tying up all of your cash, but always remaining liquid, for a number of reasons:
Possibly most important, leverage. Real estate is the best place to make a little bit of money do a lot. As you explained, you could buy five $200k homes with $1500 per month cash flow, or you could buy 25 homes putting down 20% one each and getting loans.
In your example, upon purchase, you would have 5 properties with $7500 cash flow and we would have 25 properties with $5000 (assuming only $200 per month cash flow per property).
Our investment strategy really passes you up, however, over the next 15 years. If everything in our example stops and stays the same, we would end up with 25 homes with $1500 per month cash flow ($37,500 per month) to your five ($7500 per month).
Our goal is long term cash flow and retirement. When you’re done, you’re done forever. And all of this, when structured properly, passes on to the next generation at a stepped up basis meaning your heirs inherit at the value it is on the day they take ownership.
Which leads me to the final benefit of buying over time rather than paying cash. Taxes. In this country, there is still tremendous benefit to owning rental properties and, even, having mortgages. You get many write offs and deductions to offset income that you don’t have when they are free and clear. By owning them outright with no mortgage interest deductions, you will, no doubt, be paying more taxes on your income. Don’t forget, you’re not making these mortgage payments – someone else is.
As far as property management companies, I highly recommend them to anyone with that many properties. They charge about 10% of the rental amount (and definitely earn it). If you’re making $7500 per month, $750 per month is well worth eliminating the frustration of property management.
There are certainly many ways to do real estate and you will decide which ways work best for you. Once you’re in it and begin to learn more, real estate becomes a sweeter and sweeter investment alternative.
And to answer your final comment, there is a boom coming. I don’t know if it’s in three, five, or ten years, but it’s coming. The population is increasing and there is no more land being built. Interest rates are ridiculously low and so are housing prices. Do not wait to buy – you will be kicking yourself 10 years from now no matter what the market. Even without appreciation, you have cash flow, tax advantages, and someone else is paying down your mortgage. Eventually, that property will be free and clear with pure cash flow. Why sell? Start buying today.
Thanks so much for your comment!
Jul 9th, 2012 / 12:43 am
Great article and advice.
One question I had is why not tie up your cash in all your properties vs getting loans with a smaller cash flow?
For example, if you had one million dollar and say each home is $200k, rental of $1500 a month.
You could buy and manage 5 homes yourself part time vs. say putting 20% down and buy 25 homes.
At 25 homes, you really need to either quit your job or hire someone that will eat into your profits.
Of the two choices, which one would you rather do and why?
If i knew there was another boom coming, I would of course buy 25 homes, and probably retire when i sell them all, but i can’t predict the future.
:)