“I want to invest in rental properties, but I don’t know where to start.” This is a phrase I hear all too often. I am a very accomplished procrastinator/excuse-maker myself, so join the club.
You’ve heard me say this before: rental properties are one of the best tools for building long-term wealth, and I genuinely believe everyone should own them. Why? Four reasons:
- Cash flow – I’m talkin’ about that passive income, baby! You can make a few hundred bucks per month with very little (sometimes no) work.
- Equity buildup – your tenants are paying your mortgage for you. That means after 30 years, you own a property free and clear having only paid the down payment. Dope.
- Tax benefits – property owners enjoy certain tax deductions
- Potential appreciation – if the value of the property increases, that’s even more equity and wealth you are building!
Here’s the thing: you don’t have to invent the next iPhone to become wealthy. You just have to invest in rental properties. Rental property investing is the everyday woman’s way to achieve financial independence – believe you me (as a good Southerner would say).
Anyways, I’m writing this my good friend texted me yesterday. She was very frustrated with herself for not taking the first step to invest in rental properties. She listed many reasons why she was holding herself back. And I KNOW many of you feel the same way (because I get this question a lot).
HOW DO I GET PAST THE FEAR?
My friend brought up several reasons she hasn’t taken the first step, so allow me to destroy these one by one.
Obstacle Number 1: It’s hard to find properties I’m interested in, where the numbers work and the level of attention is doable.
I agree completely: it is hard and this is where most investors get stuck. Sometimes you can find deals on the MLS (Multiple Listing Service), and sometimes it will take more grunt work. I’ve had luck with the MLS (partly because I have my real estate license, so I am the literal first to know if a property gets listed that meets my requirements.) But most don’t have that advantage.
With the MLS, you gotta be patient. Don’t settle. It took me almost a year to find and actually close on my first duplex, and that was after making several offers and even having other contracts on properties fall through.
The reality is that most good deals are off-market properties. If you’re not finding deals on the MLS, and you want to speed up the process, take a few minutes to look up these other creative ways to find investment properties:
- Short sale and pre-foreclosure leads from agents, attorneys, or lenders
- Foreclosure or tax deed auctions
- Real Estate Owned leads from a bank
- Probate leads
- “Driving for Dollars” (literally driving around for leads)
- Bandit signs
- Networking (join your local real estate investors association, it’s a huge source for investment property leads)
- For Sale By Owner listings
- Expired MLS listings
Obstacle Number 2: I don’t want to buy a property that requires more work (maintenance, ongoing babysitting) than expected. I want it to be passive.
Yeah, chances are, none of us want to quit our jobs to become full-time landlords, right? That’s why it’s important to build in the expense of hiring a property manager from the very beginning… even if you don’t plan on hiring a property manager. Why? Because having options is a very good thing, fam. The last thing you want to do is lock yourself into something where you have to do all the work because you can’t afford to hire things out. Nope, just nope. A standard property management company charges 10% of gross rents. Work that expense in and don’t purchase the property unless the numbers work. That way the work will stay minimal for you… no matter what.
Obstacle Number 3: What if I can’t find renters or collect the rents needed to make a profit?
Real estate is very cyclical, so chances are, this will happen to you at some point or another. It’s not a matter of “what if,” it’s a matter of “when and how.” The goal is to minimize the risk and ensure you won’t go broke when this happens.
First, you must estimate the rent accurately before you buy the property. A lot of people think they can raise rents right away, or that the prior owner has been undercharging. That is rarely the case. What it’s renting for now likely is the market rent.
Estimating your future rent is not the time to be overly optimistic. I use Zillow, Craigslist, and Rentometer to get a good idea of what I think I can rent the property out for, especially if it’s currently vacant. You can look at similar active rental listings on Zillow and track them for a few weeks. Is the owner lowering the rent price because It’s been vacant too long? How long does it ultimately take a listing to get filled on Zillow? This will give you a good idea of your competition.
Second, run your worst-case scenario. What if the property was vacant for two or three months? Could you cover the mortgage and other expenses on your own, do you have enough in savings? If so, good. Yeah, maybe you won’t make as much profit that year as you thought, but as long as you’re not losing overall, I call it a win. And if you estimate your rent right, that won’t happen every year. That will only happen in a year like 2020. What a time to be a landlord.
What if you had to lower your rent? I’ve had to do that before for many reasons: a new apartment building opened up right next to my duplex, the unit was starting to feel dilapidated and not up to par with my competition, I was trying to get it rented in the winter when demand was lower, etc. How low could you drop rent and still breakeven? That’s a number you’ll want to know. If the unit isn’t renting, it’s because the rent is too high. You need to have wiggle room to be able to lower rent when necessary. If you can do that, you’ll always be able to rent it out.
Obstacle Number Four: I don’t want to be tied down to a property and less able to move or travel.
This is not a thing, I promise. You will not be tied down geographically. And I can say that with confidence now because all my rentals are in KY and I just moved to CO. And guess what? Long-distance landlording is actually the bomb. We’re not running down to our properties twice a week; we are forced to outsource and delegate.
If you have family or people you trust in the city to check up on things while you’re gone, that’s ideal, but not necessary. This just goes back to hiring a property manager (see Reason Number 2 above.)
Obstacle Number Five: What if I buy my first rental and then find something way better right after?
News flash: your first rental property is rarely your best investment. In fact, I would hope that with what you learn on the first one, you’ll be able to find and buy even better properties after that. You might find a winner immediately after purchasing your first rental, and you won’t be ready to buy quite yet because you just depleted your savings. And yeah, that sucks. Don’t kick yourself. Don’t think “grass is greener.” You’re already killing it. If that first one is serving its purpose, you’ve done it right, and you are already one HUGE step closer to achieving financial independence.
Obstacle Number Six: Some of these old homes seem like a Pandora’s box of bad surprises.
You right. They can be. You should only close on the deal if you have a complete understanding of the condition of the property; that’s why you pay $500+ for an inspection. Always do an inspection. The last thing you want is to buy a rental, only to find it needs $20,000 in structural repair work.
Also, when you’re estimating the initial investment, throw in a couple extra grand as a buffer. I generally expect bad surprises from the outset if I want to buy a really old property. If you want to avoid that altogether, you could consider only homes built after 2000, for example. It will limit your leads, but if that’s a hard no for you, that’s fine!
Obstacle Number Seven: I’m old and my brain keeps telling me I’ve missed my shot.
No. NOOOO! You’re NOT OLD. It is NOT TOO LATE FOR YOU. I can’t even count how many people I’ve come across that were 50 or 60 or older that only just started investing in real estate. Wanna get inspired? Listen to Bill Manassero’s Old Dawg REI podcast. Bill started investing at age 58 and his goal is to acquire 1,000 doors in 6 years. And he started while he was living in Haiti! Hello?! I assure you: he is NOT the exception. The beautiful thing about real estate investing is that anyone can do it, at any age, on any income. Read that again.
I started young, and that’s been nice. I thought it would take me 15 years to achieve financial independence through real estate. It took me less than three years. What if I had been 60, and I put off getting started because 15 years sounded too long, not knowing that in reality it would only take me three years?
Do NOT count yourself out of the game because of age. Valid fear, but illogical. Kick that one out the door.
Here’s what will ensure that you “miss your shot”: not getting started. Don’t be that guy.
Obstacle Number Eight: I don’t know what I’m doing.
I felt the same way when I first started investing in real estate, and this was actually the biggest thing that held me back, too. But, you could say that about practically any new endeavor you could ever try. Do any of us really know what we’re doing until we actually do it? No. Most people fake it till they make it.
Obviously, you shouldn’t buy a $300,000 investment property on a whim. Luckily for you, there’s this thing called the Internet.
Seriously, though, we live in the information age: free information is one click away. You can learn SO much by reading reputable blogs, buying a few books, and listening to podcasts. A couple legit resources are the Afford Anything podcast by Paula Pant, and the book Hold by Steve Chader. Also, anything by BiggerPockets.
Listen up, though. You can’t just consume, consume, consume. Eventually, you have to take the first step and actually implement what you are learning. Knowledge is nothing without execution.
That first one WILL feel scary, and you will NOT know everything at first, but you never will know everything until you just. get. started.
Obstacle Number Nine: I don’t have enough money.
You came to the right girl, because I know of a couple ways to get started investing in rental properties without having tens of thousands of dollars. Because normally, when buying an investment property, you MUST pay 20% to 25% down, and there’s no way around that. And not all of us have an extra $50K laying around. Here are two ways to get started without a ton of money.
First: house hacking. House hacking is when you buy an investment property and live in it. You can either: 1) fix it up and “flip” it for a profit, or 2) purchase a multi-family property, live in one unit, and rent out the others. The beautiful thing about house hacking is that since it’s your primary residence, you can qualify for a much lower down payment: 0% with a VA loan, or 3.5% with an FHA loan, or even 5% to 10% with a normal conventional loan. Keep in mind you often will have to pay Private Mortgage Insurance (PMI). Plus, you will be more leveraged and therefore at higher risk. BUT this is a great way to get around the 20% down payment requirement.
Second: wholesaling. Finding the deal is the hardest part. And there are other investors out there willing to pay YOU to bring them good deals. Wholesalers will find a property, put something called an “assignable” contract on it, and then sell that contract to an investor. I’ve seen wholesalers make anywhere from $5,000 to $20,000 per deal. It will only take a few of those for you to stockpile enough cash to start investing on your own. Plus, you’ll learn a lot along the way. If I had to do everything over again, and I didn’t have a single cent, this is exactly what I would do. Boom.
Obstacle Number Ten: I don’t know what to look for in a rental.
I gotchu, sis. You want to consider three main things when looking for a rental.
Location: What area would you like to invest in? Maybe you want to avoid higher-crime areas, or you don’t want to deal with downtown rush hour traffic, or you don’t want to drive 40 minutes away. All things to consider when you begin defining your parameters.
Condition: Do you have the funds, energy, and knowledge to fix up the property if needed? Or does it need to be move-in ready?
Numbers: This is the most important. Do the numbers work? I usually consider two main metrics: the cash flow, and the cash-on-cash return-on-investment (ROI). You’ll want to define your own minimum requirements: how much cash flow do you want to be making? I started out aiming for $200 to $300 per unit. I also reasoned that I would like a cash-on-cash ROI of at least 12%. I figured I could earn 8% to 10% in the stock market, and what was the point if I wasn’t beating the stock market? And btw: don’t underestimate your expenses. This is where most newbs go wrong. Include vacancy, maintenance, utilities, HOA fees, lawn care, pest control, property management, and a large buffer.
What are some things ANYONE can do today to take that first step forward?
This was a lot of info and chances are, you are STILL feeling overwhelmed. Totally normal. Don’t get too caught up in trying to plan way ahead. Start today by just taking one small step. Here are some things you can do right this second:
- Post on Facebook or ask family and friends for a recommended real estate agent that is experienced with helping real estate investors find deals
- Define your requirements around location, property condition, and key metrics
- Take a look at any property on Zillow or the MLS and practice “running the numbers”
- Join a local real estate investor association
- Read a book or listen to a podcast on real estate investing (my bestselling book, Passive Income, Aggressive Retirement, has a whole section on real estate investing! If you haven’t read it yet, it’s a great place to start. Another great resource is Hold by Steve Chader.)
I want to hear from you: if you’re trying to get invested in real estate, why haven’t you started? What’s the #1 thing holding YOU back?
Rachel Richards is a former financial advisor and bestselling author. ,,You can download her free budgeting and net worth worksheets here.
