A while back, I wrote about why I think that rental property is the best way to financial independence. I had so many people reach out to me to ask more questions, that I thought that I would hit the other side: how to get rental property.
The number one thing to think about is cash flow. The price of the house does not matter. The cost of fixing it up does not matter. Nothing else matters if your rental property does not cash flow. What I mean by this is all of your monthly expenses need to be less than your monthly income. Over simplified example: Let’s say that you get $1000 a month in rent. You have a $800 per month mortgage payment that includes principle, interest, taxes and insurance. If you have no other expenses, then you are making $200 every month.
This is why I say the price of the house does not matter. You could buy a house for $10,000 and cash flow $100 a month. You could buy a house for $350,000 and cash flow $100 a month. It all comes down to your total expenses.
I am obviously massively over simplifying. Things to think about:
1.The Neighborhood. How much are other people getting for rents. Look on craigslist. Look on rentometer.com. Call signs that say “For Rent” in the neighborhood and get up to the minute rental numbers. If the neighborhood is maxing out at $1500/month, and you need $1800/month to cash flow; then one of two things need to happen. You need to get a better deal on the house. Or you need to look elsewhere.
2. Repairs. You could buy a house for $10,000 and put $40,000 into it. Or you could buy a $50,000 house. Depending on the neighborhood, and the level of the deal, either of these options could be the better choice. Sometimes you can finance repairs. If you were replacing the HVAC system (Heating, Ventilation, Air Conditioning) for example, you might be able to finance it so that you don’t need to pay a lump sum, and your renter can pay off the liability for you.
3. Repairs. You need to plan for upkeep of the rental property. That $200 per month cash flow that I talked about above. You do not want to go spending that until you have a comfortable cushion for when repairs are needed down the line.
4. Of course, Location Matters. And what really matters about location is what you want to get out of it. Buying a rental near a university or a condo to rent in an aging community will get you very different tenants with very different needs.
5. Property Management. My strongest suggestion to anyone looking to get into the rental game is to look at property managers. On average, they charge 10% of monthly rent and they take everything off of your plate. I can tell you from experience, a good property manager is worth their weight in gold.
6. The City. You will need to deal with the city whenever you own rental property. You will at some point pull permits to fix up a house. You will always need to get rental certificates and inspections for every rental unit you own.
There is a lot to think about when doing this. I, of course, recommend using experts to help you out. I know very good contractors, property managers, and I just so happen to know a great realtor who just so happens to own rental property himself.
When I can help you or anyone you know buy a home, sell a home, or invest in real estate, I will work hard to make sure it is the best process possible for you. You can reach me at 515.639.0047 or RyanLynch@KW.com. Let me know how I can help.