Investing in buy-and-hold real estate is one of the best ways to generate long-term wealth. While most investors are focusing solely on rehabs and short term profits, there are many good buy-and-hold opportunities to be had. That is not to say that you can’t stick with flips, but you also shouldn’t ignore a good rental property when it presents itself. The right rental property won’t just fall into your lap, however. There are steps that need to be completed before you can even consider buying a rental property. Building a rental property portfolio is, in itself, a completely different strategy. Those serious about increasing their portfolio should do so slowly over time. Before you know it, you will have a sizable portfolio supporting you in retirement.
The first step of a rental property purchase is in the acquisition. Run the numbers and make sure they work with what you are trying to accomplish. If your numbers are off, a good looking property can quickly become a black hole. Most rehabbers will spend more time on the numbers than on the actually property, and rightfully so. The same should be the case with a rental property. Long term rental wealth will be impossible to achieve if you are running a negative cash flow every month. This all starts with your acquisition price and what you pay for the property. The higher the price is, the less likely you will find cash flow. In addition to the price, you need to consider the property taxes, insurance, utilities and other monthly costs associated with ownership. These numbers have to be solid and can’t just be your best estimate. You can make the numbers whatever you want to make the deal look good, but all you are doing is hurting yourself. Most successful rental properties start with a careful evaluation of all the numbers and getting the property at your price.
The main factor in evaluating the numbers and determining monthly cash flow is the repayment of any loan. There are an increasing number of investment loan programs hitting the market, but for the time being all of them require a substantial down payment. Anywhere from 15-25% is the current industry standard. Interest rates are at or near all-time lows. Therefore, finding a great rate is not the main problem. The type of loan you take, the loan amount and the interest rate are the main concern, but you also need to consider the taxes and insurance. The taxes and insurance are variable and can go up from year to year. Once you know what the repayment will be, you can further evaluate the deal and see what the average monthly rentals are. It is important not to assume that any work you do will automatically equal an increase in the rent. If you need everything to break right with the purchase price, loan payment and monthly rents just to scratch a small cash flow, you should look at other properties.
In addition to any down payment, you also need to allocate some funds for upgrades and repairs. With a rehab that you are looking to sell, you need to consider all of the areas of the property and think about the big picture. With a rental property you can make modest upgrades without having to revamp the entire property. That being said, you need to spend money to attract quality tenants. You can’t just expect tenants to flock to your property unless you make it appealing to them. You also need to have money in place for periodic items that always arise with every property. Even if you do a good job of upgrading before anyone moves in, you still need reserves for broken appliances and other unexpected items that happen on every lease.
Finding quality tenants is the key to any good rental property. Your rental can look like a million bucks, but it is useless if tenants don’t pay on time or in the right amount. This means you need to spend time and possibly money to find tenants. If you decide that you want a property manager to oversee your property, you need to have the cash flow that allows for such an expense. If you want to do everything yourself, you need to have the time to market tenants, screen them and review every application. This process can be very time consuming and tedious, but as soon as you start to slip you may regret it.
Maintenance is the final piece to owning a rental property. Even if you are handy, there will be items that are out of your control. You need to have people in place that can handle whatever job you need before you need it. The longer you go without taking care of something, the less confidence your tenants will have in you and the more likely they will find somewhere else when their lease runs out. Problems will come up in almost every lease, regardless of how good your tenants are. It is critical that you are prepared for anything and can resolve it quickly if you want to keep your rental profitable.
There is a lot that goes into owning and running a rental property, but the rewards greatly outweigh the work. By adding just one new rental property every few years, you will end up with a portfolio that can be used for retirement or for income in ten to twenty years.
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