Owning Rental Property Made Easy

by Neal Frankle, CFP ®

If you are interested in owning rental property, you couldn’t find a better time to do so. Real estate prices are low and so are interest rates. At the same time, demand for rentals is very high. But despite these great conditions, you must still exercise extreme caution. If you don’t you could still end up on the short end of the real estate stick or find yourself involved with a real estate scam. Here’s how you can own real rental real estate now without ending up in the poor house.

1. Market

In order to be successful, make sure you buy in the right market – and that means you may not be able to invest in your local area. Scrutinize the overall market and the take a microscope and exam the neighborhoods. Here are the questions to ask:

  • Have rents been trending up?
  • Are there any developments planned?
  • Who regulates the local rental market and are the regulations restrictive and difficult to comply with?
  • Are rents controlled by local ordinances?
  • Is crime and unemployment on the rise?
  • Is household income growing or on the decline?
  • Is the population expanding?

You can obtain much of this information from various sources including Local Market Monitor.com (but they will charge you for it). You can also get a great deal of information from other sources at a lower cost or for free.

RentRange.com will give you a great deal of information on rents and vacancy rates. You can also use Craigslist.com. This is a source I often take advantage of. See what other property owners are renting their properties for. Is there too much competition or does the lack of advertisements for housing represent an opportunity for you?

Other good sites to get free information include Zillow. This site will help you get a sense of real estate market trends, properties currently being offered for sale and values.

Just remember this when you do your research; don’t even think about buying property unless you see evidence of an improving employment picture and rent increases that stick. These are the two most important success ingredients for rental real estate right now.

2 – Assemble Your Team

Before you invest in rental property, interview property managers and real estate agents to get a sense of current market conditions – and to look for potential partners. Tell them what you are looking for and see how responsive they are. I recently spoke to 4 different realtors. A client asked me to find her some rental property with good cash flow. None of these realtors ever followed up with me. Obviously, they got crossed off the list. Set high standards and don’t settle for any non- professional behavior.

And good property managers are important too. A good one will tell you if your expectations are realistic or not. They can also access the MLS in many cases so you won’t be super dependent on your broker. They will also let you know how difficult it may be to find good tenants.

Property managers can explain local regulations and steer you away from troubled neighborhoods. They’ll also educate you on the most desirable areas and where rentals are most in demand and where vacancies are tight. Make sure to ask these professionals about foreclosures. Are banks about to flood the market with properties? A good property manager might know.

Obviously, if the property manager is helpful to you during your property search that might be a good indicator that they’ll be a good team member once you actually buy the property.

Talk with contractors too. Make sure you don’t get buy a property that requires more rehab than you are prepared for. Contractors are important because there could be repairs that need to be made that you can’t see or don’t notice. Consider the foundation, electrical wiring and plumbing. Any one of those items could cost you thousands to fix.

And even if the property is in great shape, it may cost you an arm and a leg to bring it up to code and/or to comply with regulations (some city council require you to meet strict standards including making the rental “disabled-person friendly”. Find out all this before you sign on the dotted line.

3. The Numbers

Make sure the numbers work before you decide if it’s a good time to buy real estate. Success in the rental property business is not about collecting trophy properties. Usually high end homes do not make good investments. That’s because the monthly rent-t0-price ratio doesn’t work. Let me give you an example.

In Los Angeles, you would have to spend $600,000 in order to buy a home that would rent out for roughly $2500 a month. But in Florida, you could buy a home for $60,000 and rent it out for $1000 a month. Clearly, Florida is a much better value. Do your math. Compare different neighborhoods and price ranges. Make sure you’re getting the highest rental dollar for the price you pay for the property.

4. Hassles

Don’t even think about becoming a landlord unless you are ready to deal with problem tenants. You are going to have problem tenants at some point no matter how carefully you screen. And even if the tenants are wonderful, you’ll have to deal with everything from collecting rent to managing repairs or possibly doing them yourself. And be ready to deal with those issues at the worst possible times – when you are on vacation or in the middle of the night.

5. Managing the Money

Obviously you’re going to have to keep a very close eye on your finances. I strongly recommend that you use QuickBooks or YNAB to set up budgets and to track spending. Also, since you’ll be collecting security deposits, you’ll have to not only account for that money but keep it in a separate account. Don’t comingle that money with your own.

6. Cash Flow

Most small businesses fail because they don’t have enough cash flow. Don’t let that happen to you. What happens if the property sits idle for several months? Are you prepared to continue paying the mortgage on the property in that eventuality? Will you have the cash to do the repairs once your tenants move out?

7. Protect Yourself

If someone gets hurt on your property you’ll be held responsible. The way to make sure such a problem doesn’t ruin you is to:

a. Carry the right kind of property insurance
b. Make sure your property is in tip-top shape and encourage your tenants to let you know if there is a problem.

Owning rental properties is a smart way to build wealth – especially these days. But it’s work. Don’t get involved with rentals if you are not ready for that.

Go in with your eyes wide open. Expect the worst but hope for the best. Don’t pay too much for your property, buy in the right market and neighborhood and keep your property in great condition. Finally, screen your tenants as if they were seeking your daughter’s hand in marriage – don’t settle.

Do you think buying rental properties is smart now? Where are you buying if so? Why not if not?

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{ 1 comment… read it below or add one }

Jerry August 19, 2012 at 9:33 AM

We have a rental property and we’ve been really happy with it. The rent just covers our mortgage, taxes and insurance so we’re not making a bundle on it but we’re grateful that it does even that. It might lead to use acquiring others since the rates are so low.

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