Rental Properties: Where to Begin?

Have you thought about wanting to get into rental property as an investment? You may feel like it is overwhelming.  There is a lot to learn, but everyone starts somewhere. In this article, I not only answer the question, “What type of housing should I invest in?” but also give several tips for getting started with rental investments.

How to Start Investing in Real Estate

You do not have to be the most experienced investor to know that this is sound advice. In fact, almost every article or book that I have read, everyone emphasizes the importance of starting small. This has many benefits. It helps to reduce the mistakes that you WILL make. Everyone will make a mistake or two. By following this philosophy, you are able to reduce the negative impact on your wallet. By starting small, you also put your foot in the door and learn what it takes to be a successful rental property owner. This includes mastering the skill set of being a landlord (if you choose to manage your properties yourself) as well as figuring out the tax benefits, among many other things. This advice is also geared to keep you interested in rental properties. If you overwhelm yourself at the beginning, it is unlikely that you will want to continue in it.

Best Advice from Experienced Real Estate Investor

This bit of advice about starting small is not merely an abstract theory applied to rental properties. ‘Small’ also suggests the ideal type of rental property. Two separate authors on Rental Property Investing (Rental Houses for the Successful Small Investor by Suzanne P. Thomas AND The Weekend Millionaire’s Secrets to Investing in Real Estate by Mike Summey and Roger Dawson) prefer single-family homes. Their preference is based off a variety of reasons. The most important is the ease with which you can sell the property. The fact is that there are more people interested in buying single-family homes because you do not just have investors that are looking for them, but also families who want to own their own homes. With the higher number of units (like a multi-family dwelling or a major apartment complex), it is harder to find someone that is going to be willing to purchase the property. This may not be a huge factor if you are planning on keeping your property for a long-term investment, but it is comforting to know that it is easier to sell if some financial difficulty comes up. The smart investor, it seems, not only starts small, but stays small. Some of the other reasons for investing in single-family homes include:

    • Renting out what used to be your personal dwelling after moving. Some people buy a house that needs a lot of work to later rent out for a positive cash flow each month.  As a result of not being able to afford two mortgages, they will often live in the house while they are fixing it up.  Others may want to upgrade their personal dwelling while keeping their old home and using it as a rental.  People will often take this approach when the market is bad in order to avoid having to take a loss when they sell their house.
    • Less maintenance. Individuals or families that rent single-family homes are often expected to take care of the lawn and sometimes even provide major appliances. This means fewer miscellaneous expenses for the owner.
    • Better tenants. While this isn’t always the case, people who rent out single-family homes are generally more responsible. This means that they are more likely to respect the house as their own, but also pay rent on time.
    • Easier to Manage. It is much easier to take care of a couple of single-family homes than a major apartment complex. In fact, some state laws require properties with a certain number of units to have a property manager, which means another cost that reduces your cash flow.

Exceptions to the Rule

While ‘Start Small, Stay Small’ may be a good rule of thumb, it is just that. There are always exceptions to a rule.  Truth be told, single-family homes in certain markets are not always going to be profitable. One example of this is the market that I live in. The homes are built much earlier than areas with new development which means higher costs for maintenance. They are also more expensive because of the proximity to major cities, and have extremely high property taxes. The combination of these three things makes it unlikely to find a single-family home that is profitable. The people who can afford to pay the high rent that would be required to make a profit are also the same ones that can afford to buy a home of their own. Rental property investments is never an exact science and it does take time to learn the market, but it is easy enough to make a small profit and build wealth over time.  It can even make a nice retirement income.

 

20 Responses to Rental Properties: Where to Begin?

  1. I live in Phoenix and the real estate market has been devastated. You can find some great bargains and have been thinking about purchasing a rental property.

    • Corey says:

      Yeah, with this economy, there are great markets for getting into rental property. If I were in a more realistic markey (instead of the greater NYC), I would be more serious about getting into rentals right now.

  2. We have been talking about this a lot lately. We aren’t quite in the position to buy as of yet but it definitely something we are considering saving for. We are looking to some university apartments knowing that they will always have tenants. Thanks for the great tips on how to do this right- especially with starting small. I also like you point about staying small. This is definitely something we want to do; we want our investment to be as maintenance free as possible.

    • Corey says:

      Yes, I think having your rental properties as close to maintenance free is the trick to staying in the business and making a long term profit.

  3. Kellen says:

    I’d be interested in investing in real estate, it just seems like a lot of work for uncertain returns. I’d rather do less work and invest in dividend stocks for my uncertain returns. I think the benefit to real estate investing is the easy leverage – you can put down $40,000 and borrow $160,000. When I buy dividend stocks, I can only invest my $40,000 and that’s it. (Except I could borrow a personal line of credit, but the rate would be much higher than a mortgage.)

    • Corey says:

      Kellen, Those are two great points – in fact, the leverage is what has me hooked on getting started in real estate.

    • Brandon says:

      Agreed, but the leverage with real estate investing can be even better than you think. If the property is your own, you can put as little as 3.5% down and borrow 96.5% of the purchase price. Imaging purchasing a 4-plex for $100,000 (more than I’d pay usually, but not all areas are as good as mine for investing) but only needing $3500 down and making $400 per month in positive, passive cashflow. That’s a 137% cash-on-cash return, not even taking in the future sale price into the equation. Talk about good leverage!

  4. I am looking to start investing in real estate by the end of the year. I thought it would take me longer but I have found a way to get started sooner rather than later. I think once I have my first house paid off I will hire a property management firm to take care of the details. –LaTisha

  5. Interesting investment for diversification purpose, what do you think the return looks like in rental properties?

    • Corey says:

      Great question SB. I will have to write another article on this topic (thanks for the idea). But, a short answer is that because the return rate will be based on a lot of factors, it’s going to vary. You also want to keep in mind that it is going to decrease with time because the return rate is based off your initial investment as well as the change in equity, etc. If you are doing it correctly, you should find a home with an initial return rate of 15-20% for the first year (According to Suzanne Thomas, author of Rental Houses for the Successful Small Investor).

  6. Mr. Frugal says:

    The value of small … such a good lesson.

    My wife and I have aspirations of owning income properties in the not-too-distant future. We’ve thought of other investments such as a vending machine business, a storage facility or a laundromat. And the #1 and #2 interests for us are being able to minimize our initial cash outlay and minimizing our ongoing risk. Basically, we want to keep things small. So your comments here are right up our alley.

    One other thing I’ll throw in too is that while we can’t afford to take on a rental property here in silicon valley, we’ve lived in small towns around the country over the last ten years. We still have friends in those towns, including some people that are very handy. We’re looking at buying an income property in one of those smaller towns where the initial cost is much, much lower (like 1/10th the cost) and where we’ll be able to provide an opportunity for our old friends and neighbors to make some extra money as well by managing the property.

    So this actually brings up another great question. What advice do you have on managing income properties? What should we look out for, what are some of the biggest risks and how can we mitigate them?

    • Corey says:

      Mr. Frugal, what a comment. You ask a loaded question. For the short answer to managing income properties from a distance, you should go one of two routes. You can ask a “handy” friend to watch over and take care of the things as they come up or you can hire a management company. I will have to write a post about hiring a management company (thanks for the post topic – look for this soon). There are lots of details, but the basic thing would be to read the fine print. Also, make sure that the company does background checks. Renting to quality tenants is so important for staying interested in real estate investments.

  7. I understand the single-family home theory. However, I’m not convinced. Are you trying to resell or earn money from rent. If your goal is the later you should be able to earn more rental income from multi-family. If you are looking for resale value then I’m not sure renting is the smart way to go in the first place.

    In my humble opinion.

    • Corey says:

      Shaun, thanks for an honest comment. I certainly understand where you are coming from. I don’t think there is any hard and fast rule without exceptions. I think it varies from market to market as well. My primary interest is making money from rent. Single-family homes do provide you with some options. Also, multi-family homes are often purchased and sold by investors. As a buyer, he/she is wanting to buy for as little as possible. As a seller, sell of as much as possible (and sell based on rent income). But, on the other hand, you are right that you can get more rent at one location from a multi-family home.

  8. […] Finances: Rental Properties: Where to Begin – This article not only offers advice on how to get started in real estate investments, but […]

  9. We are accidental landlords. We recently bought a shortsale house and since the market tanked we could not afford to sell our first house. Luckily we found a great family to rent out our house. So far, so good!

  10. The real estate business is often portrayed on TV by all the so called guru’s as a glamorous business get rich quick scheme. But in fact its more of a business than anything else. Its a twenty four seven business also. If more folks new what they were getting into they most likly would not have gotten involved in the real estate business to begin with. Having the right type of personal qualities to deal with tenants that default on their rent evicting tenants and so forth is a essential element in your success or failure in the real estate business.

  11. Looking for good tenant is not easy. Make it easy for your tenant by not overpricing the rent and to make sure that your tenant stays longer so you don’t need to got through the tedious task of looking for a new tenant again. Be a good, supportive landlord and your tenants will last which means easier life for you.

  12. Aida says:

    That’s because when you purchase your home and on the Current
    Interest Rates Mortgage prediction, and all other home buyers could be eligible for up to $6, 500.
    The lenders that are willing to current interest rates mortgage accept a lower price.
    5% of the purchase price and for at least the 2nd quarter of next year.
    Mortgages under 4 percent are still available for consumers looking to purchase a home.

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