When we discuss real estate investing strategies, three core methods come to mind: rehabbing, wholesaling, and renting. Each of these real estate investment tactics can help you reach your unique personal and professional goals. In this article, I will focus on real estate investment with rentals. Many HomeVestors® franchisees use a rental strategy to meet their long term goals. For example, franchisee Kip Roth is using a rental portfolio to prepare for retirement.
Investing in Real Estate with Rental Properties
Rental properties are the most involved of the three top real estate investing strategies, since they necessitate a long term commitment. With rental properties, you also have to decide between hiring a property manager or managing your properties yourself. If you put a sound rental property plan in place and you are willing to stay the course, the reward is truly great. Building a rental property portfolio is typically best for someone who is patient and focused on the future.
Different real estate investment markets lend themselves to renting like markets with low vacancy rates (like Asheville, NC), a high portion of renters among the population, and markets with major universities. Wherever you invest in your rental properties, you need to make sure that the demand is there. You also need to consider the factors that affect real estate investing and the best places to invest right now.
If the market checks out, then it’s time to formulate your plan. When considering rental investments, you need to go into it knowing how you will manage your properties. For each rental property, you will be managing tenants, building maintenance, emergency repairs, and other unforeseen tasks. Since you own the home, your reputation as a property manager is on the line. Your tenants expect clear and consistent communication and your neighbors expect a well-maintained property. All of these factors have to be balanced against your bottom line.
Rental Property Strategy
Your rental property strategy can start small and grow slowly over time, or start with a large investment in multiple properties. For the sake of this article, we will discuss rental property strategies for traditional single family residential homes. Single family rentals are easier to manage and are one of the most scalable strategies.
For every rental deal, you need to have a financial goal in mind and a clear path towards reaching your goal. If you secure a mortgage, you have several strategies for paying down the mortgage and enjoying the monthly income. The first method for this is to pay down your mortgage quickly with extra-large payments that knock-out principle and interest. With this method, you will use the entire rental property (minus expenses) to pay down the mortgage. You will also dedicate any extra savings from your job to paying down your loan.
This strategy can be modified or even scaled to multiple home purchases. There are a variety of ways to pay off your mortgages and you will have to find one that matches your cash availability, credit score, and long term goals. This is simply an example of how one might execute a rental property strategy. If you decide to go down this path, I highly suggest that you do your research and find the strategy that is best for your unique financial situation.
My Rental Property Lessons
In my opinion, rental properties become much easier to manage after you acquire 20 or more. This is roughly the point where you can afford to outsource or even bring on a full time maintenance manager. You can and should use a property manager to place tenants and collect rents from the beginning, but on demand maintenance can be difficult up until you can have someone do it for you full time.
One of the biggest mistakes I see rental property owners make is to not raise the rent annually. After 5 or so years of failing to raise rent, their properties are significantly under the market value for their area. Then, when they try to bring the property back to the market rental price, they lose tenants.
Another mistake I see is confusion over when to cash out. Ideally, when the time comes to maximize your ROI from an “investment” property, you should use lease expirations periods. This gives your tenants warning and gives you time to determine if you want to renew the lease or end the lease. If you choose to end the lease, you can then begin upgrades and renovations to place the property on the market as a single family home. This is really the only way to maximize the return for the rental property.
Finally, most landlords managing their own properties forget to renew their lease terms with their tenants after the first year. At this point, the lease become month to month by default and the risk of losing a tenant quickly is far greater than with longer lease terms.
The Benefits of Rental Properties
As you build a rental portfolio, you will experience the benefits that come from being your own boss. You decide which properties to buy, how to manage them, and how to build your real estate investment business. Rental properties give you the flexibility to front load the work and set up an income stream that will continue until you sell the properties.
The benefits of rental investment include:
- Direct income stream from rent payments
- Income from increase in property value over time
- Sweat equity from home improvements (painting, repair, upgrades)
- A flexible and scalable investment strategy
Your rental portfolio will provide income from the three different sources mentioned above. First, you will receive a direct income stream from your tenants as they pay rent. This is a reliable influx of cash that you can use to pay down the mortgage debt, make repairs, invest in other properties, or simply use as your primary source of income.
Second, you earn passive income as your property value increases over time. A smart real estate investor is always weighing the benefits of renting versus selling. Depending on your position and the market, the opportunity to sell your property for a gain might present itself. Either way, your asset continues to become more valuable.
Third, as you manage your rental portfolio, you are building sweat equity. Every repair, improvement, paint job, or maintenance upkeep that you perform adds value to the home. While these costs are also listed as a downside, they are really a benefit. Keeping your rental portfolio in great shape helps you attract top notch renters and positions you to seize opportunities as they arise.
Finally, rentals are a flexible and scalable way to invest your money in the real estate market. You can invest in one rental, or build a huge portfolio of 100 homes. Your goals dictate the type and size of your rental portfolio.
The Downside of Rental Properties
Rental properties are certainly not for everyone. If properly planned and managed, rentals can provide financial freedom and supply you with the active job of your dreams. Some of the downsides to rental properties, however, are attributed to risk and cost.
The major potential downsides to rental properties are:
- Tenant risk
- Requires active involvement or a property manager
- Taxes, Fees, Insurance, Maintenance, and Hidden costs
- Potential for concentration of assets
Let’s take them one by one. Tenant risk is just what it sounds like; you could have risky tenants in your property. This can mean anything from tenants who don’t pay their rent, to tenants who burn copious amounts of candles and start a fire. Proper background and credit checks, clear expectations, and an ironclad lease can help you reduce tenant risk.
Second, rental properties are an active endeavor. Either you, or your property manager proxy, will be the hands-on point person for each property. The role of the property manager includes collecting and depositing rent into the proper bank accounts, maintaining property insurance, performing routine and emergency maintenance, and other tasks related to your residential properties.
Third, your rental properties are just like any other home. You will need to pay insurance, property tax, and other fees. You will also need to budget for home maintenance, appliance or infrastructure repair, and unexpected emergency repair costs. If you plan for these fees and incorporate them into your bottom line, you will be fine. To combat the unexpected costs, you can keep an emergency account that you pay into monthly just in case. Your upgrade costs can also shift if the market starts to demand higher end finishes, stainless steel appliances, or hardwood floors.
Fourth, if your net worth is low, you could risk concentrating a huge portion of your wealth into a rental property. Luckily, Homevestors® has systems in place to help you assess your position and build wealth through smart real estate investment strategies. Many of our franchisees begin with wholesaling deals to get their feet wet and boost their business. Then, they tackle rentals or rehabs.
That said, you shouldn’t be afraid of rentals! Managing a rental portfolio is rewarding both professional, personally, and financially. A real estate mentor can help guide you as you explore your options. In addition, a HomeVestors® real estate investment franchise can provide you with the network and the systems you need to tackle any real estate strategy.
How HomeVestors® Helps You Create Rental Property Portfolio
HomeVestors® supports franchisees in every real estate strategy they use. Franchisees enjoy proprietary software that helps them analyze a real estate market and specific rental properties. Charlotte, NC franchisee Kip Roth attributes his real estate investment and rental success to his HomeVestors® real estate investment franchise.
“My retirement plan is rentals and there is no better vehicle than HomeVestors® to quickly amass a significant portfolio of great properties with a solid equity position.”
– Kip Roth, excerpt from his Insider Interview
If you are ready to discuss how HomeVestors® can help you build your house buying business, reach out to me today.
Call me today at 828-989-3785 to discuss your HomeVestors® real estate investment franchise opportunities.
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