Real Estate Investors - Why are you looking to own rental properties?

At investor meetings, many people will share that they want to own rental properties. I ask why. The answers vary. Experienced investors will usually point to five key benefits:


  • Cash Flow--The income earned after tenant rent has been collected and operating expenses have been paid.

  • Appreciation of the property value.

  • The opportunity for tax benefits, such as deductions for operating expenses, mortgage interest, property taxes, 1031 exchanges...

  • An asset with the potential to hedge inflation.

  • Use of leverage (borrowing against the asset)

It can be extremely challenging to find a property that will both enjoy large cash flow numbers, and large appreciation numbers. So, picking one of the two as the primary focus, and having the other item as a "nice to have" secondary benefit, will impact your acquisition decisions. As an example, a rural property might have strong cash flow numbers but less appreciation--while a property in a city might have no positive cash flow numbers but strong appreciation prospects.


If looking to acquire inventory through a third party's efforts--a wholesaler or a real estate agent, as the main examples--the more precise you can be about your "buy box" (your criteria for what you want to buy, are willing to buy, are unwilling to buy), the better that third party can help you.


Being specific about your direction (cash flow vs. appreciation), and your minimum acceptable numbers (raw numbers or percentages), any geography restrictions, quality of tenant....sharing all of those points will help others to help you.


"If it were so easy, everyone would do it". Not everyone should be a rental property owner. The challenges include:


  • Acquisition--It's time consuming to find the right property. Consider the cost of your time.

  • Capital--it takes up cash. If you are buying a $200K property and need to put 20% down, that's $40K just to be at the table.

  • Get-Rich-Quick syndrome. If you include the hours to become educated, to find the property, and the time it takes to actually make a meaningful amount of money...it's a Get-Rich-Slow, not a Get-Rich-Quick plan. Do you have the patience needed?

  • Liquidity--Excepting a line of credit using the property as collateral, or a cash out refi (which takes time), your money is tied up in the property.

  • Tenant challenges

Pro Tips


  1. You'll learn from reading and hearing people talk about rentals, but you'll appreciate the good and the bad more if you just buy a property. Are you a shoot-first / ask questions later, person? You might want to just buy a relatively inexpensive property somewhere and enjoy the experience. If it doesn't work out, sell.

  2. Self-managing saves the PM fee but adds other costs, including time. Self-managing can restrict the location of the properties you are willing to buy. Consider which way you want to go on the self-management versus outsourced management. A good PM is worth his/her weight in gold, AND is a good source of finding inventory.

Wrap Up


Eric Thomas said, "It's not easy, but it's simple." He could have been referring to owning rental properties. In other words, the concepts are not difficult to understand but the execution can be challenging.


In 1976, the Tampa Bay Buccaneers went 0 and 14. They were coached by John McKay (who had an outstand career coaching the USC Trojans before coaching the Bucs). He has two of my favorite quotes. "We can’t win at home and we can’t win on the road,” he once said. “What we need is a neutral site.” And...after one of his teams embarrassing losses, he was asked, "Coach, what do you think of your team's execution?" McKay replied, "I'm in favor of it."


To that point, my final opinion on the topic of being an effective investor is that the execution of your plan is what separates the successful from the unsuccessful--it's a lot of work, be ready for that.


Adam Schneider, TREIA, Inc Member

Schneider Property Solutions, Inc.

HomeVestors

We Buy Ugly Houses

Adam.Schneider@HomeVestors.com




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