Top 10 List for Investing in Rental Properties

I have been investing in rental real estate for several years and researching the field even longer.  I am now using my experience to compile a Top 10 list of tips for investing it rental properties.  This list is primarily for the rental investor but some of the items could apply to other investing techniques.

Here is my Top 10 list for investing in rental properties.

  1. Just Do It –  Research is fine but don’t overdo it.  You need to find a deal and buy a house. 
  2. Margin of Safety – Margin of Safety (the Ben Graham concept) means to buy low enough so that you can absorb mistakes.  Make sure you have room for unforeseen problems – they will occur.  When things go as expected this margin of safety becomes profits.
  3. Cash Flow – No positive cash flow – no purchase. Make sure the rent covers servicing the debt, property taxes, and insurance. My records show I spend about 25% of the gross rent for repairs and maintenance and vacancies – cover this too.
  4. True Costs – Your invested cost is not just the purchase price and repair cost.  You need to include carrying costs, closing costs, and many other expenses that vary from deal to deal.
  5. Sweet Spot – First, make sure you are buying house that rent for an amount many tenant are willing to pay.  You want a large prospective tenant pool so the house rents easily.  You can usually buy 2 properties that will rent for $750 for a lot less than a single property that will rent for $1,500 (actual numbers may vary in your area).
  6. Formulas – Avoid emotional decisions.  Make use of investing formulas so you can remain objective – and stick to the formulas.
  7. Just Fix Things – If something is broken then fix-it.  Don’t spend money on upgrades and remodeling.  These things may help a flip but that rarely help rentals.
  8. The Right Deal – Do not be in a rush to do-a-deal and lower your standard.  Wait for the right deal then act quickly.
  9. Hire Professionals – Sub out the rehab work – Do not do the physical work yourself. You may enjoy the work but the pressures of the schedule pressure will eventually burn you out.  And certainly do not rely on doing work yourself to make the numbers work.  If you have a lot of free time then use it to find more properties – not to sweat.  I have seen the problems caused by doing the work yourself.
  10. Numbers, Numbers, Numbers – Only the numbers matter. When the numbers don’t work let the deal go.  Don’t looks for other reason to buy the property.  No one ever lost money by buying to low.

I look forward to your comments.  What did I miss?  What did I get wrong?


The Sweet Spot


When investing in rental properties I look for properties that will rent in the ‘sweet spot’. By this, I mean properties where I get the best return on my investment. In my area, that is between $600 and $900 per month. When renting for less than $600 manypeople that apply have a poor rental payment history and a history of evictions. Once the rent goes over about $900 the pool of prospective tenants shrink and it becomes hard to rent the property.

If the rent is under $600 per month the cash flow generated is usually too small for the effort. Once I get over about $900 I find that the return on invest drops on the property. I will illustrate the point with two examples.

Suppose I buy a house valued at $75,000 for 70% of value. I pay $53,000 for it and rent it at $900 per month (I have two like that now). My gross rent is over 20% of what I spent on the property. Also, this house rents quickly because the pool of renters is large in this rent range.

Now, if I buy a $225,000 house for 70% of value I will have spent $158,000. To get the same 20% gross rent I would have to charge $2,600 per month. That would be almost impossible in my area. The house may rent for $1,500 but it will be very hard to find tenants. And the $1,500 rent represents a yearly gross rent of less than 12% of what I spent on the house.

If I can spend 158,000 on rental property I would be better buying 3 houses that rent for 900. My monthly rent would be $2,700. That is 80% more than buying the single expensive house. Of course, I will probably get more market appreciation on the more expensive house, but this is usually less than 5% (and negative recently).

These are actually numbers from my area. The rent ranges in other areas may vary. However, there should always be a sweet spot for the rent amount.

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