Rental Property Investing 101

For-rent-2The good news about real estate investing is that most people can earn a fairly substantial amount of wealth over their lifetime if they educate themselves and make better decisions when purchasing property. The bad news is that contrary to all the TV shows about flipping houses and people making money, or turn-key hassle-free rental properties, real estate is actually really hard work, it’s time-consuming and it can be a risky place to invest your money.

Click here to see what our videos and books can teach you about this.

Here are some tips that should help you earn real estate wealth. By the way — it’s a marathon, not a sprint.

Think long term (skip get-rich-quick schemes)

Long-term ownership is the key to real estate wealth. If you buy decent properties and hold them forever, that’s going to provide the highest likelihood that your real estate will have significant equity down the road. Also, if it sounds too good to be true, it always is — especially in real estate. Drop the idea that there is fast and easy money to be made in real estate. It’s just not true. Sometimes people get lucky, but you don’t have to worry because that “lucky” person will never end up being you.

Cash flow positive properties

A significant portion of investors buy properties that are cash-flow negative or have very low investment returns. That means the buyer puts in their equity cash capital when they purchased the property, and they are still investing additional funds each month, which could go on for decades depending on how bad of a deal they purchased. The better way to invest is to buy properties where the rents minus all the expenses, including the mortgage payment, provide positive cash flow that you can deposit in the bank. So if you collect $1,200 in monthly rent, then subtract expenses of ($400) and a mortgage of ($500) you will have $300 per month left over. Nice job!

Simple analysis tool: The 1 percent rule

A simple way to do a quick analysis is to take the conservatively estimated monthly rental income and divide it by the purchase price of the house. You still need to pencil out your deal with rents and actual conservatively estimated expenses, but this back-of-the-napkin test is a quick and easy test to see if it  makes sense.

  • Example of a good deal: If you can collect $1,600 per month in rent and you paid $200,000 for the property, you are collecting rent that is 0.8 percent of the purchase price (0.8 percent = 80 basis points in financial terms). And that’s probably a really fair deal.
  • Example of a bad deal: If you can collect $1,600 per month in rent and you paid $400,000 for the property, you are collecting rent that is 0.4 percent of the purchase price, or 40 basis points. And that’s not a really good deal.

Find good quality properties

Smarter investors work hard up front to find the good areas where the rents provide a nice positive cash flow and investment returns, low crime rates, better schools, and decent amenities nearby like parks or retail. Coupled with good tenants who have excellent credit, you also create low vacancy rates. Smart investors also buy properties that are in decent shape, although every property needs paint, carpeting and some plumbing and electrical work from time to time. Do that hard work upfront and spend the money to put your properties in very good shape, you’ll get a little more rent and probably have a bigger pool of interested tenants from whom you can then choose. Lastly, do your homework, talk to other investors, read guides and books, shop properties, pencil out deals and have a long term ownership plan. Hopefully it will translate into a nice cash flow retirement picture.
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Comments

  1. Josh Williams says

    Thanks for this info. I’ve always had an interest in real estate investment and have experience in renovations and flipping but not much in renting. Your site has been helpful.

    • LeonardBaron says

      Thanks Josh….. Study up, the more you learn from studying my material the less you will have to learn the hard way! Good luck, Leonard

  2. Johnson says

    Thanks for the post, my husband and I are both active duty military, we bought a brand new-never lived in 2 bed 2.5 bath townhome about a mile away from the Army post, for $85,0000. We’re hoping to rent it out when we leave this post. With such a low mortage (our housing allowence the Army gives us is 3.5 times more than our mortage) and always an abundence of soldiers needing rents, we feel like it was a no- brainer. But we’ve never owned before so its all new to us, sometimes we feel like its so risky and wonder if we made a bad decision. Your website is really helping me feel like we can do it. Thanks!

    • LeonardBaron says

      Hey Johnson. A great way to start landlording is to buy a place you live in first – so you know the property really well – and then rent it out in 1-2 years and move into your next home-soon-to-be-rental property. If possible, repeat that every few years and it might be best to own several properties in one general area so you can have one property management company handle when you leave the area…..or maybe you’ll be in that area for a long time and continue to accumulate real estate.

      You note “it is risky” and yes every investment is risky (except leaving your money in a bank account that pays almost no interest and that’s risky too because of inflation). Real estate can be a great long term investment…the more you educate yourself, the better the chances your investment in property will produce wealth. Good luck, Leonard