Amidst all the cheerleading by your local wholesale ‘experts’ about how they have sold ‘x’ many properties, and the promise of ‘turnkey, headache free’ solutions, comes something unexpected:
Reality.
Time and again, at The FlipBoard – America’s premiere real estate blog, we watch as investors who purchase through other wholesalers get caught up in the hype of cheap area real estate, plunking down hard earned money based on promises of equity and cash flow, only to forget about such things as vacancy, maintenance, and appropriate rent ranges, and in doing so wake up with a little surprise known as 30 years of negative cash flow.
Has this happened to you?
I pray it hasn’t, and in order to help you avoid such situations I have put together a little guide to owning rental property that some of you may find enlightening, although it may clash directly with the snake oil you have been sold from wholesalers who are interested solely in whacking you over the head for a massive commission.
Rental Property Ownership: Guidelines
1) You will rarely, if ever, have 100% occupancy.
I am speaking from experience here, but let me say that, even when you think your portfolio is purring like a cat, there IS something unexpected around the corner. Last month, for example, I was riding high with 100% occupancy only to have one tenant declare bankruptcy and another have to get evicted for refusal to pay rent. The point? You have to accept such elements as an integral part of property ownership, and be prepared to deal with such things without getting emotionally involved. Such is the key to successful property ownership(and don’t forget good tenant screening!).
2) Rent ‘ranges’ are easier to have success with then singular rent values.
What happens if a wholesaler tells a new investor that a property should rent for $750? It is month one, and the new investor receives offer to rent the property $695. What does the new investor do? Well, of course he(or she) turns it down because they were told $750 was the rent, and they allotted for that in their cash flow figures, so maybe at $695 the numbers don’t work so well.
So they wait. And wait.
Finally, 3 months later, they take $675 because what REALLY happened was they were told(by a wholesaler, trying to make a quick sale) that the property would rent for $750, which was the quintessential high end, when really what should of happened is they should have been given a rent range of $625 – $725, and then all of a sudden $695 looks really good. In the meantime, they have serviced the debt for 3 months, which has eaten their cash flow for the next 14 months. Oh well, maybe they can be profitable in 2010.
3) You do not have to over – improve a house to get a great tenant.
Too many times, new investors come in and over – improve the house, trying to emulate the lifestyle that they would want to live in such a house. Really, I try to stress to new investors the importance of purchasing properties that need only cosmetic repairs. Why? Simply put, because it easier to paint, clean, and carpet than it is to do massive renovations and have to make the decisions involved(cognitively and monetarily), plus it is an easy guideline for what to do when a tenant moves out. Just wash, rinse, and repeat. So, don’t spend that extra money for granite countertops when formica will do.
4) Price is important, but location is more important.
Buy a house in a good area, that is friendly to tenants and able to provide the amenities necessary to attract a good tenant. In Memphis, TN, I like to purchase near ‘optional’ schools, city schools that have a program for gifted students, admitted by intelligence test only. Why? Parents WANT their children to live in these districts, and are willing to rent these houses specifically to send their children to these programs. Caring parents = great tenants, and an ample supply of them. Don’t purchase a property based on price alone. Houses are cheap for a reason, and you need to investigate why they are cheap, and not just assume that it is because you are getting a good deal.
All told, I have told my wife to expect the ups and downs that rental property ownership brings, and in doing so, we see owning investment property as a truly long term investment, a game to be played patiently, with conservative approach and sound judgment. Remember, there are not always clear cut answers when you own rental property, but wise judgment and sound decisions usually are the keys to win the day.
Also, while it may be simply common sense, it is critical to evaluate the due diligence provided to you regarding a property you are considering buying. Look at the numbers given to you by your seller: have they been verified by experts in their independent fields? For example, has the estimate After Repair Value been validate by a certified appraiser? These are the questions you need to ask as you begin to construct the foundation of a successful real estate portfolio and business.
Now THAT is what I call how to make money!
-Richard
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[...] http://www.theflipboard.com/archives/what-is-making-money-right-now/Time and again, at The FlipBoard – America’s premiere real estate blog, we watch as investors who purchase through other wholesalers get caught up in the hype of cheap area real estate, plunking down hard earned money based on promises … [...]