What if you after working 18 month you could afford to take off 12 months? That is a crazy idea. But if you are on my email list and read your copy off 6 Simple Steps to Taking a Year Off Every Decade, you know that is our situation. Actually, that is the flexibility offered from just our rental income.
Rentals are a game of numbers. The love or hate you feel towards your rentals will 100% boils down to the numbers. We LOVE our rentals. Because we love the numbers.
So if the thought of rental property has ever crossed your mind, here are the first steps you have to take. Don’t start with grandiose ideas. Just start by looking at the numbers. I will always recommend looking at the number close to where you currently live. If they aren’t favorable, maybe you look in other areas, but start close to home first.
Step 1: Look at Income
You need to figure out what rentals are going for. I would start by looking at a few types of properties. We prefer 3-4 bedroom single family houses, but there are lots of options so spread a wide net. Apartments, duplexes, single family, condos. See what people are asking for the kinds properties they are offering. But remember: Their asking price is the highest possible price they will get. And they might be insane. Have you seen what people ask for there things? So take this pricing with a grain of salt. Get an idea of the price range, type of housing and condition of the properties. Here is where I search to find my local info.
This is a great place to find what landlords are offering. It also is a great indicator of market demand. How long have the ads been up? How many people are “searching” for places? If half the ads are people looking for housing, there is a huge demand. If offers outnumber the searching 100 to 1, maybe the market is saturated. If 90% of the ads are 3 weeks old or less, that shows good demand. If half are older than a month, maybe the demand is weak in your area. Look at the pictures, what they are including in the prices, and the area.
Oh, I love facebook groups for rentals. They are snarky, drama filled, tell alls to the rental market. People will post what they are offering and you can see how many people are “interested.” Then follows all the comments about their thoughts on the price and condition. You can get a great feel for your market: who is looking, what are they looking for, what price point is in demand, what others are offering and what renters think about those offerings. And sometimes people just rant about landlords or prices. Pure gold. You get to see the profile pictures of the “interested.” Are they flipping off the camera and holding a red solo cup? (Pro tip for Millennials: If you are looking for a rental or job, change your fb profile picture.) Is it mostly family photos? Young professionals? Or older workers? Once who know is looking, you can keep that in mind when you search properties. Find some fb groups for your area and join. The more angry people seem, it is a good indicator of demand. If the seekers seem aloof and relaxed, the demand might not be strong. Housing is a personal and important issue. If people can’t find affordable housing for their families, those feelings will come out in a facebook group. If the numbers work, you might be able to be part of the solution. Stock income is nice too, but personally I love being able to help people with this most basic need. I have a great relationship with our renters. I appreciate them, and they appreciate me.
Rental Company Websites
Spy on the professionals. See what they are offering. These prices tend to be on the high end of what the market will bear. But this is great data. Locations, prices for property type, how long they have been listed, condition of homes and requirements for renters.
You can call the rental agencies and ask about their fees if you are considering having your potential property managed. Ask on a facebook group what people think about that company. Just remember not all negative feedback is a bad sign. Sometimes people are angry if they are expected to pay on time. Ask for some feedback from other owners as well.
Step 2: Look at Costs
You have a good idea of the market for your area , rent for property type and size, what they include in that price. Now you can check out what is on the market.
I prefer to start this on my own before I involve a realtor. But if you want a bit more hand holding, seek out a relator who is very familiar will finding rental properties. You want someone who gets the numbers aspect of the game, knows the rental market, and will give you a heads up when the deals show up. A good test questions is if they have seen any great deals get scooped up in the last few weeks/months. If a great rental deals aren’t on their radar, they might not spot one for you either. A great rental deal takes lots of research up front, then speed of offer. So I like to be able to get a hold of my agent fast. And trust they can put in an offer same day.
I generally start by browsing a few sites. Pick a favorite MLS listing for your area. I generally also check Zillow, but know that those are often a few days behind the curve. There are two sets of numbers I look at.
Baseline home prices
This is your average to below average home with solid rental potential. Not all homes make good rentals. It might be 10% of the homes listed have any rental potential at all. So just look at those. The reality is that most people are willing to pay more for their home than it’s rental value. I’m not. But most people are. So 90% homes will fall into that “emotional” price point.
Steals and Deals
These have offers on them in 1-5 days. Well, they often have an offer on the first day, but sometimes the owner will keep accepting offers for a few days then take the biggest and best offer. These are the deals where you bump into other investors before and after your showing, and 4 investors are driving by. You might not see any deals the first day you look at the MLS. But just check every day. You will see them pop up and quickly disappear or be under contract. You are never guaranteed to score a great deal, but it’s good to know what those look like in your area.
Step 3: Calculate Your Gap Number
Add up the mortgage cost of potential rental properties, property tax, maintenance, and vacancy potential: then subtract that from the going rates. How big is the gap? There needs to be a gap. You will not want the hassle of rentals for “appreciation growth.” No. Just don’t. It needs to put a little bit of cash in your pocket. There are a dozen different ways people think about how big the gap should be. But if you are still just playing with the idea of a rental to see if a market has any potential, first just make sure there is a gap. Every rental market is different. But these two steps are where you have to start to test a market.
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For conversation: Have you looked into rentals in your area? Would you consider long distance? Does the idea of rentals scare or inspire you? Have you ever been part of a crazy rental fb group? What other tools do you use for research?