Getting Started with Rental Properties

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.

 

Craigslist

 

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.

 

Facebook

 

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?

 

 

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20 thoughts on “Getting Started with Rental Properties

    • Awesome. =) Lots and lots of research in the area you are considering is the best first step. I think even before deciding what kind of property you want. We love the single family home rentals, but only because the numbers work.

  1. Ms. Montana – I agree that rental investments are a great option for many folks. We have rented our vacation cabin for the past 3 years, and have earned income in excess of our entire operating expense on the cabin. We didn’t plan it that way, but are thankful that the extra income earned has moved us closer to an early retirement in the next 18 months. Earlier this year, we sold our primary home, and now live in the cabin full time. FIRE is on the horizon, made possible in some part by the extra rental income we’ve earned on the cabin.

    Your work is a great tool for anyone considering real estate investments.

    Speaking from experience, real estate rental investments work! Thanks for sharing your knowledge with others in the community, they’ll benefit from your words!

    • Thanks so much! And vacation rentals are another great option! That is more the direction we have personally been looking in the last year or two. Another good option is a primary home with rental included. There are a lot of reasons I like rentals. We have even looked at using our main home as a weekly rental if we travel for long periods of time. When we started with rentals I read quite a few books, and honestly didn’t really care for most of them. It can be too much hype. Too many grand plans. I think for most folks: one vacation rental, a house with a separate apartment, one or two rentals, a duplex, that is where the real options are. And people could use some info to get started there, not in empire building. =)

  2. Great tips! We are still trying to decide whether we want to buy a foreclosure in our area or expand our search to other areas where we could get a turnkey that is cash flow positive (but then we would need a management co.). We live in a higher cost of living area and, though we would like our first property to be close to us, we want to have a wide gap as well.

    Great suggestion on the facebook groups – I’m definitely going to check that out!

    • If the numbers are much stronger in other areas, I wouldn’t rule them out. Rental markets vary SO much even city to city. And if the house is a day’s drive and the market is very strong, you might not need a management co. I have never had turnover in either of our rentals! There is a really strong market here. The first house was taken by the first person who viewed it. And our second I showed for 1 weekend. Other than that management companies cash checks (thank you USPS for delivering those to me!) and they call repair people (thank you google for helping find those repair people.) I will put other posts together about finding a handyman or the secrets to look for on a rental application (people who don’t like change.) But if you expand your search within 4 hours, you might be able to swing it. For $100 a month per house, I will figure it out myself. =)

  3. Hey, Ms. M. What are your thoughts on trailer parks? Is there too much chaos on the low-end of the rental market? My nephew is considering purchasing a trailer as a rental property. I don’t know if I’d have the stomach for that. It seems to me that being a landlord is as much about managing people as it is about managing property. And a trailer may be too much for a newbie landlord.

    • In general, the more affordable the housing solution, the more profitable. But there are other trade offs for sure. I absolutely won’t rule it out entirely. There are some nice trailor parks with great people. I might target the ones geared towards elderly. They hate to move, are quite and tend to keep things tidy. If the area seems overrun with drugs and violence, it might be too much of a hassle. If they start cooking meth, your trailer might explode (get good insurance!) The more demand, the more picky you can be. Each person has to balance the profit vs hassle. You might have a lot of turnover with students and young people, but if you make $400 a month, maybe it’s worth throwing an add on craigslist 4 times a year. Even if it takes 4 hour a month, that isn’t too back for $400 in profit plus tax benefits for a lot of people starting out. =)

      • Our long term plans include more rental property (besides our starter home that we currently rent) and I have mentioned trailers to Mr. Smith. He doesn’t like the idea at all. He always points out that you generally don’t own the property, so you have to take monthly trailer park fees into consideration. Also, the trailers will not last as long as a traditional building. His opinion (right or wrong) is that there is more long-term stability and value in a house as opposed to a trailer.

        • I read a lot of books that said, “this is the one perfect kind of property for everyone!” I don’t believe that. So much depends on the market and situation. But I also don’t think one kind is always wrong either. The reality is that people make money on every kind. So it’s more about what could be profitable in your area, and then what your goals and preferences are. I have a local friend who bought a country lot cheap. Then he spent $25k on a used trailer (in really decent shape.) He rents it to people who are custom building their dream home. Typically they can’t afford to hold both mortgages, so they sell their old home, move into the trailer for 9-12 months while their new home is being constructed. He charges $1200 a month! The lot was maybe $40k. Now in 20 years the trailer will be too old and he will have to buy another $25k one to replace it. On his $65k investment he nets $12,000 a year. Boy howdy I wouldn’t rule that out. So I always say cast a wide net and then be choosy about what works for you. Even nice trailer parks aren’t always a bad idea. You just have to run the numbers. If you love the numbers, you might love the property. =)

          • Not that it is for everyone, but here is one scenario that we would consider.
            $25k used trailer x 3 (in this area those are rather nice) with the idea that they will be put out of commision in 25 years so $1000 of loss every year or about $100 a month: add that to cost
            $400 lot rent, all included
            So we are in for $500 a month in expenses. Another $100 for extra expenses. So $600 a month.But we don’t have lot property tax.
            If we could rent those for $950 a month. That means we would clear $350 a month x 3 (for each trailer) or $1050 a month. We have put in $75,000 upfront, and the extra $100 would buy the replacements. If we could clear $12k a year with $75k in capitol. That beats the heck out of 4% withdrawal for early retirement plans. Now I wouldn’t put 100% of my funds towards that, but it could be a solid way to diversify retirement income. For some that is way too much hassle for $12k. OR the numbers are way different in their local area. But at this point, for us, if I had to pick between that cash in a taxable investment account, pulling 4% or 3 trailers netting $12k. The trailers would be a better fit for us. =) Not that I am all pro trailer (we don’t own any!) But I can see how people make it profitable.

  4. Weekly rentals on vacation properties can be very profitable, but they are seasonal. My husband had a vacation home that he was living in before we got married. It was paid off and he was going to sell it, but the market was soft. So his real estate agent suggested he look into vacation rentals to reduce the carrying costs of the house. Well looking at the numbers, given it is paid off and if we keep it reasonably priced, we can see over 15 weeks a year plus some weekends during leaf season, Thanksgiving and Christmas into New Years, and possibly some during the ski season. So it would earn over $22K, before taxes and expenses, and he keeps the asset. He is handy with repairs, we live close by, so we will manage the rentals online ourselves to save the property management fees. We may get some help with snow removal and other small things, if we don’t have the time away from work. But this will boast the retirement income, which is a great thing.

    • That is a nice boost in income! It would be interesting to see how that income compares to a 4% withdrawal strategy. Plus one the the things I love about rentals is that I don’t feel like I depleting the resource by spending the profits. At this point in the game, it would be a hard mental shift to start cashing out our stocks, but I don’t mind spending our rental income. =) In our area we have a strong summer season and depending if the house is close to the ski hill a decent ski season as well. So we have thought about properties with vacation rental potential. Thanks so much for sharing your story cheryl! That is great info. =)

      • House would sell for $180K in a good market, so that would be a 12% return on investment, before expenses. If house would sell in the current market for $140, that would give a return of 14% and there is no depletion of the principle. Certainly beats a 4% depletion as we know the market will rebound, and people like getting a house that can sleep eight with two baths with lake access for the same price as a hotel room in the local area per night that doesn’t.

        • Those are some great numbers! I would have a hard time letting go of that as well. I am betting on the sharing economy expanding even more. I think this is a great example of how a rental can give you another source of passive income. I like the diversity of income streams. Thanks again for sharing!

  5. We have rentals, but they consist of properties that we originally bought to live in. As we pick up more, we’ll have to think about our choices differently.

    And they are scattered. We’ve found it fine to manage our in-town property ourselves but pay for property management out of town…much cheaper to pay for someone else to rent them quickly than have them sit empty for a couple of months.

    • I think that is a great strategy. I wish more people looked at the rental value of a the home they are going to live in. It gives you so many more options when you need to move.

  6. I keep oscillating on the pros and cons of rental properties. In our current area (Washington DC metro) housing is so expensive and just about any investment would require a mortgage. Considering that we are rapidly paying down the mortgage on our primary residence, we have an aversion to taking on debt through a mortgage.

    Once our mortgage is paid off, we’ve been thinking about purchasing a vacation rental property somewhere in the south (Florida maybe?). We likely would not live in the area, so we need to consider how to deal with maintenance, cleaning, etc. So much left to learn!

    • We lived in the DC area too, for about 4 years. Housing was nuts. We could rent MUCH cheaper than we could have bought at that time. It doesn’t make sense in every market. This summer we considered buying a rental out of state. Now that we have a bit of rental management, I feel like we could swing it. A vacation rental is another good option, although I think it is actually a bit harder than just a long term rental.