It’s that time of year again where most of us find our minds wandering to far-off vacation destinations and scheming of ways to quit our jobs and move to Costa Rica.
But for the well-prepared investor, this dream is less of a fantasy and more of a reality than you might think.
As a real estate professional, you know one of the secrets to generating wealth is to create passive income. Once you’ve put in the initial work as a real estate investor, and created a virtual money-producing machine, you’ll have a steady cash flow for years to come — and in some cases, indefinitely. You can also become the perfect advisor for clients who want to do the same.
If you’re new to working with investors, or are looking for a slow, steady, and genuine way to set yourself up for financial freedom, than it’s time to educate yourself on what I like to call “rent estate.” As you know, income-generating rental property can offer some pretty great returns in the form of both immediate cash flow, as well as long-term rewards with appreciation, equity, and some decent tax breaks.
Owning rental properties isn’t a silver bullet to you or your clients’ retirement — not all investment properties are created equal. But with careful planning and hard work, owning rentals can prove to be an invaluable part of your investment strategy. Finding success is the result of two very important things: choosing the right property, and managing it profitably. With this in mind, let’s take a look at how you can do both.
- Find a Winning Property. You need to make sure that the property you or your investor clients choose has a high “rentability” factor. Not all properties perform well as rentals. If they are run down, they could cause you more hassle than they’re worth. While there are good bargains to be found by purchasing fixer-uppers, consider carefully whether it’s worth the investment. Factor in the time and money necessary to get the unit ready to rent, all while it sits empty, not producing income. You’ll have to cover the mortgage and all of the other expenses yourself during this time, so make sure you’re prepared if this is an option that you’re considering. On the flip side, you’ll want to be wary of investing in extremely high-value properties as well. These properties can provide sky-high gross returns, but the higher cost of maintenance, upgrades, and upkeep will eat into your profits considerably. Many investors find success by taking a middle-of-the-road approach, and investing in decent homes near good schools and jobs. You’ll want to find your own niche, of course, but make sure you do your research so you can make the best decisions for yourself and offer solid advice to your clients.
- Consider Cash Flow vs. Appreciation. Next, you’ll want to decide if you will invest in a property for cash flow, projected appreciation, or both. There’s money to be made with all three options, but you or your clients want to have realistic expectations about how much your property will be producing in monthly rental income, as well as what you can realistically expect in terms of appreciation. While hot market properties will most likely provide the best returns in both respects, these properties will be out of budget for many first-time investors. On the other hand, properties located in small towns without huge growth potential can provide good cash flow returns, even though they can’t be expected to appreciate much in value.
- Income and Expenses. Having expectations of a property’s rate of return will give you a better idea about what type of offer you or your clients should make the seller. Tally up your projected income — do research to see what similar properties are charging in rent. Talk to local property managers to get their thoughts on pricing. Then, add up your expenses: the monthly mortgage, insurance, property taxes, the vacancy rate, and other costs, and subtract them from your projected annual income. You’ll be able to use this figure to find your cash on cash returns, and more accurately assess the viability of an investment.
- Try to Score a Great Deal. Getting the best deal possible on a property is key to securing the biggest returns, and you’ll want to embark on a search for decent properties that fit your criteria. Determine the rate of return you want to get from your properties, and don’t compromise. While some people are happy with 5 to 10 percent cash on cash returns, some experienced investors try for around 20 percent or higher. Regularly peruse foreclosures in your local MLS. The preforeclosure period is often best time to purchase a property, but you can often find deals on foreclosures as well. The longer the bank has had the property, the more anxious they may be to sell.
Managing Your Property Successfully
While finding the right property is vitally important — your ability to manage that property successfully will also have an impact on its profitability. Here’s how you can get a property set up right.
- Minimize Your Vacancies by Setting Competitive Rent. The key to maximizing your returns is finding the sweet spot that you can charge for rent. This means determining the highest price that you can charge while still keeping it low enough to attract interest from potential tenants. This will help to minimize your turnover rate, helping to keep your property occupied and cash flow positive for most of the year.
- Protect Yourself: Brush Up On Landlord-Tenant Law. It’s essential as a broker who personally owns rentals or works with investors, to have working knowledge of current federal and state landlord-tenant laws. Laws have changed on several issues in recent years, and it’s more important than ever for landlords to be familiar with fair housing legislation and tenants’ rights — particularly in the areas of applicant screening, security deposits, and evictions. You’ll want to run your rental agreement and policies by an experienced attorney to ensure that they’re helping keep you on the right side of the law.
- Protect Your Investment: Perfect Your Tenant Screening Process. Finding the right tenants will have a major impact on a rental’s profitability. The best way to ensure that you or your clients only allow qualified applicants into a property is by having an airtight tenant screening process that’s in writing, and adhered to it each and every time. You’ll want to ensure that you run background, credit, and reference checks to verify the accuracy of the information that an applicant provides, and to confirm that they will be able to pay the rent and comply with the terms of the lease. Keep in mind that you cannot screen tenants based on any other reason, and new HUD laws now forbid landlords from making blanket bans on any applicant who has a criminal record or prior history of arrest. As mentioned above, it’s worth having an attorney check your screening policy to ensure it’s in compliance with the law.
- Automate the Process: Consider Hiring a Property Manager. Finally, investing in rental property doesn’t mean you or your clients have to do all the maintenance. If property management isn’t your specialty, it may be prudent to enlist property management services. A good property manager will be able to free you up to focus your efforts on growing and managing your portfolios, and will also make it easier for you to invest in long distance properties.
As you can see, real estate investing requires hard work and effort in the beginning, but once a property is set up, it can be a straightforward way to generate passive income. Whether your dream is a beach house in the Caribbean, an early retirement, or growing your investor clientele, with careful planning and the right management strategy, rentals could be your golden ticket.