The Ideal Rental House

There’s an almost romantic notion about owning a rental property or three — until you do it. The logic is sound. If you can accumulate ten rental properties over your career, by the time you are ready to retire, you could live just off the income from them. This is true – provided the homes are free and clear. And even if it happens, it won’t be without some challenges. Once you know they are coming, how to head some of them off at the pass, and what to do with the others, your experience with rental properties will go much more smoothly. Here are several principles you need to understand as you embark on this journey.

  1. Buy the right house. The ideal rental house is small, low maintenance, and located in a working class neighborhood with decent schools. In other words, good people will want to live there, and when you have the inevitable turnover, it won’t cost as much to turn the house around. Low maintenance means a brick or natural stone exterior, hard surface flooring and a small size that will be inexpensive to repaint.
  2. Buy the house right. Beware of the seminar gurus and the rental house clubs that will sell you a house and finance it for you. They are making money on both the house and the financing. These arrangements rarely work to the benefit of the investor. They often end up with cash flow projections that ignore vacancies, repairs, and maintenance. All these things must be considered when considering the true cash flow. In fact, the vast majority of leveraged single family rental homes do not cash flow at all and many have negative cash flow. You have other benefits from depreciation and deductibility of some expenses, but for most of us a positive cash flow is desired.
  3. Get the right tenants. You owe it to yourself to engage in careful screening. Screen the tenants if you are managing the property yourself or carefully screen the management company if you are hiring it out. Single family homes perform MUCH better if the tenant stay at least two years or more. Be prepared to offer concessions to lock up a tenant for multiple years.
  4. Know your numbers. There are several ways of analyzing a rental by the numbers. You owe it to yourself to understand those analytical methods. Ultimately the numbers will tell you the quality of the deal. This involves cost of purchase, value of the home, repairs, cost of maintenance and upkeep, schedule of maintenance (do we need a new roof anytime soon?), property taxes, cost of management, and several other data points. We break down the numbers in many of our resources here and in our training.
  5. Know the community. Is it on the rise, in decline, or stable? It’s tough to know what’s going to happen five to ten years from now. But there are some areas that seem to remain stable throughout the years. They are the preferred areas. You want a working family with children. They will be more stable and less inclined to leave.
  6. Be open to creative deal structuring, particularly on the acquisition side. But do not enter into any creative deal structure without the information you need to put it together legally and safely, protecting your interests and investment.
  7. We can’t tell you everything you need in one post, but we can tell you this. Our recommendation for new “Buy and Hold” investors is the same as it is for “Fix and Flip” investors:
    1. Get Information
    2. Get a Mentor
    3. Follow a Proven Path.

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