Owning a rental property and collecting “mail box money” (aka passive income) can be one of the best experiences of your career and a true blessing to your long-term financial planning.
Here are 6 Guidelines that will help you to achieve your goals.
- Realize that the best deals might not be in your backyard, but that does not mean that you cannot participate. Investing in property that is out of your own backyard can be scary, but it can also be very rewarding. Real estate is local and there are many markets where cash flow is very high right now. With the right team on the ground, you can achieve great results investing in these markets with little or no hassle.
- Focus on the market first. Focus on cities that are experiencing good to moderate growth and are forecasted for that growth for the next 10 years. Look for cities that have a great employment base, lots of jobs, and lots of opportunity for upward movement of their citizens. Examples of this are cities like Dallas, Houston, Memphis, Austin, and Raleigh. Here’s a good list
- Focus on cities where the middle class want to live and raise their families. Again, if you focus on the right cities and now with the right circumstances, you will be just fine. Many cities have a healthy middle-income population that is looking for nice, safe homes to rent. I’m talking about that “bread and butter” $100,000 home. I’m talking about the 3/2 with a 2 car garage or carport in a nice area and within walking distance to schools and shops. When you focus on providing these types of homes to renters, EVERYONE wins. You have better tenants. You have better properties. You have less hassles.
- Invest for cash flow and evaluate properties based on Return On Investment. Professional investors do not use sites like Zillow or Trulia to evaluate a property’s value. You shouldn’t either. It all comes down to ROI. If you have a great property, in a great neighborhood, in a great city with economic growth, and coupled with a healthy 8-12% annual Return On Investment, secured by a deed of trust and insurance – you have a winner. You’re making money all day and you have a solid investment. All of that is regardless of whether you are paying 75% of retail or 90% of retail, because ROI is calculated by your annual rental income, less expenses, divided by cash invested.
- Use good partners when investing in rental properties. I don’t care if you’re investing in your backyard or in another city, you need good partners to handle the day-to-day. Get very comfortable paying a property management company 8-12% because it will be the best money you’ve ever spent. That is a small price to pay for peace of mind and not dealing with tenants, toilets, and termites. My best advice, work with the best companies that you can afford in any city to handle EVERYTHING for you. There are plenty “turn-key” providers around the country now – including our companies: Memphis Invest, Dallas Invest, and Houston Invest. These companies should handle everything for you “soup to nuts” (if they don’t then move on).
- Use your Self Directed Retirement accounts to get tax-deferred or tax-free benefits from your rental properties. Bottomline, it happens everyday and smart investors all over the country are doing it. Why not you too?
If you can build a rental portfolio, you will be well on the path of long term wealth building. Getting to that point, however, will require you to do many things you may have never expected. The benefits of owning a rental property greatly outweigh the work required, even if it doesn’t seem that way all the time.
I’m doing a training this week on how to achieve great results in this area and to build a plan.