Investing in rental properties – specifically, residential single- and multi-family rental properties – is a sure-fire way to build wealth. Some investors have more success than others, though.
Why is this? And how can a first-time investor increase his or her chances of hitting a bulls-eye the first time out? We’ll cover all you need to know here.
Why Do Rental Property Investments Fail?
When you invest in a rental property, either you make money or you lose it. If you investigate the reasons, there are really only a couple of ways this investment can fail.
- You’ve purchased the wrong property. If you buy the wrong one, it’s probably not going to matter what you do. You’ll never earn the profit you need to make it a worthwhile investment. Everything depends on acquiring a suitable property.
- You’re managing the property poorly. Success doesn’t transpire at the closing table. You have to manage your holdings in a way that ensures they remain profitable for years. This includes both how you handle the physical property and building healthy relationships with your tenants.
Obviously, multiple facets will fall underneath one or the other of these categories, but these two are basically all there is to it. If you want to be successful, you just have to buy the right property and manage it well.
Six Ways to Guarantee Your Success
Instructing you to buy the right property and manage it well doesn’t make for a very helpful article, so let’s break this down and look at some of the specific ways you can guarantee success.
1. Know What You Want
It’s crucial that you know precisely what you want out of a property before you begin looking for one to acquire – certainly before you make any offers. Keep both your short-term goals and your long-term vision in mind.
Is your goal to earn a few hundred bucks in passive monthly income? Or do you hope to build an entire portfolio of properties?
Are you only interested in investing locally? Or are you willing to invest anywhere the numbers pencil out?
Would you prefer single-family properties or multi-family properties? Or could you be open to anything?
By defining your goals and expectations on the front end, you’ll give yourself the benefit of a focused property search.
2. Run Conservative Numbers
Real estate investing is primarily a numbers game. If they work out on paper, it’s usually a pretty strong investment; if they don’t, then you should look elsewhere.
The question is, how do you run the numbers so you’re rarely (if ever) wrong? The answer to that question is a two-parter: first, you need the right equations; second, you need accurate inputs.
To be more precise, you have to use conservative numbers. There are too many relevant equations to cite all of them in this article – such as net operating income, cap rates, cash flow, and cash-on-cash return – but you should just recognize that this part of the process will take time.
Most of your time as an investor will be spent crunching numbers. If you fall into the habit of taking shortcuts here, you’ll pay for it later.
To run numbers conservatively, always round up on expenses and round down on income. For example, if it looks as if maintenance will cost you $237 per month, use $300 in your calculations. If you think you can get $1775 for rent, bank on $1,700.
On top of all that, always anticipate at least one month of vacancy per year.
3. Remove Emotions from the Equation
There’s little room for emotion in real estate. If you’re buying a house to live in, sure, you can let your feelings play a role.
But a rental property is a pure business opportunity. The numbers either work or they don’t. If you find yourself making excuses to bend the numbers, that’s a sign you are about to make a mistake. Keep it black and white.
4. Build Your Own Team
So much of your success as a real estate investor will depend on the people with whom you surround yourself. If you can assemble a solid team of talented and trustworthy colleagues, you should have as much success in this industry as you’d like.
You should have a few folks in particular on your team. The first is an experienced real estate agent who can help you find deals (especially off-market ones) and crunch the numbers.
The second is a professional property manager like GreenResidential.com to handle all the day-to-day management tasks (including tenant screening, rent collection, repairs and maintenance, accounting, etc.). The third is a good real estate attorney and/or CPA. This individual will help you maximize your protection and cash flow for greater ROI.
5. Be a Meticulous Screener
Even the most conservative numbers can come crashing down if you get bad tenants who don’t pay and/or treat your property poorly. The key to finding good tenants is to be a meticulous screener.
At times, thorough screening might feel unnecessary and intrusive, but you have to do it. Run background checks, verify income, speak with prior landlords, talk with their employer – do everything you can!
Spending a few extra hours to screen up front can save you thousands of dollars in the future.
6. Save and Reinvest Profits
As soon as the first rent check settles into your bank account, you’ll probably feel the temptation to begin upgrading your own lifestyle. You’ll think, “I did it!”
But don’t go crazy just yet. The most successful real estate investors are the ones who strategically utilize the money they earn.
First off, you should set aside at least three months’ worth of expenses for each property. If it costs you $1,500 a month to pay the mortgage, insurance, taxes, and utilities, you should place at least $4,500 in a dedicated checking account.
Once you have that emergency fund set up, we recommend putting every additional dime toward a down payment on a second property. Repeat this process with the second property, and that will lead to compounding income. At that point, it may take only a few months before you’re able to buy your third property, and so on.
Adding it All Up
When everything is said and done, rental property investing success indeed consists of nothing more than choosing the right properties and managing them well. If you do that consistently, it’ll be a matter of only a few years before you have your own mini real estate empire.
And all it takes is five, 10, or 15 properties to begin building considerable wealth. Good luck!