Advice on first real rental property?

Question

Hi all-- I'm a new member and I was hoping to get some guidance on how exactly to choose a good rental property that will generate a solid income stream (to pay for my kids' college in 10-15 yrs).  I'm very fortunate in that I make a good W2 income plus already have significant equity in a home I had lived in but now rent out.  This is my first foray into purchasing a property specifically for rental purposes.

I'm planning to take out a cash-out refinance loan from my other rental property (I'm thinking $150-$200K) to purchase a townhouse or single family home in Houston that is mostly turnkey and then renting it out for an additional income stream.  I know this is not great timing as interest rates are high but I don't have a time machine and can always refinance later. One concern is that property taxes in TX are high so I may need to rely more on appreciation to build future income rather than have a good income flow now (as payments on my cash-out refinance may equal or even be greater initially than rent).  Do you have any tips -- specifically what do you recommend I look for regarding neighborhood and specifics of the home?  I don't have much experience in fixing up a home but I have a few connections to good contractors.  Do you have any recommendations on how to find a real estate agent who is smart, experienced and has my best interests in mind?  I figure that's a good first step.  Would love to hear any tips/advice you can share.

Thank you very much in advance!

Dave

Nathan Gesner · Answer

Welcome to BiggerPockets!

I recommend you build a strong foundational understanding of real estate investing before looking for specific deals.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by Brandon Turner or The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control of your personal finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the BiggerPockets podcasts. This will help clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.

4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. Biggerpockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up. Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice. It doesn't take long to learn how to spot a good deal.

5. Study the market. You can learn to do this on your own or get a rockstar REALTOR to lead the way. I highly recommend a well-qualified REALTOR that works with investors and knows how to best help you.

6. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.

Wale Lawal · Answer

@David H.

After deciding that owning rental property is the right investment, there are five basic steps to follow:1. Arrange financingFinancing a single-family rental property works a little differently than applying for a mortgage on a primary residence. Down payments are bigger, lender fees and interest rates are slightly higher, and there are different requirements to qualify. Although there may be more hoops to jump through when arranging financing on a rental property, the good news is that there are a lot of options available. Conventional lenders, such as banks and credit unions, offer loans backed by Fannie Mae or Freddie Mac, while other investors obtain rental property financing through private lenders or by forming a joint venture.

2. Understand rental property returnsReturn on investment (ROI) is a financial metric that real estate investors use to help determine how potentially profitable an investment property might be. To calculate the ROI of a property, an investor needs to know:Estimate annual rental income -- including tenant rent and additional income like pet rentEstimate annual operating expenses including repairs, property management fees, insurance, and taxesForecast annual cash flow by subtracting expenses from incomeDetermine down payment and other upfront cash (such as needed repairs)Calculate ROI by dividing annual cash flow by the total amount of cash invested

3. Find a rental propertySome of the key factors to consider when choosing the right rental property and the best real estate markets include:

• Job and population growth
• Percentage of renter-occupied households
• Rising rent prices and declining vacancy rates
• Historic change in home values may lead to long-term appreciation
• Neighborhood rating, including school district quality and employment rates
• Potential for a turnkey single-family rental property with a tenant already in place (or a home that is rent-ready) helps to reduce investment risk for first-time buyers.
• Property tax rates can vary dramatically from one city and state to the next, and impact potential ROI

4. Hire a property manager (if not self-managing)Being a landlord can be more time consuming than it might appear. Finding and screening tenants, collecting the rent, and taking care of repairs are only some  of the duties required for successfully managing a rental property.Those who are not interested in -- or simply don’t have the time to dedicate to being --  a landlord often hire a local property manager. Hiring a property manager may allow an investor to enjoy the benefits of owning a rental property while avoiding the hassles of being a landlord. The best rental property managers take care of day-to-day details so that investors can focus on growing passive income streams by buying rental property in the best markets for the best returns.

5. Track income and expensesEven for experienced real estate investors, keeping track of rental property income and expenses can quickly become overwhelming. Common income and costs that affect the return on a rental home include:Rental income

• Security deposit
• Other income (pet, storage, laundry, roommate, etc.)
• Leasing fees
• Property management fee
• Repairs and maintenance
• Landscaping
• Pest control
• Utilities (sometimes found with small multifamily properties)
• Mortgage payments
• Insurance
• Property taxes
• HOA fees
• Depreciation expense
• Owner expenses (such as traveling to an out-of-state property)

Read this article for detailed information https://learn.roofstock.com/bl...

All the best!

Juan V Lopez · Answer

Man, you got a ton of great advice on this thread. Your kids will be very thankful for the moves you are making now.

When starting, I always recommend to connect with a local investor-friendly realtor with a track record of success. They have their pulse on the market, best areas, rents, property managers, contractors, etc.

Joe Miller · Answer

This is silly coming from me but Id talk to several agents about what you are looking for. There is no such thing as having too many boots on the ground.

Connect with lenders too. I'd talk to several, get pre-approved with several and rate check them against each other. If you apply to them all the same week it makes it SO much easier because you have all of your info together.

Finally, its okay to place low offers. I recently helped a BP client. We placed almost 10 offers before we had one accepted BUT when it was appraised, he walked into 26k in equity off the bat. That is worth putting in 8 offers.

Seth Young · Answer

I think that is a great plan! I work with investors that have done that very thing, cash-out refi and purchased an investment property with it. You're exactly right, nobody can change interest rates right now. It about time in the market over timing the market. If you are not looking to form a team yourself, I would suggest checking out turnkey companies. They will have fully renovated properties that are set up for the longterm buy and hold. Feel free to reach out if I you have any questions.

@David H.

Eliott Elias · Answer

Your tenants are going to suck. Rents aren’t always going to hit your bank account every month. Brush up on your rights as a landlord

Theresa Harris · Answer

I'd look at a place that doesn't have HOA or condo fees, so a single family home or a duplex.  It doesn't have to be turnkey, but unless you want to invest a lot of time into it, I'd buy something that only needs cosmetic changes (eg coat of paint, perhaps new flooring).

Do you know any other people who have rentals so you can ask them what realtors they recommend?  Make a few calls and ask for someone who is used to working with investors.  Another option is call a property manager and see if they have a person you can work with to buy the house.  Doesn't mean you have to hire them to manage your property, but they will know the rental market and for them, they get the commission from the sale.

Advice on first real rental property?

Most Popular Reply