Looking to Find First Rental

[Joshua Randall]

I have heard some people say it's best to start of small with a mobile home, others say go right for a multifamily and I've even heard of some people closing their first deal on a 20 unit apartment building! What would you all suggest is the best route or that you have found is the best route for someone looking to start building their rental portfolio?

[Randall Alan]

My suggestions would be:

1.  Avoid mobile homes... they are seen as depreciating assets.  They don't appreciate like brick and mortar homes.  

2.  Think about what you can afford, and what you are good at managing.  If you are on house Zero, the thought of jumping to a 20 unit apartment should terrify you... just because you are so green.  Plus, you are probably talking $1,500,000 to 2,000,000 purchase price to buy a 20 door apartment with $300,000 to $400,000 down... so while I imagine that thought was just conceptual... start small... 1 property... maybe it has 1-4 doors... its often more about what you can find, that is at a good price, that you can afford, that will rent the best.

We are at 40 doors in 3 years, and it's a number we have been trying to hover at, because it is a size we can self manage, and that is what we are trying to do for the moment. When we started, we bought duplexes, and double duplexes (2 duplexes on the same lot)... our thought was - "If one side is empty, at least the other side pays the rent." After some seasoning, we quickly realized that you can pretty easily fill most any unit in under 2 weeks. If you have notice from an exiting renter, you can usually dove-tail their exit and the new tenant's start date within a few days. So we eventually backed off of targeting duplexes, and pivoted to single family homes. The advantage there is that SFH are far more plentiful, and there is not (quite) as much competition for them as the duplexes. This meant we could get better deals, which resulted in better profits on the single family homes. They are also cheaper (obviously). An interesting side effect of that 3 years later is that we had a lot of homes that had a lot of appreciation. So we could start selling some of our SFH and sometimes double our money off what we paid for it just 2-3 years ago. We have done this several times.... and we chuckle all the way to the bank at how fortunate we have been!

So, start small... maybe start with a small duplex, but don't be too afraid of single family homes.  Avoid mobile homes.  For a slightly further primer - you want to look for what you can buy the cheapest, that will rent for the most.  It's literally like two crossing lines on a chart for price paid versus rent received.  Our chart looked like this:  Any door that we could buy for $75,000 or less, that would rent for $1,000 or more, was our target.  Obviously there were some caveats there... we didn't want F class properties, and we wanted them to be in at least descent condition.  But we were ok with putting $3-5k into a property if it needed some minor rehab.  By doing that strategy, we could pocket about 1/2 the monthly rent as profit - and that included allowing for a maintenance reserve.  Both the price, and the rent can be adjusted for your area.  People in California would laugh at those numbers... but where we live, it is what was working a couple of years ago.  Prices have obviously gone up in the past year, but the concept remains sound... pay the least, rent for the most, you'll do fine.

All the best!

Randy