Newbie Rental Investment Questions

[Kim Rose]

We are looking to purchase our first rental property, but are feeling overwhelmed about the amount of information and "analyses" people use to make their decisions. We have a few personal friends who own rentals and none of them ever really went into depth with these things and all are doing well so far...

We live in Colorado Springs where home prices and population have been increasing. There is still a growing market here, and the colleges and military bases all bring in plenty of renters. My husband and I rented here for several years here before buying our house and our rental applications were turned down often because we were competing with so many other applicants (we have pets!)

If we're buying a single family home that is not undervalued or a foreclosure in a growing area where home prices are expected to rise, shouldn't we reasonably assume that its value will go up.. as we expect to happen with our own home? (we don't live in California!)

Also, for a place that is going to be used 100% for renting, do you buy the worst house on the block that can rent cheap or a nice place that you would live in yourself, but that is considerably more expensive?

[William Allen]

@Kim Rose Try not to get caught up in what everyone else is doing and how they are over analyzing their properties. What you guys need to do is sit down and see what attracts you to real estate investing, where you want to get to, and how you want to get there. I started by renting out my homes when I moved away, a lot like what you are talking about. Then, I started buying pure rentals in nicer neighborhoods where I wanted to live that were under priced or needed work. I was able to force appreciation with improvements and make the numbers work as a rental home. I try to be as close to the 1% rule in those SFR as I can, 1% of the purchase price per month in rent. I run every deal through a calculator I came up with that shows income and breaks down each expense and estimation of repairs/vacancy/etc... Then I look at what the cash on cash return is and what my overall ROI is without any appreciation. From there, I make a decision on whether the property works or not. So, start with the 1% rule then further analyze it with all the detailed numbers and conservative estimates. If you are buying homes cheaper homes in worse neighborhoods, certainly those quick look numbers would need to change. A lot of people want 2% or more on those types of properties. I manage my rentals myself, some from a distance, so I want the kind of houses and renters that I don't hear from very often if ever. Of course saying that now my phone will ring. However, that is my choice and I'm sure it won't work for everyone. A lot of people will certainly disagree and say their method of investing works better than mine. And, my strategy may change in a few years time as well.

I would caution you not to invest based on appreciation alone, paying market prices for houses as rental properties hoping they will continue to go up in value is dangerous. I like to buy about 25-30% below market to ensure I can withstand that type of drop in prices. To do that, I have to wait for the right deal to come along and constantly be looking. I have enough cash now to where I am making cash offers on undervalued homes, renting them out and then pulling the majority of my capital back out by placing financing on the property. I can only do that on a couple more residential secondary market loans then I am over to commercial or portfolio loans. But, it wasn't like that at first so I was looking for short sales, foreclosures, big price drops on the MLS, etc... It took time and I made some purchases then that I wouldn't make now.

Good luck and if you have any questions I would be happy to help out, I wish I was a member of this site when I was thinking about getting started.