Making "low end" rental property work

[James Sinclair]

Some people have indicated that they have good success with low end rental property. I would like tips on how they manage to do that. The property managers that I have talked to won't even accept property that does not rent for $1,000/month. They don't advise people to buy property at the low end because any positive cash flow you might get will most likely be used up repairing the property, cost of evictions, other legal cost, etc.. The issue seems to be that the difficulty of getting a good tenant that will pay the rent on time, not tear up the property, and be stable year over year.

I have had a couple of rental properties over my life, not ones I planned to have, but because of personal moves. I never had a good tenant in either of those properties. I would like to consider rentals as an option but only if I can get to the point of them really being a good investment and not a cash drain. I don't see how $100.00/month free cash flow is worth the head aches? So how do you make it work?

[Bill S.]

Probably half my units rent for less than $1,000 per month. They are not in the 'hood and they have tenants with respectable credit and reasonable jobs. They are 1bd units in multi-unit properties (2-4 units per property) located near the downtown area. My typical tenant is probably 25-35 and has a full time job or is returning to school or relocating to the area. They all have good rental history and about half have pets.

Your property managers don't want inexpensive properties because there is no money in it for them. Their fees are usually a percentage of rent so would you rather manage 50 units at $800 per month or 50 units at $2,000 per month? I think the answer is clear. The easiest property to manage is a SFH in a neighborhood with good schools. Low turnover and is usually very hands off.

With regards to positive cash flow. I believe multi unit properties offer much greater cash flow per dollar invested. Good quality tenants take care of the property so most there are minimal repairs. My properties have been fixed up so there really aren't too many items needing to be repaired either. I have seen significant appreciation of rents and property values so I have earned equity as well as seen additional positive cash flow.

Proper management makes the tenants pay for damages so that also helps keep my expenses down.

Tenant selection is the most critical component of property management. You need to figure out the type of tenants you want to deal with and then purchase the properties they want to rent.