How/where to start owning rental properties?

[Mark Adkins]

Hello, 

I’m aching to ditch 9-5 and diversify away from the stock market.  I’d like to acquire some rental properties but don’t know how/where.  I read this article which suggests seeking high rent to price ratios on a map as a starting point.  I’m in the Seattle area and notice areas in FL appear to have more favorable ratios, but I’m not familiar with the area.  Could there be a downside to this approach?  My in-laws have done well in the Seattle area by simply renting out their homes when they buy a new home to live in.  Is there a single comprehensive book/resource which could be a good bible to learn from/study?

https://www.biggerpockets.com/...

Thanks/best,

Mark

[Eric Fernwood]

Hello Mark,

Real estate is the common person's path to financial independence. And, there is a safe and straightforward way to achieve financial independence, but it is not easy. There are five steps:

Goals

Define your goals. Your goals do not need to be anything detailed or complex, but your goals must contain at least the following three elements:

• Starting Point - How much capital and credit do you have or expect to have in a reasonable time frame? Unless you plan to pay cash for your properties, get pre-qualified for an investor loan, so you will know what you have to work with.
• End Goal - This is usually something like $10,000/Mo. income, in present value dollars.
• Time Frame - The shorter your time frame, the more initial capital and credit you will need.

Location

Location is the most important decision you will make, not the property. Why is location so important? Because you are looking for a long-term reliable income stream and that means that your rental income must keep pace or exceed the inflation rate. There are other location selection criteria, but price and rent growth is number one.

• Rent and Price Growth Rate - Inflation is constantly eroding buying power; each year, it costs more to buy the same set of goods and services. If you buy in a location where prices and rents rise faster than the inflation rate, your buying power will increase due to the increased rents. If you buy in a location where prices and rents are increasing below the inflation rate, your only option will be to decrease your standard of living over time. Also, do not rely on the rapid increases resulting from COVID; these increases are not sustainable. Evaluate locations based on the ten years preceding the COVID times compared to the current inflation rate (>5%).
• Population Size - Greater than 1 million. Small towns rely too much on a single business or market segment.
• Population Growth - If people are moving into a location, many things have to be right, including jobs and the cost of doing business. Do not invest in any location where the population is stagnant or declining.
• Crime - People and companies will not move to locations perceived as dangerous. One source of cities to avoid is Neighborhood Scout's 100 most dangerous cities.
• Disaster Risk - Some parts of the country suffer frequent natural disasters. The best indicator for natural disaster probability is the cost of homeowners insurance. Avoid states with high insurance rates. Note, even if insurance pays for all the damage your property suffers, you still lose. When a significant disaster occurs, businesses are destroyed so people and jobs move to locations where they can make money today. The location may take years to recover, or it may never recover. ValuePenguin is a good source for the relative cost of insurance by state.

If you select a location that meets all of the above goals, you have a good investment location.

Investment Team

If you needed surgery, you would not start medical school. Also, not just any doctor will do. You want a surgeon that specializes in the kind of surgery you need, not a general practitioner. The same is true with real estate investing. You want to work with an investment team that already has the skills and a proven track record of finding, qualifying, renovating, and managing properties. A good investment team will minimize your risk and save you time and money. If you try to do everything yourself, it will cost you more, and the odds of success are much lower. The place to start is with an investment Realtor, not an investment "friendly" realtor. Below are the skills and experience an investment Realtor and their team members provide.

Finding an Investment Realtor may not be easy. Even in a large metro area, there is likely only one or at most two investment Realtors. To build a list of candidates, talk to property managers, cruise real estate investing sites, seek out local investors, etc. Once you have a list, follow the diagram below to determine if they have the skills and experience you need. Start at the top and ask each question, noting their answers. If they are unable to provide a satisfactory answer to any question, go to the next candidate.

If a candidate passes all of the above, you can be assured they know what they are doing.

Tenant Pool

The only way to consistently make money is to keep the property occupied by what I call a "good" tenant. A good tenant is someone who:

• Has stable employment in a market segment that is very likely to be stable or improve over time
• Has a credit history with which you can evaluate the likelihood that they will perform
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

The right tenant pool is so important that I would interview multiple local property managers to validate the tenant pool selection. You will only want to buy properties that attract the tenant pool you want. Let me know if you would like more information about selecting the right tenant pool. I cannot stress enough the importance of targeting the right tenant pool.

Property

Only buy properties that your tenant pool is willing and able to rent. The property selection is based on the target tenant pool. See the image below.

The minimum property selection criteria:

• Reasonable maintenance cost
• Type: Condo, high rise, single-family, multi-family, etc.
• Price Range - You must be able to profitability rent the property within the target tenant pool's rent range.
• Location - Where the target tenant pool wants to live.
• Configuration: For example, >2,000SF, two bedrooms, three-car garage, large back yard, single-story, two stories, etc.
• Wants - Tenant pool specific property features. You largely implement tenant pool specific "wants" through renovation. For example, bars on the first-floor windows might be very important for one tenant pool. For another tenant pool, it might be granite kitchen counters.

In Conclusion

With sufficient initial cash and credit and following the above steps, your odds of achieving financial independence are very high.