How/where to start owning rental properties?

Question

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 · Answer

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 timeHas a credit history with which you can evaluate the likelihood that they will performPays all the rent on scheduleTakes care of the propertyDoes not cause problems with neighborsDoes not engage in illegal activities while on the propertyStays 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 costType: 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.

Basit Siddiqi · Answer

@Mark AdkinsLook to invest in an area where you feel like you have a 'competitive advantage' over those who are investing sight unseen.This can be various different locations1) An area that you grew up in2) An area that you went to college3) An area that you currently live in4) An area where family livesBest of luck

Sherief Elbassuoni · Answer

@Mark Adkins, to make numbers make sense in the greater Seattle area, we need to be a little more creative. For example, finish a basement, get an ADU permit, rent by the room, ...Renting the whole house to one family typically will net you the cash flow you want

Brendon Pishny · Answer

@Mark Adkins I would try to find a suburb or area nearby that makes sense. Every part of the country has an area people are investing. If you live in Seattle and are thinking of investing in Florida that seems like a long way away. If you’re just starting out that feels like a good chance to fail. Look at all aspects of rentals. Cash flow, depreciation, appreciation and loan pay down to find an area that will get you to your goal. First thing is find a local meetup. Other local investors can help you more than anybody else. Welcome and best of luck!

Guy Gimenez · Answer

The only thing I would add to the other responses is this. When buying rentals, know which states are landlord friendly and which states are more tenant friendly. This becomes very important when investing in an asset that is not moveable.

Luciano A. · Answer

@Mark AdkinsWelcome to BP. I think you got some great pointers on here thus far. I remember back in 2006 I started buying in Houston before Texas was the market to be in. In 2008 I moved here and started buying long-term holds as well as flips. I agree long term hold will not get you out of your 9-5 overnight but as others said, better to start now. You won't have all the answers but a good agent, a good inspector will go a long way. You don't have to have a property to learn. Just make every day count by investing time to listening to podcasts, reading books, each realtor until you find places you either know people in or become interested.I would not follow the herd. Don't go where everyone else is going to buy rental. Find a city that is near other major cities that might have cheaper houses to take on but rents are not low. As in anything in life, if you want to be good at it you need to invest time in education and keep learning. Won't be overnight but take action because before you know it, it will be another year past.Best of Luck

Cody L. · Answer

Step 1: Buy a houseStep 2: Find a renterStep 3: ProfitIt's a little more complex than that, but not by much.

Chris Pasternak · Answer

Your income is your number 1 wealth building tool. What makes you want to quit your job? What kind of work do you do? Degree? How can you increase your income with the skills and knowledge you already have? How much debt do you have? What kind of insurance are you carrying and is it enough? Notice I haven't even mentioned real estate yet...

Aigo Pyles · Answer

Welcome to BP community!

Mark Adkins · Answer

Thank you Eric and Brendon!I appreciate your perspectives/guidance; very helpful.Fyi, the thing I’ve always found puzzling is how some markets can have rent that is so expensive in relation to a monthly mortgage payment. Pensacola, FL would seem to be such a place, while Seattle absolutely is not. I’m thinking there must be risk that I’m not grasping. Low anticipated price appreciation or higher than average vacancy rates perhaps.Thanks