According to Andrew Carnegie, “ninety percent of all millionaires became so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”
While this quote is decades old, it’s still true today. And while you can make money from wholesaling or house flipping, it’s only a short-term profit. It can, however, be a great tool for getting the money you need to build a long-term portfolio of rental properties.
With multiple rental properties (each one generating positive cash flow), you can fund your retirement without having to worry about all the economic factors that can affect the value of stocks and bonds. And it’s never too late to start!
If you’re young, you can save up for a down payment so you can buy your first rental property. And from there, you can grow your real estate portfolio over time. If you have five to ten years before you reach retirement age, you can convert any of your low-yield investments into real estate so you can increase your monthly retirement income. You can even do it if you’re past retirement age.
Important Factors of a Real Estate Property Investment
Here are the factors you should consider as you look at residential rental property investments (whether they’re single-family homes or condominiums):
- Location – Real estate is all about location. You wouldn’t want to rent a home in the middle of a supermarket parking lot, but you might look for one that’s near a green belt or park because it could be a great place to spend time with your kids.
- Rentability – Location is part of this factor, but there’s one caveat. If it’s in a great location but has stiff competition, it may not be a great investment. If there are many renters in the area and owners are giving them incentives, it might not be the right time to get into that market. If there’s a smaller pool of rentals available, you will not only have a better chance of keeping the property occupied but can also charge higher rents.
- Expenses – This factor is somewhat relative because while property taxes can add a significant amount of cost, some areas are higher than others. This could be because the area has more amenities, which can also drive-up rental revenue. So, if you can offset these expenses with monthly cash flow, then it’s a positive.
- Appreciation – While cash flow is a major consideration, appreciation is important as well because the properties you own should increase in value over time. There are two ways that you can build equity on a rental property: appreciation in value and paying down the mortgage. If you leverage your investments intelligently, you can use the equity on the properties you already own to grow your portfolio.
You may think that every one of these factors needs to be perfect before you decide to buy a rental property, but it’s rare for that to be the case. You should, however, try to maximize each of these factors as much as you can. And sometimes, one can be more important than all the others.
The Process of Locating and Acquiring a Rental Property
Once you have enough money for a down payment and are ready to buy your first rental property, you want to make an informed decision. Here are the steps you should follow throughout the location and acquisition process for a rental property:
- Know your market area – Take the time to do a complete analysis of your market area. You may be looking in a specific neighborhood or area, but you want to expand your research so you can have the information you need to compare possible properties. Learn about what’s selling well in your price range, and do some research at the courthouse for areas where homes are selling for cash. Investors are the normal cash buyers, so doing this can help you to determine which areas experienced investors are buying into.
- Learn how to value properties – Learn how real estate agents do a Comparative Market Analysis (CMA), because the first thing that real estate investors will tell you is to buy below market value. This will lock in a profit right at the closing table. It also makes it easier to generate an acceptable cash flow when mortgage payments are lower.
- Analyze your competition – Look at local media sources (both print and online), so you can see where rental properties are being advertised. And when you’re researching a neighborhood, determine the average rental amounts for the kind of properties you’re thinking about buying. How many are available? Are owners offering incentives? And how much rental income can you expect to generate on each property?
- Nail down your expenses – This can include all the normal ones (such as budgeted repairs), but it can also include real estate taxes and insurance that will apply to every property you purchase in a specific area. Making a mistake in this part of the process can be just as bad as getting locked into a below-market rental for a year, because you would be throwing away profit. The condition of the properties you’re considering is a separate thing, but you still want to budget for any repairs that you know will be coming if you buy an older property.
- Find the bargains and negotiate a deal – This process is critical to your long-term success as a real estate investor because if you’re paying retail for the life of the ownership period, you’re losing profits.
These are all the pieces of the process, and all of these steps will help you get the most out of your rental properties.
Finding Purchase Deals for Your Rental Real Estate Portfolio
Everyone knows about foreclosures and the great deals that can sometimes be found, but the days of massive foreclosures are over. Many of the foreclosed properties you’ll find today will be in bad condition, with some of them being vacant for a year or more. But it doesn’t mean you shouldn’t be looking for foreclosures on sites like RealtyTrac.com. They’re still out there, so you might be able to find one that’s in rentable condition.
Here are some other ways you might be able to purchase deals for your rental real estate portfolio:
- Owners in distress – Look at the media and other online sources for owners who are in distress. These are people who need to sell their homes quickly, because they’re going through some kind of financial hardship. They may have medical expenses, been laid off at work, or they may need to move quickly because they got a job at another location. This can give you an opportunity to buy a home below market value. Do keyword searches on Craigslist for listing with phrases like “must sell” or “taking all offers.”
- Pre-foreclosures – These properties are opportunities for investors, because they can pick up properties before they go into foreclosure. RealtyTrac.com and other sites have sections just for these types of listings.
- Working with good wholesalers and fix-flip investors – Experienced real estate wholesalers can be great sources for finding rental homes. If they have a good understanding about their role in selling to rental property investors, they know you want to buy below the current market value and that the properties should be ready to rent. Fix-and-flip investors also sell to a lot of rental property buyers, so they will know what you want and can help you find properties that are ready to rent.
Once you have found your niche and have honed your skills, you just have to keep doing the same thing over and over – all while adding more properties to your rental portfolio. As you pay down mortgages, you may want to leverage it with the equity you have built. But you want to do it carefully so you don’t overextend yourself.
Many real estate investors went under during the 2007 market crash because they were over-leveraged and couldn’t get enough rental income to keep making mortgage payments. Like every investment real estate has risk and should be carefully evaluated especially when you bring debt into the equation. But with that being said, real estate which cash flows should have a place in everyone’s retirement plan!