Non-Negotiable Knowledge You Should Have BEFORE Buying Rental Properties
I’ve heard a few people say, “I want to buy and own rental properties. What background knowledge or experience do I need to have in order to do that?”
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Well, there is good news for you. The amount of background knowledge or experience you need to have to get into rental properties can be tailored to exactly how much you want to bother getting. There are ways to buy rental properties with minimal knowledge and experience required, and there are ways to buy rental properties where you would need quite a bit of knowledge and skill.
I’m going to break down the list of “must-haves” into two categories:
- Required knowledge for ALL rental properties
- Optional knowledge not required on all rental properties
There are certain things you need to know that pertain to any rental property you could possibly encounter. Those are the required bits of knowledge you need. Then there are rental properties with certain circumstances in which you would need those optional bits of knowledge. Get me?
OK, here we go.
Non-Negotiable Knowledge You Should Have Before Investing in a Rental Property
I put the word “should” in the title because I certainly can’t force you to have any or all of this knowledge before diving into a rental property, but I definitely think you should not consider going forward on a property without knowing at least something about these things.
You must know how to analyze the calculations involved with a rental property. Why? Because the whole point to owning a rental property is to make money, right? So make sure a property is actually projected to put cash in your pocket. For detailed information on calculating rental property numbers, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”
This pertains to both the general market you are buying in and the more specific areas or neighborhoods of that market. The reason this matters is because those fundamentals — the stability and trends of a market or neighborhood — could dramatically impact whether or not you ever see a profit from your property. I can give you a couple articles to check out that speaks more in detail to this: “How to Know if Any Given Real Estate Market is Wise to Invest In (With Real Life Examples!)” and “How Do Real Estate Markets Differ and Which Should You Buy In?”
Those should help get you started in understanding general market information, and then for specific neighborhoods you really want to be in touch with someone very local to that area, preferably a property manager or a real estate agent who deals with rentals on a regular basis, and ask them about things like rentability, any saturation problems, tenant pools, vacancy issues, etc.
Anytime you buy a property, you should plan to conduct a certain level of due diligence (DD) on that property before signing your life away to it. The minimum amount of DD I do on the most basic of rental properties involves confirming the property’s condition by hiring a certified property inspector to do a full assessment and verifying income and expense numbers, such as rental rates, property taxes, and insurance. Then you have basic things like reading through all of your contracts and working with your lender, but those two things — the inspection and the verification of numbers — are important ones.
Value of a Good Tenant
Whether you are the one finding tenants for your properties or you have a property manager finding tenants, I really encourage every rental property owner to at least be up on why a good tenant is the best thing that could ever happen to you. Knowing this will help you deal with your own tenants, or it will help you in monitoring what your property manager is doing.
For instance, I had a bad tenant recently in one of my properties, and even though my property manager handles the property, because I knew how risky a bad tenant is and how valuable a good tenant is, I was able to come up with a solution for the situation (and man, did it work out well!). Had I not understood how risky a bad tenant can be, I probably never would have had so much heat around this. So understand why a good tenant is valuable, but one way to know that is to know why bad tenants are the worst thing that can happen to you (hint: vacancies, evictions, repairs — they all get expensive).
No, not the property taxes; I mean your own taxes. One of the absolute best perks of owning a rental property is the tax benefits. Essentially, you can (and should) end up with tax-free income on your rental property. I highly encourage every rental property owner to work with an accountant who specializes in real estate in order to maximize the benefits owed to you through your property. If you don’t want to work with an accountant, this is an area you want to brush up on in a big way! I personally have no interest in knowing tax details so I pass it to an accountant. And don’t trust TurboTax for these benefits either. My TurboTax days ended when I bought rental properties.
If you are working with a very straight-forward rental property (like one that isn’t in shambles or in an area where guns rule the land), you probably know enough to know whether or not you are securing a decent rental property for investment.
Now, things aren’t always that straight-forward. The following bits of information that I encourage you to be familiar with are only an issue if they pertain to the particular property you are looking at. I would consider any property that involves any of these things to be a more “advanced” rental property, if you will.
Advanced Knowledge Helpful in Dealing with Rental Properties
Again, these things won’t pertain to all rental properties, so just focus on the ones that pertain to what you are looking to get into. Or use this list to encourage you to stay away from the more complicated (i.e. risky) properties if the idea of dealing with any of these things doesn’t jive quite right with you.
If a property you are looking at is not in rent-ready condition, be ready to start the rehab. Or maybe you are intentionally trying to get into fix and flips or the BRRRR method — things that have rehabbing as part of the gig. Rehabbing is totally fine, but if you are getting yourself into that, be sure you know what you are doing! Don’t go into it blind or make assumptions on the scope of work or budget.
If you are doing the work yourself, make sure you know how to do the work yourself. If you are hiring contractors for the work, make sure you know how to deal with contractors in a way to avoid getting completely demolished (man, what a great pun!). Never underestimate the complications that are possible with rehabbing. Know what you are in for.
I’d say most rental properties out there are probably landlorded by their owners, but I consider this to be an optional set of knowledge for you as an owner because you can always hire a property management company to do the landlording for you. Landlording, I would argue, is not for the faint of heart, and aside from the science of working directly with tenants (meaning working with other human beings which can always go haywire fast), you also have to work within the laws of your state in regard to tenants. So make sure you know the ins and outs of dealing with tenants, but also make sure you are very up on the laws you have to work within.
A dramatic example, but I know of property management companies in Compton, CA that specialize in Compton properties — specifically ones the owners themselves cannot go to for safety reasons, and these managers carry guns with them to tenant visits. Now, in no way am I saying that low-income rental properties all fall into that category, but I give that example to say that there are certain grades of properties that need special attention in some way or another.
Extremely cheap properties can be very profitable, but there really is a certain level of education you need to have in order to make that work. If you aren’t up on what comes with shady tenant pools, you may get eaten alive with tenant issues and vacancies and repairs and such. There are people who specialize in these types of rentals, so be sure you connect with them and learn the ins and outs of them before nonchalantly investing in some random $15,000 property! (Note: what would be considered a low-income rental will vary with every market. For example, a $100k property in Houston may be stellar and fantastic and safe, whereas a $100k property in Los Angeles may be the slum of the earth and only attract the local sharp shooters.)
There you go — the basic categories of information you should consider getting educated on before diving into any rental properties. Remember, there are rental properties out there that are so straight-forward and basic that you only need to know the necessities and you can get a property that works out well. Or you can get a property in shambles in Compton and have at it. And there are rental properties everywhere in between. So in digging through getting educated on these topics, really assess your interest level, skill level, and risk tolerance in deciding which type of property to get into. There will be a difference in returns between the different types of rental properties, but always consider the trade-off between returns and risk level.
All of your experienced investors — am I leaving anything out of the must-knows of rentals?
Leave your comments below!