Making "low end" rental property work
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?
Not all "low cost" properties are low end. I have properties that rent for as little as $600 per month per unit, or $750 for a SFH. Just because a property doesn't cost that much doesn't mean you'll have problems if you screen right. I'm a member of the "$30k property" club.
I'm not a member of the "club", but I have a few houses where I'm all-in at around 30 or less. And most of these are doing well for me. The ones that are not are the ones that I didn't fix up very well.
On the other hand, I have some multies that are truly low end (or lower) and they are not doing well for me at all.
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.
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James,
Our properties all rent for under $1000/month. One currently vacant may get over that - base rent of $875, 3 pets at $25/mo each, plus rolling in water sewer garbage (a good idea in low income, since they leave you holding the bag at move out and the city doesn't care), but not sure that counts.
Anyway, we always laugh that we are doing all this work and only earning $15K/ year. It breaks our heart to do the same replacements over and over and over. It's not worth it. But on the plus side, it is kind of our entertainment and it saves us money since we have something else to occupy our free time and shopping desires. We have way more interesting stories when we hang out with friends.
Also, our net worth is increasing faster than it could with the conservative "pay off all debt and save" model. And once the mortgages are paid off, we will have something to show for all this headache.
Originally posted by @James Sinclair:
I don't see how $100.00/month free cash flow is worth the head aches? So how do you make it work?
By not buying property that only gives you $100 a month. Seriously I wouldn't even get out of bed and most likely lose sleep when the new month approaches hoping that rents come in timely. Mine are around $200-300 a door if not more on some other properties.
The key is to make your "low-end" property appeal to responsible renters and to screen out the ones who are likely to leave you with unpaid rent, damages and drama. There are plenty of responsible renters who need affordable housing. Do what you can to find them. Do what you can to attract them. Then do what you can to keep them. Low turnover will save you money.
Do the numbers to get good cash flow. Keep enough in reserves. Have a well written lease/rental agreement and enforce it. Keep up on maintenance and repairs. Protect your interests with the right kind of insurance. Budget sufficient time to attend to your business. Keep eyes on the ground... either yours or that of a good PM. Act quickly if things start to go south.
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#2 All Forums Contributor
- Real Estate Broker
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James I bet you would have more fun being the bank, than being the landlord. cash flow is much better let some of these young guys and gals that want to build up their portfolios deal with the 3 T's while you cash your check.
Most of the Investors I work with now a days would much prefer to be the bank than own the asset.. But hey we need those that want to own the asset so we can make loans to them...
find yourself a rising star in your market check them out carefully try some short term deals with them.. and see how you do.
I prefer 30K or less because the cash flow works and I'm providing a nice home. Affordable homes is my "niche product" In my market area most working class are in the $1800-$2400 monthly income. Although they can't afford $1000 month, they want a nice home. I could live in any of my properties and feel quite comfortable.."Investing in People", my mantra....so far the great tenants outweigh the bad. I offer home ownership to those interested as well.....Find your niche...It's different for everyone, but it can work...
Most of our properties would be considered low end. We paid all cash, rehabbed and all are currently rented all SFH. The rents range from $750 - $900 ( 2,3 & 4) per month free and clear since we have no mortgage.
How I make it work, it to screen the tenants, verify the information, inspections (vary from quarterly to twice a year) and I stay on top of my paperwork and have a pretty good rapport with my tenants. However my rapport with the tenants will not prevent an eviction but if they fall on hard times they will call and speak with me about it and based on their payment history with me is how I determine how I will handle the issue that they are having.
The key for success on those properties is to spend 3k-5k extra and make them better than the competition...
I agree that there is always a good responsible tenant on a tight budget out there that can make your investment very profitable (I have few of them that work wonderfully) ... However they are a small percentage of all applicants... So the key is to have your property nicer than others and target those tenants.. In order to be nicer I suggest:
- show property extremely clean, yard grass cut well, bushes/trees trimmed ($400)
- good paint job ($1000)
- scratch and dent stainless steel appliances (they are a wow factor) ($600)
- living area no carpet... Put allure (see Home Depot web site)... Looks great ($1500)
- tile bathrooms ($800)
- resurface kitchen cabinets if need be (0-$1500)
- put simply safe alarm system ($300)
- sometimes I even spend an extra $2000 to put granite countertop... Completely off the chart for the neighborhood
Now your property cost 35k instead of 30k, but you will get ten times more applicants ... And in the mass of applications you can be picky and find a person with good credit/low income that will be responsible and hardworking ...
That is the very best
Also if the area gentrifies, you have all upgrades in place to attract higher renters
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Originally posted by @Paolo Ruggieri:
The key for success on those properties is to spend 3k-5k extra and make them better than the competition...
I agree that there is always a good responsible tenant on a tight budget out there that can make your investment very profitable (I have few of them that work wonderfully) ... However they are a small percentage of all applicants... So the key is to have your property nicer than others and target those tenants.. In order to be nicer I suggest:
- show property extremely clean, yard grass cut well, bushes/trees trimmed ($400)
- good paint job ($1000)
- scratch and dent stainless steel appliances (they are a wow factor) ($600)
- living area no carpet... Put allure (see Home Depot web site)... Looks great ($1500)
- tile bathrooms ($800)
- resurface kitchen cabinets if need be (0-$1500)
- put simply safe alarm system ($300)
- sometimes I even spend an extra $2000 to put granite countertop... Completely off the chart for the neighborhood
Now your property cost 35k instead of 30k, but you will get ten times more applicants ... And in the mass of applications you can be picky and find a person with good credit/low income that will be responsible and hardworking ...
That is the very best
Also if the area gentrifies, you have all upgrades in place to attract higher renters
For me I'm against low end but that's me. What I look at is the market rents are rising. For low end folks the economy does not support higher rents. I just feel longevity in the types of deals are not there for the long run.
I sit and watch local folks selling these low end deals because the numbers( entry point for newbies and they t know any better). To me owning lower end deals are strictly that a numbers game. You need a lot of them to make things work. A lot of heavy lifting with these types of deals
Ask most not all the long term investors they tend to shy away from these deals and segment of the market( most not all ).Then look at most of the hedge funds that came in and purchased turnkey. Not one fund shopped in the lower end market for turnkey. That should speak volume to folks.
Alex
James, there is great advice here already. To sum it up
- Make your property a cut above the (clean, curb appeal, good repair, stylish)
- Screen your tenants well using written rental criteria you stick too
- Keep tenants happy so they'll stay by offering reward for paying rent on time, being responsive when repairs need done
Doing so creates less headaches and puts more money in your pocket!
Good luck!
Man, I always get sucked into zombie posts. James may not even be alive anymore (though I hope he is, unless he wasn't a good guy to begin with, then maybe not :D). I gotta remember to start checking these dates...
@JD Martin, I also reply to many posts from my key word alert system and do not check the dates. Since people read these posts who are not the original poster answering them still provides guidance to others.
On that note I do not have any rentals anywhere near $1,000 per month, and not many make me more than $100 per month. Part of that is because I use 15 year notes for the most part since I want to pay them down fast. You are limited by your local market conditions. Texas may have thousands of rentals in one city that are over $1,000 but my area probably has less than 20 of them in the entire town. I would love to make $300 or more per unit but that is not possible. You can invest out of state, and I have 5 out of state rentals at this time, but cash flow on them when you consider all factors has ended up being no better than I am doing locally, and I still maintain control. On the other hand I don't have any $30K properties locally, about $45K is the bottom and they go up pretty quickly from there. It is hard to beat the 1% rule here, and the higher the value of the property the harder it is to make a profit. You really cannot rent properties here with an acquisition cost of over $80K on a SFR because you cannot get enough rent to cover expenses. I have 2 properties that I bought for $100K or more and I lose $200 per month on them or more. I bought them for no money down and consider the negative cash flow my down payment being made over time. After 5 years I try to refinance them to get rid of the negative cash flow. Using 15 year amortizations allows you to pay them down rapidly. As long as properties break even after figuring all expenses on a 15 year payoff I consider them a good investment.
Hey everyone,
Despite this being an old thread, I found it very useful. Thanks for replying, even if the reply was done to a 'zombie thread' after some time of it being dead.As a newbie, it's super helpful to use the search function and go back troll through the archives to find valuable information like this buried deep.
Thanks again.