11 Fundamental Tips for Successfully Investing in Rental Properties

16

Investing in rental properties is an awesome way to grow wealth, generate extra income, change your career path and even enhance your community. I started investing in rental properties over a dozen years ago and have not looked back since. These rental properties have allowed me to do all of the items mentioned above and more, but my experience has not always been smooth sailing. I have had a few speed bumps along the way and thus learned a few key rental property investing tips that I want to share with you in this post.

Download Your FREE Rental Application Form!

It may seem like a small thing, but having a solid rental application is the first step in finding great tenants. Since BiggerPockets is all about helping you succeed in real estate investing, we’ve put together a complimentary Rental Application for you to use. Download it today and go find some great tenants!

Click Here For Your Free Rental Application

11 Fundamental Tips for Successfully Investing in Rental Properties

Buy Close to Home

One of the most valuable things in life is your time. Do not underestimate how valuable your time is. With that in mind, I suggest buying close to home. Not necessarily next door, but not an hour away either. Doing so will save you tons of time, especially if you are managing the properties yourself. If a property is an hour away from you, that is two hours just to get there and back. Remember, your time is very valuable. Learn to conserve it.

Keep Properties Clustered

This tip also focuses on saving your time. Do you want to be driving all over your city to show or maintain your properties? Would it not be easier if they were clustered in one or two neighborhoods?

Don’t Buy Somewhere You Are Afraid to Visit

Seems rather obvious, but the cash flow numbers can look really appealing in rougher neighborhoods. Why? Because of two words: increased risk. Risk to your property and risk to you. If you can handle the risk, go for it. If not, think twice before buying.

Save for Expenses

Stuff breaks. It breaks all the time. And if you don’t repair it, you and your property can quickly fall into a downward spiral. You simply have to keep some money set aside for repairs.

Related: What Kind of Property Makes the Best Rental?

Remember: Cash Flow is King

The rental property business is all about cash flow. If a potential deal does not cash flow, do NOT buy it. You do not want to be in the situation where you have to write a check every month rather than cashing one. Cash flow is king. That said…

Don’t Bet on Appreciation

Some think they can forgo the cash flow because they will be able to sell the property later for a profit. And while that can happen in red hot markets, markets are tricky and fickle. You are making a bet that you can time things perfectly. It can happen, and if it happens to you, great. Do not forget the crash of 2007 and 2008.

Write Down Your Rental Policies

Do this before you get started. What is your rent going to be? What will your income requirements be? What about past criminal offenses or evictions? How about pets? Smoking? The thing is, if you are wishy-washy about these criteria, you can be accused of discrimination and potentially fined. Determine your rental criteria now, write them down and stick to them.

Know the Law

First, know that Federal Law states that you cannot discriminate based upon the seven protected classes, including race, religion, color, creed, sex, familial status and national origin. Turn someone away because there are “too many” kids, and you might be in big trouble.

Plus, there are a myriad of state and local laws that spell out the eviction process, how much rent or late fees you can charge or add additional protected classes. Seems like a lot to cover and it is, but running afoul of any of these laws can be a hard lesson to learn.

Get Your Lease Reviewed

The lease is your most important document in this business. It is the contract between you and your tenant that spells out the numerous details related to renting out your property. Should you trust some boiler plate document you bought at Office Max? No, you should not. Find an experienced real estate attorney in your area and have him or her review your lease. The few hundred bucks this will cost will be money well spent.

Related: The Easy, 3-Step Process to Decide: “Should I Buy This Rental?”

Start Small

Please do not go out and buy a 30-unit building as your first purchase. If you do, you are most likely setting yourself up to fail. Managing rental properties can be a tough business, and I suggest you start small, get a feel for the business and then build your way up.

Think of Your Exit Strategy

One day you will likely be ready to sell these properties and move on. Who will you sell them to? Most likely to another investor. What will that investor be looking for? The same thing you were looking for — a cash flowing deal. Be sure you think about that now when you buy, rather than later when you are trying to sell.

These 11 key tips are a lot to think about and digest, but one should not blindly march forward into the real estate investing arena. The more you do on the front end, the more successful you will be on the back end.

Landlords: What other key tips do you have?

Please share with your comments.

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

16 Comments

    • Kevin Perk

      John,

      I understand where you are coming from.

      Perhaps you can move a bit farther out where there is a bit more value.

      If you do look farther away, plan and look for a quality management company as you time is quite valuable.

      Thanks for reading and commenting,

      Kevin

  1. don alberts

    Kevin, thanks for your input and expertise.If you have any properties in the Chicagoland area or suburbs please let me know. Also if your looking for anything please allow me to help you. Thanks Don

    Have a wonderful day.

  2. Thomas Hubbard

    Good post Kevin. Thanks for the tips. I need to dig deeper into learning all the landlord/tenant laws in Texas. I got my lease from a friend who’s a realtor with Keller Williams. I think that should be sufficient but would you still recommend having an attorney review? Thanks again

    • Kevin Perk

      Thomas,

      Please do become familiar with your local laws and yes I would have another set of eyes look at it. I put together a lease here in Memphis from many different landlords I know around here and then had an attorney look it over and he still came up with a couple of valuable suggestions.

      Thanks for reading and for the kind words,

      Kevin

  3. Hi Kevin- Good thoughts to have before going into the buy and hold business. Not a get rich quick process!

    I will add that when calculating cash flow and costs, you include the higher premiums of “commercial” insurance, ie. one that is not owner occupied. That premium can more than double. Also, part of my lease states that the tenant has paid his premium for renters’ insurance, incl liability. This is so important, as a trip and fall on the steps there would be paid out first from renter’s coverage, and only then from mine. It is not expensive, and my tenants see the benefit to them also.

    Finally, in my state of Florida, one can only homestead the primary residence- so the taxes on a rental have no cap, and here can go up as high as 10%/year- Keep those rising taxes in mind! Good luck, all!

    • Kevin Perk

      Maggie,

      Thanks for the tips.

      Same sort of things go one here. As an example, commercial properties are taxes at 20% of appraised value while residential properties are taxed at 25%. And that duplex you bought and rent out both sides, it is considered commercial. Know your local laws folks!

      Thanks again for reading and sharing,

      Kevin

  4. Wendy Black

    People usually suggest buying close to home, but we’re in AZ and have done well with our CA properties. Even though some of those that cash flow well are 12 hours away in NorCal and were left to us, we always have a hand in their management. The ones we bought in SoCal are 6 hours away and do fine.

    Personally, I don’t think it’s a proximity issue if they’re going to be managed. We won’t buy in an area in which we’re unfamiliar with the market. SoCal is like a second home, so we could “read” the market well.

  5. Great insight, Kevin! Everything about planning to invest on rental properties was discussed. I particularly liked the fact that you gave emphasis on the importance of rental policies and knowledge of the law. Those are some of the most important components of landlording that most people neglect.

    Jason

  6. These are some great tips, and I appreciate your advice to start small when first investing in rental property. I haven’t done this before, but my brother has gotten into it recently, and I’d like to try it out. I’ll definitely start with a smaller project so I can manage it and not get overwhelmed. Thanks for the great post!

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php