Investing 101 – Getting started Part II
We left off last time discussing personal criteria for a rental home. I was just on the phone today with a good friend of mine who lives out of town and owns a dozen or so rentals in his town. We were talking about the similarities and differences in the houses we own and manage. We are the same age and grew up in the same area. We have the same hobbies, same friends and are both self-employed. We also got into real estate investing about the same time and constantly borrow information from each other. As much as we have in common, we have different policies when it comes to buying rental homes.
David buys anything that is cheap, to put it best. Nearly 100% of his purchases are foreclosures. He likes to know that he is getting a great “deal” when he buys. He doesn’t care much about the house as long as the structure is firm and there are no material defects. The cheaper the house, the better. He will throw out five or six low offers and hope that one works. There is nothing wrong with his system. It works well for him. He knows how to fix up a house and make it marketable for renters. His only problem is that the foreclosure market is drying up and what is left is fought for by cash investors from all over the country, leaving no room for his lowball offers. But, that is his system and he is comfortable using it.
I have a different approach. I like cash flow. It’s the name of the game for me. My goal is to retire young and this is my ticket to do that. I also don’t like the day-to-day problems that a lot of investors have, such as constant maintenance problems and delinquent tenants. I want to collect rent and never hear from the tenants, unless it’s to renew a lease. I don’t want the never-ending maintenance calls. I want a life without frustration. I want consistent income without asking for it or essentially doing anything for it. This is where my system comes in.
The price of a house isn’t that big of a deal to me. If I buy it at market value then that’s fine. I’m good as long as the cash flow is there. I have homes that I bought from $12,000 to $210,000. The ongoing theme is that I get good cash flow from my properties. Personally, I have found that the best return I get is for properties that I purchased in the $90k – 110k range. The tenants tend to be well-qualified and the rent is much more than the monthly payment, including taxes and insurance. By the way, I have bought some underpriced foreclosures. I am definitely not opposed to it. I just don’t live and die by that principle.
My criteria for an investment property is simple. It must have good structure and be well-built.I will only buy an investment that is on a slab foundation. I don’t care for freezing pipes and the possibility of ruining a floor with a water leak. A slab house will protect from both of these. Foundation repairs are expensive and they will come sooner or later if the house is built on a crawl space. I also want a good roofthat will last at least 5-10 years from the time of purchase.
If the house meets those 2 requirements, anything goes for the interior. I normally replace all flooring and paint everything in the house. I have a certain paint that I use for every house. That way I don’t have to keep up with a hundred different paint schemes. I replace every minor thing in the house that will be a headache down the road, including electrical outlets and switches and washers for the faucets. I also replace the inside parts in the toilet tanks. These are cheap upgrades and will prevent the phone from ringing when they go out a month or two into the lease.
As for the location, I am all for diversification.I have homes on the Section 8 program that we’ve all heard about. I also have homes that are in the best school districts and rent for $1,300. I balance it out, just like a financial advisor would tell you to do with your portfolio. “Don’t put all your eggs in one basket” is what they say. I have rental houses in four counties over two states. Rentals can work anywhere. It’s more about the infrequent headaches and positive cash flow for me.
There is no one single formula for investing. What works for one may not work for another. But if you go swinging blindly then it is going to be a long, tough road. I remember one thing from my Strategic Management class in graduate school. The teacher taught us over and over, “planning is everything, the plan is nothing.” Create a firm plan. It won’t go exactly the way you imagine, but it will make all the difference in the world.
If you want more info on the specific formula I use for my personal investing, email me and I will be glad to go into more detail. I hope you find something here useful.
My time’s up, I thank you for yours. – JD