My husband and I recently decided that I would start investing and managing rental homes. We are in an area where major corporate headquarters are moving and also are experiencing major growth. We’ve avoided investing in rental homes for a long time due to not having enough time to research or manage rental homes.
Since I know little about rental properties or owning rental homes, one of my first moves was to call our financial advisor and hear what he had to say:
1. Rental Homes are a Long Term Investment – Owning rental properties will create cash flow, but most of your costs will be highest at the beginning. For example, right at the first, you will have closing costs and realtor fees. You will also likely be paying a mortgage and performing any maintenance the house needs. Finally, you might have to pay to check people’s backgrounds or get assistance finding tenants.
After you’ve owned the home for a long time, say 15 years, you may have paid down the mortgage. You may have long term renters and likely do not have to make frequent repairs. So big profits on rental homes aren’t going to happen at the beginning.
I am interested in starting this business because I want rental properties to pay for some items now and not only in the future. I’ll have to make wise decisions to ensure I can take out some cash now.
2. Seminars can be Suspect – If you are a newbie like me in the area of rental homes, you might be tempted to sign up for a two or three-day conference. Sadly, my financial advisor says that many just exist to make money or sell you products or more seminars.
Scott recently did a podcast review of a real estate seminar he just attended that tried to sell him more time at another seminar. So don’t start with a pricey sales pitch at a hotel. Start with the internet, your local library or amazon.com for books.
3. Check out Clark Howard’s Website – A trustworthy source for internet research is Clark Howard’s website. Clark Howard is an upstanding radio personality that gives good, free advice.
He has a Home and Real Estate Section of his website that you can also sort down to Renting and Leasing. There are free articles that might be a good place to start (especially when comparing to a seminar that might be a scam.)
4. Consider creating a Limited Partnership – Consider using a limited partnership as the rental business. Each home or group of homes can be held under a limited liability company (LLC) inside the Limited Partnership.
This legal framework makes it much simpler to protect your assets. For example, if you were to be sued over one of your homes, LLC’s limit the amount of assets you put at risk.
If someone sues you for an event at House A and House A is in a single LLC, the only assets that are at risk, are the ones in that single LLC. This keeps your personal money, home, and other assets safe from the lawsuit in almost all cases.
The overarching Limited Partnership allows you to easily track expenses, such as general costs of running the business, mileage, and other deductions for the overall business without having to divide the expenses over each rental home.
5. Be on the Lookout for Difference Makers – Be aware that certain factors can improve your rental property. For example, a great school district can mean you earn rents 30%-40% more than a property across the street that is in a poorer performing school zone.
Pay attention to upcoming improvements to the area – retail spaces, highways, new business areas when selecting your rental properties. A piece of real estate might be a great rental until you realize there will soon be a highway in the backyard, or a rental that is not so great might become better if a highway is built in that makes a commute faster.
6. The Rule of 1% – A rule of thumb my financial advisor passed on, that was from his father, is that if you can charge 1% of a home’s price for the rent, you are likely going to be “in the black” or making a profit on the house.
For example, if a house costs $150,000, but you can charge at least $1,500/month in rent, then you will be doing well for that rental property. If the house costs $150,000 but you can only charge $1,000/ month in rent, then it is likely a poor investment.
That is the summary of the six things I learned from my financial advisor when I had my exploratory call with him about getting into the rental home business. Good to know!
The next step for me will be a call to my attorney college friend to discuss getting a Limited Partnership set up.
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