I want to deploy my capital in an efficient and diversified manner. I read Afford Anything and No Nonsense Landlord I feel like I am missing out by moving some investments to real estate. I didn’t say a rental property, but that would be the most likely scenario. I don’t think the flipping houses phenomenon is a reality in my locale (but it is possible I guess).
I have thought about adding a rental unit for a while now, but I keep putting it off for some reason. As we head into summer, I am thinking about at least doing a cursory search to see if I can find something that will fit the bill. I like the idea of getting some free cash flow each month from a rental unit and, hopefully, seeing the property appreciate over time as well. It would be important to set up an additional bank account to keep the funds separate for repairs/maintenance, taxes, and insurance. I tend to keep very little assets in cash, so I don’t want to co-mingle the funds and not be prepared for something that needs to be handled quickly.
I am fairly handy around the house. I am not great with electrical, but can replace switches, fans, etc. without a problem. I can fix drywall, trim, and paint issues (as I hope most people could) and make it look like it was done right. I am okay with plumbing, but have some things to learn there as well. I also have most of the tools I would need to get minor repairs done. After repairing my own washer recently, I am feeling like I could learn more and take on some additional things. Of course I also think I would have the smarts to call in a professional when I feel like I am in over my head.
I should also mention that I while I have not ever bought a property for rental or investment purposes, I have purchased two foreclosures for my main residence. The first one was in Kansas City and I made improvements over about two years before I sold it and moved to California. That included things like flooring, painting, updated kitchen, considerable landscape improvements, and some other small repairs and upgrades. That property was sold at a profit despite it being 2010 and the real estate market was down.
My current residence was also a foreclosure. I have not spent very much time on the inside (yet), but turned a dirt backyard into a pretty nicely landscaped space. As I mentioned in my last post, flooring is on the horizon as is interior painting and a bathroom remodel due to a leaky shower pan. I might even attempt to follow Mr. Money Mustache’s concrete shower pan advice when I replace the plastic shower with a tiled one.
- Do I have the time to be a landlord?
- Do I have the knowledge to handle repairs and maintenance?
- Do I have the cash flow to support an empty unit for an extended period of time?
- Do I have the cash for a down payment and the ability to get a loan?
- Do I have the cash for an needed repairs and renovations?
- Is my financial model sufficient to review the risks/rewards and does it consider all of the potential costs?
I have thought through most of the questions above over the last year or two. I am comfortable with the cash flow piece and my model, but am most leery about working with a property management company and finding a good handyman that will do timely and quality work at a reasonable price.
I know there are other considerations, which is partially why I am writing this post. I want to see where my gaps are at currently. I could have gone out and researched a bunch of things and wrote this like a guide, but I preferred to document where I am at in the process and how I am approaching this potential change in our financial life.
Steps to Finding a Property (Simplified)
I think the first step is evaluating the potential properties in the area considering both what I can afford and the type of unit (single family, duplex, etc.). At this point, I would probably look for a single family home or maybe a duplex. I really want to avoid anything with a pool or other features that would increase my ongoing costs. I would start my search with foreclosures and short sales.
Maybe I should back up and find a real estate agent to aid me in this quest. I need someone that can help me measure the market and identify potential properties. There are some deals out there that you can’t just stumble upon on the internet (hard to believe right?).
So now that takes us to the third step. Building a model based on a property that looks promising. I don’t want to overpay for a ready to go place, so I would look for a property that has a distressed look, but is not necessarily distressed. By that I mean it needs cosmetic work, but the bones are good. Painting, flooring, fixtures, etc. are easy items that can make the place look very appealing to a renter. Having to replace the HVAC, do major roof repairs, replace lots of windows, etc. are much more expensive and time consuming to deal with in getting it ready to rent. I am not saying I would rule out a place that needed more work, I would just want a much better purchase price! I think it’s a risk versus reward scenario. The more you are willing to take on, the better the return could be for you.
Assuming I find a place and lock in a deal, that’s when the real work starts. It is crucial to get a timeline in place to coordinate all the things that need to get done, so that it can get rented in a timely manner. Repairs, cleaning, landscaping, etc. all need to happen quickly. I don’t want an empty house sitting there too long (not making money and break in target). At some point I need to find a property management company as well. The 10% fee is something that I would build in to my model. Maybe down the line I would handle it myself, but right now I need to outsource that piece of the puzzle.
My Simple Rental Model
Below is a screenshot of my model. It is just the summary page, but it gives the high level information. This is based on a fictional scenario of $1,000 rent and about $90,000 total investment ($64k loan, $16k down, and $10k cash renovation). The vacancy allowance is set at 8% (one month empty each year). Monthly expenses include property management, pest control, and a 1% repairs and maintenance reserve. Taxes and insurance are also included in the expenses line item as well.
Well, I think that is my scatterbrained plan so far. I need to do more research and also talk to a friend that has several rentals in the area for some guidance as well. Having some knowledge about the rental market in the area will be invaluable to me.
Another option would be to just invest in some REITs like Jason from Dividend Mantra has in his freedom fund portfolio. That is probably a better plan for a real estate newbie like me.
Any advice for me? What other things should I consider?