Rental Property Strategy Advice?

[Mobiaz]

Newly thinking of investing in rental properties. I was wanting to buy a rental outright for approximately $300,000. Then immediately buy a second. I am figuring about $1,500 a month rent from each and I have about $5,000 per month to help pay down the mortgage on the second home. I figure I could have the second home paid off in about 3 years. From then I can buy a third rental which with the three rental incomes at approximately $1,500 each ($4,500) total I would have about $10,000 per month to pay off the third.

I would plan to just continue this trend until I have a reasonable amount of rentals that could grow on their own and then focus the $5,000.00 per month I was investing on top of the rentals elsewhere.

I am completely new to rentals and don't know what I don't know. I am just trying to educate myself and learn before I actually take the leap.

Thanks for any advice.

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[mvenus929]

You're assuming that the properties will be occupied each month and won't require any maintenance.

My mother currently has a rental property across the country and hasn't seen a full rent check in several months because there have been a number of repairs on the house, and the tenant is chronically late with rent payments. Trying to get someone evicted is also a long process, so if someone inhabits and doesn't pay the rent for a few months, it's not like you can kick them out immediately and then rent out the next day.

So my advice is to only purchase properties that you can afford to pay the mortgage and repairs and any funds for a management company on without getting a rental income.

 

[Mobiaz]

I have thought of that to some degree. I was planning on purchasing the first outright and using the first and the second to pay the mortgage for the second. Hopefully times where they are both unoccupied or unreliable renters in place would be limited. In the event that the mortgage wasn't covered from the revenue from the two rentals, I would just use the $5,000 I was per month I was putting to pay off the mortgage of the second rental to cover expenses until the rental revenue returns. Same for repairs or any other expenses. I was thinking that the $5,000 would be enough to cover any unexpected expenses, then the following month just continue to put it toward the mortgage.

Thus goes back to the question I posed before, what am I missing? Seems like it is a pretty safe way to get into rentals. However I know it won't be that simple. I was hoping if I portrayed my strategy correctly that I might get some insight from those who are better educated than I am what I am missing. Or if what i am proposing is a semi solid strategy.

 

[dpmd]

I suppose there are worse things you could do with 300k than buy a place to rent out, but if making a profit on it is your goal it isn't the safest or easiest way. But certainly better than overleveraging yourself. Maybe start with the one and see how much you like or hate being a landlord.

 

[finalpsychyear]

I suppose there are worse things you could do with 300k than buy a place to rent out, but if making a profit on it is your goal it isn't the safest or easiest way. But certainly better than overleveraging yourself. Maybe start with the one and see how much you like or hate being a landlord.

300k a month invested in index funds gets you about 18k (6% return) a year at a minimum without lifting a finger and easily more averaged over a 10-15 year block of time.

There are so many variables to real estate like will it always be rented, how about the maintenance costs and parts, are you going to do the repairs or hire it out then thats more expense, property taxes etc, then hassles with your place being rented but tenant can't or won't pay and refuses to leave then court costs.

Unless your at a place where you have invested so much in your portfolio and you have excess to diversify i guess you can try it. When i do explore this several years from now it will be from a crowd sourcing type of platform.

 

[Tee Cell]

Newly thinking of investing in rental properties. I was wanting to buy a rental outright for approximately $300,000. Then immediately buy a second. I am figuring about $1,500 a month rent from each and I have about $5,000 per month to help pay down the mortgage on the second home. I figure I could have the second home paid off in about 3 years. From then I can buy a third rental which with the three rental incomes at approximately $1,500 each ($4,500) total I would have about $10,000 per month to pay off the third.

I would plan to just continue this trend until I have a reasonable amount of rentals that could grow on their own and then focus the $5,000.00 per month I was investing on top of the rentals elsewhere.

I am completely new to rentals and don't know what I don't know. I am just trying to educate myself and learn before I actually take the leap.

Thanks for any advice.

Your rent should be about 1% of the purchase price if cash flow is your goal. Get a good idea of what the net income is minus expenses. So for a 300K house I would look for rents at 3000k to ensure you get positive cash flow each month. Biggerpockets is a great resource. I actually brought my first rental a few months ago but spent about 6 -8 months researching before jumping in.

 

[The White Coat Investor]

Newly thinking of investing in rental properties. I was wanting to buy a rental outright for approximately $300,000. Then immediately buy a second. I am figuring about $1,500 a month rent from each and I have about $5,000 per month to help pay down the mortgage on the second home. I figure I could have the second home paid off in about 3 years. From then I can buy a third rental which with the three rental incomes at approximately $1,500 each ($4,500) total I would have about $10,000 per month to pay off the third.

I would plan to just continue this trend until I have a reasonable amount of rentals that could grow on their own and then focus the $5,000.00 per month I was investing on top of the rentals elsewhere.

I am completely new to rentals and don't know what I don't know. I am just trying to educate myself and learn before I actually take the leap.

Thanks for any advice.

A decent $300K rental should pay $3000/month in rent, leaving you something like $1600 after your non-mortgage expenses. A mortgage could eat up all or more of that $1600, depending on terms and how much you put down.

This is a viable path to wealth, but landlording is another career, different from doctoring. Best to learn at least some of it from the books before your start "practicing."

 

[finalpsychyear]

A decent $300K rental should pay $3000/month in rent, leaving you something like $1600 after your non-mortgage expenses. A mortgage could eat up all or more of that $1600, depending on terms and how much you put down.

This is a viable path to wealth, but landlording is another career, different from doctoring. Best to learn at least some of it from the books before your start "practicing."

Most doctors hear about real estate and naturally think hey I want some based on silly notions of xyz success stories. I have had too many friends make dumbo moves based on "hearing" they needed to buy some vacation house because "yeah man you just rent that out and it pays for itself"..It doesn't always work that simply. In fact, most people shouldn't be doing real estate until they have maxed out their ira, roth, taxable and use real estate as an additional revenue stream and only after they have done their homework. It's tough to be an early physician and expect your going to be a master at real estate just because you hear xyz doing it without putting your due diligence in.

Hearing these kind of plans of doctors early in their careers no wonder they have to work till 65. I truly wish they required finance courses in med school but they probably worry if we got too smart with numbers we'd all retire early so secretly they all want us working for as long as possible making one poor move after the next.

 

[Mobiaz]

Thanks for all of the advice. I feel that I have I am maxing out all of my avenues concerning saving for retirement. I am just wanting to start building some avenue for passive income. I was wanting to do it conservatively and have the money to purchase it outright. I was thinking I could learn whatever lessons are coming on a home that was owned outright so hopefully the rent would cover the unknowns. I do really want to go into it with the intent of building a realestate portfolio that eventually will be some form of passive income for the future. I thought by making sure I owned each rental before purchasing a second that risk would be lower and cashflow would be positive as long as they are rented.

With still maxing out all of my retirement I was trying to use what was left to start something that might important to becoming financially independent. The main question I had was would this strategy be something that is feasible if I do try and do it responsibly. Educate myself the best I possibly can, and go into it aggressively to pay each rental off quickly. By owning two rentals outright within a few years even having them managed I was thinking that would be several thousand dollars of passive income that would at least be a start to financial independence.

Thanks again for all of the comments.

 

[WisNeuro]

A decent $300K rental should pay $3000/month in rent, leaving you something like $1600 after your non-mortgage expenses. A mortgage could eat up all or more of that $1600, depending on terms and how much you put down.

This is a viable path to wealth, but landlording is another career, different from doctoring. Best to learn at least some of it from the books before your start "practicing."

There are always rules of thumb, but always research your specific market. You cannot get 3k rent for the majority of 300k ballpark homes in my specific area, unless it has some unique amenities. Those houses are more likely rented at the 2200-2500k range in our market.

 

[Tee Cell]

Thanks for all of the advice. I feel that I have I am maxing out all of my avenues concerning saving for retirement. I am just wanting to start building some avenue for passive income. I was wanting to do it conservatively and have the money to purchase it outright. I was thinking I could learn whatever lessons are coming on a home that was owned outright so hopefully the rent would cover the unknowns. I do really want to go into it with the intent of building a realestate portfolio that eventually will be some form of passive income for the future. I thought by making sure I owned each rental before purchasing a second that risk would be lower and cashflow would be positive as long as they are rented.

With still maxing out all of my retirement I was trying to use what was left to start something that might important to becoming financially independent. The main question I had was would this strategy be something that is feasible if I do try and do it responsibly. Educate myself the best I possibly can, and go into it aggressively to pay each rental off quickly. By owning two rentals outright within a few years even having them managed I was thinking that would be several thousand dollars of passive income that would at least be a start to financial independence.

Thanks again for all of the comments.

I think it’s entirely possible to use rental properties to supplement a retirement plan as passive income as long as you do it right. However you will want to ensure that your income will cover and the exceeds all expenses so you are going to have to treat it and run it as a business. Even if you own the property free and clear you still have to factor in general and major repairs, maintenance, property management, insurance, etc. I would say if it’s something you really want to do go for it but educate yourself first. Location is going to be important to ensure good flow of tenants and low vacancies. It’s not something I think people should just do and learn as they go. If you want it to work I think you have to be strategic. You could consider real estate options outside of owning property like real estate crowdfunding and REITS as an option also.

 

[redfish955]

I follow this.
Save 15% of your earnings.
Buy a house that has a 15 year mortgage payment less than 28% of your earnings. Spend the rest. After 15 years your home is paid off and you invest that cash into leveraged real estate that you can pay off on your own in 15 years. Keep saving the 15% cash. If your rental property rents out just pay it off faster and repeat. If you do really well you will end up with 3 or 4 properties that have the same value as your home. If you picked a bad investment you still have that 15% cash to fall back on.

 

[dpmd]

I have rental property but only because when I moved from one place to another I decided to rent out my old place rather than sell it (and i could afford to buy the new place despite having the other one). Repeated it after residency. More favorable mortgage terms, I know I like them in case I need to move back to one and sell the other, and they cash flow quite nicely because I bought cheap places in good neighborhoods (both were because of a need to sell, one was divorce the other was death) then made them nice while I lived in them. But I have had some landlords headaches despite being very lucky to have some good long term tenants. Certainly isn't a set it and forget it thing. I manage my own properties which means more money to me but more potential for headaches. I haven't talked myself into buying specifically to rent even though they are both paid off.

 

[percyeye]

$300K for a rental home is way too high for only $1500 rent. As others have said start listening/reading to Bigger Pockets. Learn what the 1% or 2% rule is in real estate.

If I had $300K I'd leverage it out and buy multiple houses or probably a solid multifamily. Depending on location of course. You could buy a ~$1.5 Million dollar multifamily with $300K, althought you'd need more for repairs after it being bought.

 

[The White Coat Investor]

There are always rules of thumb, but always research your specific market. You cannot get 3k rent for the majority of 300k ballpark homes in my specific area, unless it has some unique amenities. Those houses are more likely rented at the 2200-2500k range in our market.

That simply means that you will need to put more down in order to be cash flow positive and your return will have to rely more on capital appreciation than income. If you were in a really high COLA you may find a $1M home renting for $3K. At a certain point you've simply got to say "this isn't a great investment. I shouldn't buy this."

 

[Splenda88]

300k a month invested in index funds gets you about 18k (6% return) a year at a minimum without lifting a finger and easily more averaged over a 10-15 year block of time.

That is a great return...

I have a rental property that I am not making any money on right now (maybe $100/month)... I can walk out with 250k if I sell it right now. Maybe I should sell it and put that 250k into an index fund.

 

[finalpsychyear]

That is a great return...

I have a rental property that I am not making any money on right now (maybe $100/month)... I can walk out with 250k if I sell it right. Maybe I should sell it and put that 250k into an index fund.

thats a consevative return. Over the last 10 years the index it has been closer to a 10 percent return.

 

[SigmaFS]

We haven't had a market correction in 10 years. Why do you think the market will return ~10% over the next 10 years?

 

[redfish955]

Hire an alcoholic 22 year old fresh out of college to manage your finances and rental properties.

 

[CDI]

Not a bad strategy, but I’d lower the price point. $300k is a lot to put into your first - and targets a specific population of tenants.

Aim for properties that align with what’s affordable for the average household income for the US. $1100-1500.

And forget the 1-2% rule unless you want to buy a dump in a suspect city or you want to put LOT of work into it both in terms of rehab and management. Those are far from passive. I have one of these properties but it goes vacant way more and the tenant class is not reliable.

I have several Class A & B rentals that are actually passive. I just get direct deposits every month from my PM company.

The furthest 3 are 2,400 miles from where I live. Ranging from purchases prices of $175-300k.

The $175k actually cashflows the best. However the middle one, has gained about $100k in appreciation in 3 years.

The key has been finding the right properties (in the market I look at, I might get lucky once every 6 months to a year) and also minimizing turnovers. For this you need an incredible agent who is willing to lowball, and a solid property management team that you should vet well.

Our vacancies have ranged from 3 days to 4 weeks.

 

[Splenda88]

I think it's better to have a multi unit complex... preferably 8+ units and have on PM take care of it... Find a depressed city like Detroit where you can get something cheap located in a lower/mid middle class neighborhood for a good price.

This business is not profitable IMO because you are spending thousands of dollars for a small return every month. I have 2 rental properties and I am making around $300 net profit on them per month. I could sell them in the next few months and walk away with 300k profit. I am asking myself if I should sell them and put that money into an Index fund...