Rental Properties – Are They a Curse or a Blessing?

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“You’re going to buy a rental property??” …my broke friend exclaimed. “I had a buddy that tried that… The tenants didn’t pay the rent, they trashed the home completely, and he lost tens of thousands of dollars. You won’t see me buying a rental property any time soon.”

More often than not, this was what I heard from people when I let them in on my investment plans a few years back. It wasn’t very encouraging to say the least…and it honestly took some of the air out of my sail for a while…

Are Rental Properties a Smart Investment?

Ignoring all of the “wise advice” from my friends and neighbors, I went ahead and bought a rental place anyway.

So what’s the verdict? Has land-lording been a complete nightmare? Has my rental house been burned to the ground? Or are all of my friends just complete idiots that knew absolutely nothing about land-lording a rental property? Read on and we’ll see if your hunch is right!

Are rental properties a smart investment?My Guidelines for Investing

I’m a bit unique when it comes to rental property investments.

  • I don’t go out and hunt for “zero down” deals,
  • and I’m not the kind of guy that’s hung up on using “other people’s money” (OPM)

In other words, I don’t blind myself from risk like so many other investors out there. Instead, here are my rules when I’m searching for my next investment property:

  1. You must be completely debt free (including your home mortgage) before buying a rental property
  2. If I can’t buy it with cash, then it’s not even a consideration
  3. Do not compromise on tenant criteria…EVER. Either they qualify or they don’t.

My Results More Than One Year Later

So how have these rules worked out for me so far?

We started renting out our property in early 2016. Since then it has earned us $14,400 and cost us $3,860 (property tax, repairs, and insurance). On our $90,000 investment, this is an earnings of nearly 12%! If those aren’t good results, I don’t know what is.

On top of that, our house has appreciated in value by another $35,000, which means that in one year, we’ve earned approximately $50,000. On a $90,000 investment?! Ha! Not too shabby if you ask me! 🙂

Now, what about the condition of the property? The renters are tearing it apart, right?

Wrong.

We reviewed many applications and had previously set the criteria:

  • They must have a credit score of 640 or better
  • They must have a clean rental history and glowing reviews from their references
  • And they need to earn a net amount that’s 3 times more than the monthly rent (so they’re not money strapped)

…and we also needed a good gut-check of the tenants too…

Because of our due-diligence on the front end, our tenants have been wonderful. They’re respectful, they keep the house amazingly clean, and they don’t call me with every small issue (they handle it themselves most of the time). In all honesty, I think that the house is in better shape now than it was when we handed over the keys!

Are rental properties a smart investment? Heck yes they are! 😉

The BIG Problem With “Wise Investors”

Many of you have probably heard certain real estate “wisdom” over and over again, and right now you’re thinking to yourself, “I get that buying a property with cash can work, but isn’t it better to invest with borrowed money so that you can earn a greater return on your cash??”

Let’s put this advice to bed right now…

The supposed “wise investor” will tell you to put as little money down as possible on rental properties and use everyone else’s money to get rich. It typically goes something like this:

  • Buy 10 rental houses with just $50,000 of your cash
  • Earn $10,000 a month in rent
  • Pay just $8,500 a month in mortgages and other expenses

This earns you $18,000 a year, which means you’ve made 36% on your cash investments! Whoa! Pretty good, right?

Well yes….but there’s one little detail that everyone seems to forget about…

You are in debt to the tune of $1,000,000….

Yeah…that’s one. million. dollars…

Holy crap!

What happens when three of your rentals go vacant and you can’t find renters? Well, that’s pretty simple. You fail to make the mortgage payments, your houses go into foreclosure, you’re unable to pay the bank its $1 million…and you go bankrupt.

I don’t know about you, but this sounds like a pretty terrible plan to me.

The Plan I Signed Up For

Instead of going in debt by a million dollars, I decided to save up $90,000 and put it all into one property.

Did this one investment earn me $18,000? No, but it still netted $10,000 a year and I had absolutely no risk because I don’t owe a single sole any money.

For me and my family, this is the better plan.

Are rental properties a smart investment? Yes, but do it with cash.

When Will You Pay Cash For Your Rental Property?

I get it, saving up cash for a rental property can be unbelievably slow, especially if you still have consumer debt. But these are the steps I’ve lived by and they have served me quite well, even though progress may have seemed slow at times:

  1. Pay off all consumer debt (car loans, student loans, credit cards, etc.)
  2. Save up 3-6 months of expenses for an emergency
  3. Pay off your primary mortgage
  4. Save up and buy a rental property with cash
  5. Don’t inflate your lifestyle and repeat step #4 again, and again, and again!

This is the true avenue to wealth and prosperity. And the risk to you and your family is virtually zero.

So when will you pay cash for your rental property? Will it be a year from now? Two years? 5 years? What’s your goal?

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14 comments to Rental Properties – Are They a Curse or a Blessing?

  • Hey Derek, those are awesome results. Congrats on the wide invesment!

    We don’t own a rental property but we’ve thought about purchasing one on NJ shore. We figure we could use it when we wanted and rent it out the rest of the summer. Real estate prices in NJ are crazy though so it would not be a small investment.
    Mike Collins recently posted..100+ Legitimate Work From Home Opportunities That Will Help You Escape The Rat Race Forever

    • My brother-in-law recently purchased a cottage on a lake (nothing like the NJ shoreline though). They stay in it a few weeks out of the summer and then rent it out for 12-15 weeks as one-week rentals. They didn’t pay cash for it (so not exactly my style), but they definitely break even or even earn a bit by renting it out each year.

      If it were me, my cottage would be mine and I wouldn’t let anyone else in (except for friends and family of course). Let my investments be investments and my fun be fun.

  • Kathy

    Whether rental properties are a blessing or a curse depends on many factors, not the least being the person’s intestinal fortitude for managing them. I acquired several rental properties (and tenants) from my mother and I couldn’t wait to get rid of them. She treated the tenants with kid gloves, letting them trash the properties, skip rent etc. I had to dig out of that hole and send a ton of money bringing the properties to a standard where I could place them on the market to sell. I hated getting calls about repairs. I hated calling tenants asking when rent was coming. I hated screening potential tenants. I know having rental property seems to be like mecca for the personal finance crowd, but give me the stock market any day. I sleep better at night.

    • Thanks for the differing opinion, Kathy. For me, I don’t mind fixing up properties, screening, and communicating with the tenants. I’d much rather invest my money in real estate where I can control it than in the stock market where a nuclear threat in North Korea sends the market tumbling.

      I honestly love that you have a different opinion though. It’s interesting to learn that some people are more comfortable in the stock market than in real estate. I guess I’d better write some more articles about stock market investments, huh? 🙂

  • I really like that idea, it seems like a lot of people invest in borrowed money, while this can work for a lot of people it is also a very high risk for a somewhat minimal return. What happens if you lose all tenants, housing prices drop and you have to repay a one million dollar loan…. problems, thanks for sharing.

  • Yeahhhh rental property is fun…. Ish. I “house hack”. I can’t say I’m a huge fan right now, but that’s because I’m living cheek and jowl with my tenant’s. I think things will get easier when I move out, buy a few more, and turn them over to a property manager.

    • Yeah, it’s probably a whole different story when you’re actually living WITH your tenants. I can’t say I’d be a big fan of that either!

      I think you’re right. Once you move out and buy a few more places (and get used to the operation), you’ll enjoy it more. And you’ll certainly love the income!

  • I’ve heard the cash for rental argument in the past. We haven’t made rentals part of our core plan yet but it is on our bucket list. Right now just plan on paying the house off 15 years early and pumping left over cash into retirement until we can find a way to work the rest in.

  • I’ve always thought about investing in rental properties, but the management of them scares me the most. As a single female, I wouldn’t feel comfortable going over to fix problems for the tenants or walking into a potentially uncomfortable or even violent situation. Have you ever considered a management company? I don’t know much about them, but was curious if you’ve looked into them at all.

    I do agree that if you are going to start investing, the best way is if you can pay cash for the properties. That way you can reap the most profit from your investment! Thanks for sharing your experience!

    • I never have looked into a management company, but I definitely understand your reservations as a single female. As far as I understand, they typically charge between 10% and 20% of your monthly rent amount, which is a pretty hefty sum. And, many of them are average at best. If you go that route, you want to make sure they screen tenants thoroughly and only allow the best renters in. It’s better for them AND you in the long run, but many don’t think that far ahead unfortunately…

  • Great article by Derek, great comments by everyone. I think we all can agree that real estate is something everyone should have in their portfolios. As a former landlord, myself, I can say that I have moved away from being an “active” real estate investor/owner to a “passive” investor via peer-to-peer lending (crowdfunding). Been investing in P2P real estate for almost a year now and have nothing but great things to say, thus far.

    Everyone’s situation is different, so it is just a matter of preference, but definitely essential in everyone’s portfolio.

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