“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!
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:
- You must be completely debt free (including your home mortgage) before buying a rental property
- If I can’t buy it with cash, then it’s not even a consideration
- 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?
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…
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. I don’t like any type of borrowing, not even estate loans. If I can’t buy with cash, it’s not even a consideration.
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:
- Pay off all consumer debt (car loans, student loans, credit cards, etc.)
- Save up 3-6 months of expenses for an emergency
- Pay off your primary mortgage
- Save up and buy a rental property with cash
- 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?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.