How can I get into real estate through rental properties?

A listener reached out with a question. They’re saving some money each month and want to set up a passive income stream through local rental properties.

Real estate is a tough market to get into right now. Not saying impossible just a fair warning:

It’s competitive. The economy has been booming for a long time. Everyone and their brother has a little bit of extra cash sitting on the side and is asking themselves the exact same question you are asking right now. This is the first passive income stream most people with some savings explore. Its really easy to borrow $ right now and the rates are low. This makes it even more competitive. Put simply – its harder than ever to find good deals. Not impossible. But harder.

Some cities are way overpriced because of weird market factors – mostly large cities. Boston, DC, NYC, San Fran has experienced a massive influx of foreign money that simply purchases and sits on this real estate. That drives the prices up a lot faster than rents go up. The cap rates (return multiples) goes down. People are buying real estate in Manhattan at a 2 CAP. That means they are excepting a 2% return on their cash in the form of profit. INSANE.

There are a lot of risk factors. What if you are in a college town and the college decides they want more money so they build a bunch more housing and require students to live in it? They do that all the time. What if a large employer closes up shop or moves? What if a huge development gets approved and the market floods with new supply?

I always say don’t start playing in real estate unless you can handle the worst case scenario and get through it.

What I would recommend:

#1 Start a service business that has the potential to lead into real estate down the road. Do it while you have a job. Consider starting a rental property management company that focuses on short term rentals. Learn the market that way. Collect data. Use the data to convince partners to invest with you.

#2 Find a real estate niche so you can compete against fewer buyers.

If a property is on Zillow it’s often too late. Thousands of people shop on Zillow for turnkey investments. That makes them overpriced and it reduces upside and potential. Find a way to buy off-market property. Cleaning up tax liens would be a good way to take others out of the market (as the other commenter mentioned). Getting an investor partner and buying with all-cash allows you to get foreclosures and buy from people who need a quick simple close (like those “we buy houses” signs you see). Learn a trade and fix the homes yourself. These are just a few of many.

#3. Create and study a cashflow projection spreadsheet.

Estimate your revenue and expenses on a monthly basis. All of your expenses. All of your interest. All of your maintenance. Taxes. Everything. Make sure it works out. Run them a few different ways. What if the tenant stops paying? What if taxes go up? They won’t go down that’s for sure.

May 3, 2019 6:07 am