Getting started with income producing properties is not very difficult. The three challenges that need to be overcome are as follows:
• The Knowledge Challenge
• The Mindset Challenge
• The Financial Challenge
The Knowledge Challenge:
This refers to the fact that you need to have some basic knowledge about the area of business that you are about to enter. The following is a preliminary list of what you need to have some knowledge about:
• Where to acquire properties
• A general understanding of your state’s Landlord/Tenant laws
• What type of research to do on a potential tenant
• How to manage tenants
• An understanding of the value of properties and the market rental rates
Your best bet to answer these questions in your area is to find a Realtor who has rental properties. He or she can educate you about the current market and where to find further information. You can use them to purchase your properties, and they will earn a nice commission for the information and help they have provided. You may think that if they own rental properties that they will be cautious about helping their competition, but most good agents know that no one person can have the entire market and will be willing to help because they will earn the commission when you use their services to purchase properties. But if you want them to help you and then you do not help them earn a commission when you purchase a property, don’t be surprised if they aren’t very helpful next time you call. It is a two way street.
On a side note, don’t be surprised if you find that very few realtors have rental properties. They will tell you all the horror stories about bad tenants, lost money, etc. Most of the stories will be basically true, and it will be your story, if you don’t do your homework, create a plan based upon concrete information, and follow that plan. Find someone who is successful in owning rental properties to get your advice from, not the individual who couldn’t make a go of it.
The Mindset Challenge:
This refers to the fact that you need to have the appropriate mindset before you get into this business. You need to see yourself as providing a service for a fee, not a service because you love humanity. Those individuals who are easily taken in by stories by the down and out ought not own or, at minimum, manage the properties they do own. The relationship that you will have with the tenant is very specific: you will provide a well-maintained home at an agreed upon rate; they will pay a set amount for that product. When they fail to pay, you should have no qualms about terminating the lease and evicting them for failure to pay. If you think you would have difficulty following through with an eviction after they have told you a sad story, you need to have a professional manage any properties that you purchase.
The Financial Challenge:
The financial challenge is the only challenge that most people exists in the rental business. They completely ignore the previous two. The financial challenge, to some degree, is the easiest challenge to overcome. In many areas, you can get started in the business with less than $15,000. The problem is that most people want to buy a nice house or an apartment complex to start out, but I suggest starting out small. For less than $15,000, you can purchase a single-wide mobile home in a mobile home park. In western NC, the rent a three bedroom, two bath single wide in a park is around $500 per month. You will be responsible for lot rent to the park owner, as well as insurance and taxes. Based on the properties that I own, you can expect these three expenses to cost about $1,800 to $2,000 per year, which means that if you rent the property for the entire you, you could expect around $4,000. You will obviously have repairs to make throughout the year and a vacancy factor, but you could assume that these costs will be less than $500. Therefore, a net of $3,500 would be just over a 20 percent return on investment for your $15,000 initial investment.
Another more affordable option is to purchase a duplex and live in one side of the property and rent out the vacant side. Of course, if you have the financial ability, you can always goes for larger projects: apartment complexes, a nicer home, a commercial property. But, remember, you can start small and build up over time.
If you have any questions, please feel free to leave a comment.
Joseph Griffin
