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If there is one thing the investment community learned over the last decade, it’s that the often-repeated advice from mutual fund managers to buy and hold value stocks turns out to be a losing proposition.
The truth is if you listened to your money manager from 1999 to 2014, the stock market has earned you a whopping 1.3% annualized return. That is simply atrocious considering the volatility has been nauseating during this same time, and you STILL didn’t even keep up with inflation.
For these reasons, more and more people are buying rental property in stable markets to build their retirement funds through reliable passive cash flow. The reason people are so drawn to real estate is the simplicity of the investment.
In this article we look at the three steps you should follow when buying rental property.
1) Find A Stable Market
When you are searching for rental property, finding a market with a proven history of price stability is the first step of due diligence. A few of the key metrics I always look at when I review new deals are the “asking rent” price and vacancy rate during 2008. If the rental prices weren’t affected by the worst real estate crash in US history, I feel confident that going forward my investment will be able to perform. Take a market like Memphis, TN for example. During 2008, the asking rent only came down 8% during one quarter, and it completely recovered during a 12-month period. This means that if you had a tenant in place during the 2008 crash, you didn’t lose one dollar. If you were unlucky and your tenant’s lease was expiring during the lowest point of the downturn, you would only take an 8% haircut. (Let’s say from $1,000 to $920…not a big deal!)
2) Work With A Quality Property Management Company
If you are considering buying rental property out-of-state, your property management selection is going to play a crucial role in your investment. Maintaining the value of the asset is critical to the success of your investment, and you need a quality management team in place to keep your investment secured.
What to look for in a property management group:
- Only work with in-house property management companies.
- When interviewing property management companies, ask the right questions and take note of their reactions.
- Make sure they are extremely knowledgeable about the specific neighborhoods you will be investing in.
3) Run Conservative Cash Flow Analysis
Most people’s long-term financial goal is to have their investments generate a steady passive cash flow. If you are planning to pay off necessary expenses via that cash flow, make sure you always structure your investments to under-promise and over-deliver, never the opposite. If you expect to get $200 per month and you end up getting $250, life is good! But if you expect to get $200 and you get $150, your electricity bill might be shut off.
In order to get a solid idea of how your investment is going to perform:
- Before you buy, always check the market with RentFax, the industry-standard rental estimator and investment property analysis tool.
- Use this investment property calculator.
- Always assume at least 8% vacancy.
- Never assume less than 40% expense ratio.
- Always use a 10bii cash flow calculator to predict your ROI.
There you have it. By following these three steps, you should be well on your way to making profitable rental property purchases. Make sure you follow these guidelines, as well as the many others I have outlined in previous articles.