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How to Start Investing in Rental Property

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How to Start Investing in Rental PropertyInvesting in rental property is one of the few proven ways to build wealth. Many small investors have been able to retire early with their rental income. I love our dividend income because it is a lot less work than being a landlord, but owning rental properties has been a boon for us as well. Today, I’ll share our story, go over how to start investing in rental properties, and answer a few basic questions.

The easiest way to start investing in rental property

The easiest way to start investing in rental property is to convert your old home into one. This is a great natural progression because many of us purchased a starter home when we were young. Once we start a family, we’ll need a little more space so we’ll upgrade to a bigger home. Most people would sell their old home and use the money for the down payment on the new home. Usually selling also means some extra cash to furnish the bigger home as well. However, investors should consider renting out their old home instead. This is a perfect opportunity to build another income stream and it was how we got started with rental properties.

How we got started

In 2000, we purchased a moderate single family home near my old employer for a convenient commute. We lived there for 7 years, but decided to move to a smaller condo in downtown, Portland. By that time, Mrs. RB40 was working in Portland and it took her 90 minutes to commute every day. It was easier for me to drive to the suburbs than for her to take the light rail to work. Also, we used to live downtown before buying the house, and we liked it more than living in the suburbs.

When we moved, we decided to rent out our old home instead of selling it. Our main motivation was to build wealth through passive income and property appreciation. At that time, I was just starting to figure out that passive income is better than active income.

At first, we got a property manager because I wasn’t comfortable being a landlord. This worked well for a couple of years until the property management company consolidated and stop servicing our area. By that time, we had a stable tenant and I decided to try being more hands on. This was fine because we had a good long term tenant and the house was in good shape. However, we decided to sell in 2014 when they moved out. This was mostly because I wanted a rental that’s closer to where we lived. It took too long to drive out to the property and it became more difficult when we had a baby.

Price appreciation

We purchased our old home for $209,000 in 2000 and sold it in 2014 for $346,000. (Keep in mind, our initial investment was 20% or about $40,000.) The tenants were paying down the mortgage for us from 2007 to 2014, that’s half of the time we owned it. If we kept the place, eventually it would have been paid off and we’d have a nice monthly passive income. Anyway, our current rental is only a few minutes away and it easier to keep a close eye on it. So that’s how we got started with our rental properties.

Why start with your old home?

Renting out your old home is the easiest way to try being a landlord. It’s intimidating to search for a rental home when you’re new to it. It’s much easier to find a new primary residence because you know all the criteria. Getting a mortgage loan for a rental property is also more difficult than for a primary residence. If you have enough money to put down on a new home without having to sell, then why not try being a landlord. You can always sell the old place if it doesn’t work out.

Here are some more good reasons why you should start by renting out your old home.

You know the property – We lived in our old home for 7 years so we knew all the problematic areas. I knew we’d need new exterior paint in a few years, the fence had some rotten spots, and the carpet piled up in certain areas. In contrast, you never know what problem you’re going to get with a property you haven’t lived in. Our rental duplex had an antiquated electrical wiring system and we had to spend about $1,000 to bring it up to code. We got the inspection report, but it still takes time to become familiar with a property.

Primary residence has better mortgage terms – It’s much easier to obtain a mortgage for a primary residence than a rental property. In my experience, the requirement is much less stringent than when you’re getting a mortgage for an investment property. You can also put less money down on a primary residence. The last time I got a rental property, the bank wanted 25% down and required quite a bit of extra documents. The interest rate is also a little bit better with primary residence mortgage.

Inflation adjusted investment – When we purchased our old home in 2000, our mortgage payment was around $1,200 per month. This was a lot of money at the time because we didn’t have that much income back then. The rate was also pretty high in 2000. By 2014, we refinanced and brought our payment down to $900 per month. This was very affordable for us. Inflation helped us in 2 ways.

  1. We made more income – As we progressed in our careers, we got promotions and cost of living adjustments.
  2. Rent increase – We were able to raise the rent. Our tenants helped us pay down a bigger chunk of the mortgage more every year.

Rental properties work well because the mortgage remains the same (or lower) while the rent can go slowly increase every year. This means our income increases faster than our expenses.

All in all, renting out your old home is the easiest way to try being a landlord. If it doesn’t work out, you can sell the place and call it good.

Alternatives to being a landlord

I realize that being a landlord isn’t for everyone. For example, Mrs. RB40 would never consider being a landlord if I wasn’t around. She thinks it is too much of a headache, especially if you end up with a problematic tenant. Fortunately, there are other ways to invest in real estate.

The easiest way is to invest in a REIT index fund, Real Estate Investment Trust. A REIT is a company that invests in real estate. We have some investment in Vanguard’s REIT index, VNQ. That’s a bunch of REIT companies and it’s a painless way to benefit from real estate. You could also invest in individual REIT if you want to focus on certain sector like healthcare or commercial properties.

A new way to invest in real estate is through real estate crowdfunding. Investors pool their money to fund a project which is managed by a local company. I just opened an account at out Realty Shares and I plan to invest about $10,000 in 2017. Realty Shares vetted the projects, but you can do your own research and invest in the areas that you like. Each investment is different and the minimum investment is from $2,000 to $25,000. This is a new way to invest in real estate and I want to see if it will be a good passive income stream.

Now, some questions from the readers.

Where do you list your rental?

Our rentals are located in a popular area with pedestrian traffic. I listed the units on Craigslist and I was able to fill them pretty quickly. I’ve seen “For Rent” signs on the neighboring units and I think that works well for that area, too.

How do you find, screen, and select good tenants

Finding tenants hasn’t been a problem for us. Our units are in a good location and there are many young professionals in the area. We also have been pretty lucky with screening the tenants. Here is what I look for.

  • Income and profession. The tenant should be able to comfortably pay the rent. At the most, the rent should be 30% of their income. Anything higher than this and they might have some problem paying. So if the rent is $1,000 per month, the tenant should make at least $3,335 per month. 20% would be even better. I also focus on the profession. The last time I screened for tenants, I had a Nike employee, a musician, a software engineer, and an hourly employee. The Nike employee just moved to the US and had no credit history so he was out. Guess who I picked?
  • Credit history – I used e-renter.com to check the tenant’s credit history and criminal record. At e-renter.com, you can set the acceptable credit range, but you don’t see the exact credit score. So A is 776 – 850. The renter’s credit score must be at least 776 to qualify for my property.
  • Rental history – I called the previous landlord to see if they had any problem with the tenant.
  • Meet with tenant – I met with the prospective tenants to show the place and get a feel for them. I think you can’t rush this one. If the tenant feels off, then just keep looking. All the tenants I talked to were pretty nice.

Which rental application to use?

I used the rental application from e-renter.com. I forgot where I got the lease from, but I downloaded it from the internet and added more clauses to it.

How to make sure that you get paid on time – do you get paid by check, cash or do you debit straight from a bank account?

I ask the tenant to set up automatic payment from their bank account so I get the payment check every month. One tenant lives nearby and he prefers to drop the check off in person. That’s fine, too. He usually pays on time, but I had to call or text him once in a while.

How do you find a good handyman for property maintenance?

This one is tough. I usually do minor maintenance myself, but I had to hire a few handymen, too. I usually check Yelp and Angie’s List for recommendations. The problem is that they are all really busy and it usually comes down to who can get there the soonest. It’d be great if I can find a local handyman I can rely on consistently instead of going to a handyman company. Readers, do you have any tips?

How do you evict bad tenants legally?

Fortunately, we haven’t had to deal with this one. Every state has different eviction laws so I can’t really help here. Your best bet is to learn more on the internet and see if you can get some legal help. My father in law is actually dealing with this in California and it sounds like a nightmare…

Any more questions?

We have been very fortunate with our rental properties. Our current units are relatively easy to manage and our tenants are really great. We have also sold properties when they became problematic so I can understand why some people don’t like being a landlord. I still think it is worth it because owning rental properties is a great way to build wealth over time. Even if you don’t want to be a landlord, you can still invest in real estate through REIT companies or crowdfunding platforms like Realty Shares. It’s good to have some alternative investments in your portfolio other than stocks and bonds.

Let me know if you have any questions and I’ll try to answer them. Good luck!

Note: We may receive a referral fee if you sign up with Realty Shares through the links on this post.

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{ 70 comments… add one }
  • Mr. Tako @ Mr. Tako Escapes January 30, 2017, 12:27 am

    Great primer on renting out real estate Joe.

    If my family kept our old home and rented it out, we probably wouldn’t realize much in the way of positive cash flow, but capital appreciation is a possibility.

    We live in a part of the world that’s seeing massive capital appreciation right now…I can’t help but wonder how long it will last.

    Last year alone my property value increased 13%. That’s a pretty unusual gain.

    Long term, I think I’d be better off in a REIT index fund.

    • retirebyforty January 30, 2017, 10:08 am

      Cash flow is tough in expensive locations. We’re pretty lucky that our duplex is making a little money. Most of the gain will come from appreciation.
      13% is pretty crazy. 🙂

  • Buy, Hold Long January 30, 2017, 2:16 am

    I think real estate investing is something that I am very interested in. I hope I can get started in this field at some point in the not too distant future.

  • Pennypincher January 30, 2017, 3:22 am

    Impressive post, Joe! You certainly have your act together, and know what you are doing.
    Then I get to your line-it’s not for everyone. My thoughts exactly!
    My one and only home is such a money pit w/upgrades and repairs that don’t even add to the beauty of my home (I hate those kind of repairs!).
    I too love the Vanguard REIT Index Fund, but honestly, I don’t know 100% how they really work. I’ve heard both the up and downsides of them. I need to learn more.
    It’s good to have a handyman ready, plus a backup or two. Like a plumber or babysitter-it can save one’s sanity!
    You know, I see your advantages of this type of investing, I really do. But I see my only house as merely a roof over my head, and a place to park my $, and slowly build equity.
    I haven’t been thrilled w/my return on investment, ROI, in the housing market I am in. It’s ok, not great. I’ve always believed your hard earned cash is better in the stock markets.
    My realtor once told me, it’s extremely hard to evict difficult tenants. Enough said! : )

    • retirebyforty January 30, 2017, 10:11 am

      The maintenance and repair can be a big problem if you’re not very handy. If you don’t want to deal with the repairs, then it’d be best to get a good property manager. We’ve been lucky because our condo has minimal repairs. I can just work on the duplex whenever things come up.
      Yes, eviction is difficult. My father in law is doing one right now and it’s crazy. That’s why you need to screen your tenants extremely carefully. We’ve been really lucky so far.

  • Brad, Financial Coach January 30, 2017, 3:59 am

    Have you looked into RoofStock yet? I stumbled across it a while ago and have been considering using their services in a turnkey fashion.

    • retirebyforty January 30, 2017, 10:12 am

      I have not seen RoofStock. There are too many crowdfunding platforms right now. I prefer to go with an established name.

  • Go Finance Yourself! January 30, 2017, 4:19 am

    We plan on doing the exact same thing. Our current starter home is located in a prime area and has several houses that rent out. I hate the idea of having to be a landlord and dealing with tenants so we will probably go with a property manager. I’ve heard that a property manager can run about 1-2 months rent. Is that what you experienced?

    • retirebyforty January 30, 2017, 10:15 am

      A property manager takes about about 7-10%. That’s completely worth it if they are good. Unfortunately, they are overloaded too. The companies we’ve used don’t pay that much attention to our properties. That’s why I prefer to DIY. I think if your home is in good shape and in a good location, then that’s easy for them to manage. Good luck!

  • The Green Swan January 30, 2017, 4:36 am

    Hi Joe, good overview. I would like to one day get into rental properties and have another income stream. I don’t have the time right now, but if we were to move I’d consider renting out my current home. The other thing I’d consider is buying a triplex or duplex and living in one unit while renting out the others.

    • retirebyforty January 30, 2017, 10:16 am

      I like the multiplex idea too. That’s a good compromise if you find the right property.

  • Dave in Sunny FL January 30, 2017, 4:48 am

    hi, Joe! I agree with you about the benefits of rental real estate, but I see several problems with starting out by renting your existing home: lifestyle inflation is taking place, you only have one tenant at a time, and you are not using much OPM ( other peoples money). I think it can also be inefficient to learn the ropes of being a landlord while you are fully invested in growing your career. In the last 12 months, our family has gone from zero rentals to seven. We purchased a quaplex near a tourist area, and then a triplex near a military base. The first down payment came from a HELOC on our paid-off home, and the second came from investment funds. The most important factor to me is purchase price as a multiple of full rents. (This helps me compare apples to apples.) I use a free tool from rentalpropertyreporter .com to chart the projected expenses and cash flow. I think that interest rates are only going to go up from here. That will mean higher rentals in the future, and our payments will be lower in comparison.

    • retirebyforty January 30, 2017, 10:19 am

      Interesting. The problem is we can’t do that in our area. The property price is too high to make much income. Investors could buy cheaper properties and the number will look better, but you’d have to deal with less secure tenants also. If you live in an expensive city and your main concern is cash flow, then I think it’s better to invest out of state.

  • Mrs. Picky Pincher January 30, 2017, 6:46 am

    Dude, thank you for this! I’ve been dabbling with the idea of real estate as a passive income stream, but it was so overwhelming to think about that I didn’t know where to start. I’m a little stressed out at the possibility of dealing with crappy tenants (our city has plenty of them), so that worries me a bit. I do think it’s an excellent idea to rent out an old home–ideally a paid-for home so you can maximize profits.

    We just purchased our home in September and we plan to pay off the mortgage in 5 – 10 years or so. We do plan to stay in the house for many years, but eventually we want to build a home in the country. I think renting out our old home would be a fantastic way to bring in passive income once it’s paid off.

    • retirebyforty January 30, 2017, 10:20 am

      The location is the key. Our duplex is in a good location so we can pick good tenants. Our previous property was in a cheaper location and the tenants were more problematic.
      Good luck!

  • Mark January 30, 2017, 7:16 am

    If you decide to rent your home you should consider tax implications. If you lived in the home 2 out of the last 5 years, you don’t have to pay capital gains if you sell. If you decide to rent, and the 5 years go by, you will have to pay cap gains and it may cancel out your gains from rental income. We had this situation and decided to sell!

    • retirebyforty January 30, 2017, 10:21 am

      Thank you for bringing that up. We did a 1031 rollover when we sold our old house. We’ll move into our duplex soon to avoid the capital gain tax. There are ways around it, but it’s a PITA.

    • Preston Hunt January 30, 2017, 2:21 pm

      Excellent point! You also have to pay back depreciation, if it was taken, and it all has to be paid back at once at ordinary income tax rates.

      • retirebyforty January 30, 2017, 4:44 pm

        I’m pretty sure depreciation recapture is 25% regardless of your tax rates. The capital gain should be taxed at 15%.

  • Mr Crazy Kicks January 30, 2017, 7:48 am

    Great rundown Joe! You got some great appreciation on your old home! The market hasn’t been as awesome in CT. In our area housing prices are still just bottoming out. Now that I have time, I have been keeping an eye out for a fixer upper as a project. The price has to be right, and it needs to have good cash flow, so I’ll be taking my time. I do also invest in REITs and if a property doesn’t return better cash flow than that, then there is no point in bothering with the hassle 🙂

    • retirebyforty January 30, 2017, 10:22 am

      The market is pretty crazy here in Portland. Actually, I should have held on to the old house for a couple more years. We’d made even more, but then we probably can’t buy anything.
      Good luck with your project. I think that’s a great way to invest.

  • Vivianne January 30, 2017, 7:53 am

    I was a landlord right off the bat. After I graduated, I saved money for 1 year, and bought a duplex, then turn it into a triplex.

    As far as listing goes, the tenant was in place when I moved in. So, I didn’t have to worry about that for a few years, then, she moved out. I bumped up the price by $50, which was also under-rent. I used craigslist.com a lot (Thanks, Craig!), now I’m also using zillow, as some tenant are weary of craigslist because of a few bad apple.

    Fast forward, I bought a 4-plex. The income alone allows me to call myself financially independence.

    Then, I bought a single, then another commercial/residential 4-plex. (With these, I call icing on the cake. LOL :). Just extra income so we can give away to family or donate to our school and church).

    So I have 12 units in total. Except for the one in the Midwest, they are all here in town, within 10 miles radius. On the way to work, or to park where I play tennis or soccer. I like to have the property close to my house so I can keep an eye on them. As property manager doesn’t have the same interest as me. They get the money off the bat, they only want tenant in there, and do the minimum fixing, they wouldn’t tell you if the fence is falling apart, they wouldn’t hire a guy for $75 to put screw the board back in. They would hire a bunch of contractors to tell you that you need brand new boards, stuff like that would blow maintenance cost out of proportion.

    Being a landlord is no rosy business, I post several post of “a day of landlording” or a “week of landlording” ehehhe where I complained about being a landlord. heheh

    • retirebyforty January 30, 2017, 10:24 am

      Wow, that’s awesome! Thanks for sharing. I agree about the property manager. They just can’t pay attention to your property like you do. Great job.

  • K McGarrett January 30, 2017, 7:53 am

    I have some observations from owning a rental condo for 10 years. We use a management company because we don’t live nearby but the 10% we pay has been more insurance than service. A stable tenant who makes no complaints/requests means that for 4 years we have paid to have payment forwarded once a month.

    We’re not suited to be landlords because we’re too soft! Can’t bring ourselves to sell the condo and evict a ‘nice senior citizen’ who has been such a good tenant. We don’t treat it like the investment it is. On the other hand, we’re making money and the investment is still there. When he finally moves out we’ll probably get out of the landlord business.

    • retirebyforty January 30, 2017, 10:26 am

      I’m a bit soft too. I don’t know if I could evict a nice senior. Luckily, I’ve been able to rent to financially secure tenants. We plan to get out of the landlord business at some point as well. Once we’re both fully retired, then we want it to be more passive. Unless we could find a really good property manager, we won’t be able to travel and do other things we want. It’s a way off for us, though.
      Good luck with your rental.

      • Joe January 30, 2017, 11:41 am

        Just find a good handyman. If you can find someone reliable, you can contact him to fix things while you are travelling. This is what I do for two condos, and I am gone months at a time. I have had to deal with a couple of urgent repairs while on the opposite side of the world, so it involved making middle of the night phone calls, but totally worth it for the steady passive income year after yeara and the incredible property appreciation.

        For my SFH rentals, I use property managers.

        I found the handyman through recommendation from my real estate agent. If you used a good agent when purchasing the unit, they have a ton of good contacts since they deal with repairs and investors all the time.

  • Jim @ Route To Retire January 30, 2017, 8:29 am

    Good call on renting out your own house when you can when first starting out. The important thing though is to do the numbers to make sure that you’ll come out ahead.

    I know when I first started out and was a little naive, I just figured that if my rental income was more than my mortage, taxes, and insurance, I was good to go. I learned eventually that you have to factor in for vacancies, saving for capital expenses (such as a new roof or furnace), property management if you use them, etc.

    My first house we pretty much break even on when all is said and done (though the tenants pay down the mortgage, tax breaks, etc.). But our duplex that we got last year still gives us a nice yield every month after all is said and done. We’ll be following the same strategy on the next duplex we’re trying to find right now.

    — Jim

    • retirebyforty January 30, 2017, 10:27 am

      Repair and maintenance are a always underestimated by new landlords. I still have that problem.
      How long did you own the first house? I think rentals work better the longer you own it. Good luck on your next project.

      • Jim @ Route To Retire January 30, 2017, 3:56 pm

        I bought it in 2003 and lived there for a couple years with the intention of fixing it up and renting it out… then I learned I wasn’t good at fixing things. 🙂

        But I got it done and we ended up renting it out, but that was’t until 2008. Since then, we’ve had the same tenants in there, which is wonderful (as you know!).

        — Jim

  • Mr. All Things Money January 30, 2017, 9:19 am

    Thanks for sharing!

    Being a landlord is so much work and constant worry and stress. I don’t think I will ever want to be a landlord. Dealing with tenants, property management company, handyman/repairs, is a lot to worry about. Finding a good contractor that would show up when they promise they will is also a big challenge around where I live.

    Last year I had to repair a couple of sidings on my house, it cost me nearly $7k. Can’t imagine having to deal with another house.

    BTW, your tenants are not paying your mortgage off if you yourself have to rent or take another mortgage somewhere else. It seems to be a zero sum game from monthly cash flow standpoint unless you can buy your new residence with cash.

    For me, REITs is the best way to invest in real estate as they are publicly traded companies and have the oversight of SEC. I would stay away from crowdfunding type ventures till there is better oversight.

    • retirebyforty January 30, 2017, 4:18 pm

      It could be stressful sometime. REIT is the way to go if you’re not willing to put up with the hassle.

      • Lazy Man and Money January 30, 2017, 6:56 pm

        I did a comparison with REITs on my website awhile back and maybe it’s because of the leverage or that other people’s money is paying the principle, but it just wasn’t competitive financially.

  • Lazy Man and Money January 30, 2017, 9:42 am

    This is a great guide and exactly how we started investing in rental property. My wife already had a condo and selling it wouldn’t have made much money. Then we moved out of the condo I had bought for jobs in San Francisco… same situation… wasn’t worth it to sell.

    We were able to HARP refinance them with 15-year mortgages at around 3.5% around 2012 and the principle is melting off every month while the rental market has gone up. Overall, we add about $4k a month to our net worth just by paying down the principle and accounting for the appreciation. It’s all paper money until around 2027 when the mortgages are paid off, but I don’t mind.

    People say that being a landlord is a lot of work and sometimes they are right. Sometimes it isn’t that much work. It certainly doesn’t seem to bad for $50k a year.

    • retirebyforty January 30, 2017, 4:32 pm

      $4k per month is really good.
      Also, you’re right about the time commitment. Sometime, it’s busy and sometime it’s not too bad. It’s been pretty good this winter so I can’t complain. 🙂

  • Dividend Growth Investor January 30, 2017, 9:56 am

    Thank you for the detailed write up Joe. It is very helpful for those like myself, who do not know much about investing in rentals.
    I have always been interested in direct real estate investment, but always feared the unknowns ( as I have little experience there). This is why my exposure is through REITS and REIT ETFs.

  • TPOHappiness January 30, 2017, 10:33 am

    We will be deciding to either rent or sell our home next month – what timing! Thanks for the info. Do you have any thoughts on managing a rental in a different city?

    • retirebyforty January 30, 2017, 4:17 pm

      You should start looking for a good property manager now! 🙂

  • Brian - Rental Mindset January 30, 2017, 11:23 am

    I obviously love rental properties. For anyone who thinks it is a hassle (including Mrs. RB40) – they need to balance it with the benefits. Is it too big of a hassle turning $40k into $200k over the 7 years as a rental? Obviously insert the right numbers, but suddenly the amount of work looks tiny compared to the benefit (like Lazy Man and Money said above).

    One of the missions of my website is to people know that being a direct owner of a rental property doesn’t mean you have to be a landlord. You can pay a landlord. That way you still get the benefits of being in control, taxes, leverage that you wouldn’t get with some of the other alternatives (REITs, Realty Shares).

    • retirebyforty January 30, 2017, 4:36 pm

      I think that’s the way to go too. Especially if you invest out of state. When we get older, we’ll have to do it that way or else just get out of the rental business. I don’t want to manage our rentals forever.

  • DivGuy January 30, 2017, 12:08 pm

    Thank’s for sharing your tips and experiences. I’m also interested in real estate in my middle term goals. One thing I thought was nice to look into is the possibility of buying a small office and rent it to freelancers or professionals. To me, the fears of having bad tenants are smaller that way.

    Cheers,
    Mike

    • retirebyforty January 30, 2017, 4:40 pm

      Interesting! That sounds like a good business. Will you need to provide cleaning service and that kind of thing?

  • ThinkingAhead January 30, 2017, 12:29 pm

    We are thinking about moving a few states away, and trying to decide on renting out our current house or selling it. We have lived there long enough to avoid the taxes on the gains, and there is significant equity in the house. Thoughts?

    • retirebyforty January 30, 2017, 4:42 pm

      You check our the rental rate in your area and see if the numbers work. You could try to rent it out and see what happens. If you don’t like it, sell it in a year or two and you’ll still avoid the capital gain. Check with your tax guy on that, though.

  • Preston Hunt January 30, 2017, 2:26 pm

    Good article. I have a rental property and it has been going great so far.

    One thing to watch out for is compliance with the Fair Housing Act. The law requires a landlord to rent to the first application that meets the listed criteria. There are undercover “testers” as well as rejected tenants could file a claim if they feel they have been discriminated against.

    • retirebyforty January 30, 2017, 4:49 pm

      Thanks for bringing this up. I wasn’t aware of the first qualified applicant rule. The fair housing act doesn’t explicitly state that, but I read up a bit and I understand more now. I wonder about the enforcement rate, though. How many rental can they check?

  • Ty January 30, 2017, 5:00 pm

    I’d like to get into real estate at some point, but the timing just isn’t good right now. But I appreciate this post and your perspective, Joe.

  • Linda@Frugal Turtle January 30, 2017, 6:37 pm

    Nice explanation!

    I’ve thought about getting into real estate, but frankly, it scares me. My sister-in-law has a couple of rental properties and she’s always complaining about bad tenants and looking for people to do maintenance on her properties. Sounds like a major headache.

    Realty Shares sounds interesting. I think that route is more up my alley.

    • retirebyforty January 30, 2017, 10:09 pm

      I think if your property is in the right location and you screen properly, the tenant issue should be minimal. The maintenance can take up a lot of time, though. Realty Shares looks really good. Hopefully, the projects I invest in will be on time.

  • Michael January 30, 2017, 7:53 pm

    Hi Joe, Just curious, why are you not investing in another rental property since you have had several years of experience?

    • retirebyforty January 30, 2017, 10:10 pm

      The price is too high here to generate positive cash flow. I’d have to invest out of state and I’m not quite ready for that yet.

  • Smart Provisions January 30, 2017, 8:15 pm

    Great post, RB40!

    I’ve been considering purchasing a house for a while now and am actually going to meet up with an agent in the coming weeks to learn more about the area and what’s available on the market.

    I might dabble with renting it out to people, but California eviction laws are insane.

    • retirebyforty January 30, 2017, 10:11 pm

      My father in law is going through the eviction process in CA. It sounds pretty difficult for the landlord. He’s getting too old to deal with a rental so he’s going to sell once the eviction is done.

  • Live Free MD January 30, 2017, 11:48 pm

    Hi RB40. Thanks for the nice overview. I agree that everyone should find some way to invest in real estate to help diversify their portfolio.

    REITs are appealing because they are completely passive, but they are positively correlated with the stock market and thus not a great diversifier (see this Morningstar analysis: http://tinyurl.com/jd7hkte).

    Active Management of residential real estate properties certainly provides better diversification, but has many issues as described above, including unruly tenants, repairs, and needing to be near the property in case of a problem.

    Real Estate crowdfunding may be a happy medium, but these options are relatively new and I plan to wait patiently while they are being vetted.

    For me, the search for the perfect real estate investing vehicle continues.

    Thanks again for helping us all start thinking about how to invest in real estate!

  • Andrew@LivingRichCheaply January 31, 2017, 8:30 am

    We live in NYC so real estate is too expensive. Plus evictions can take forever here in NYC…probably the same in Cali. I bought a rental property out of state so the property manager takes care of most of the issues. It’s more passive that way and I’m not that handy either…though it comes at a cost too.

  • Your First Million January 31, 2017, 11:10 am

    This was a grand slam post! I am definitely in favor of rental properties as a way to grow wealth. In my opinion, real estate is far superior than dividend income because the returns are far greater, and in my opinion there is actually a lot less risk involved if you do your homework. Yes it may be more work however, in all reality, not by much.

    I purchased the home I live in today with an FHA loan (3.5% down payment) for $195,000 back in 2013. I specifically chose this home because I thought it would make a good rental property in the future.

    After refinancing a couple years later for a superior interest rate and being able to rid ourselves of the pesky mortgage insurance, our monthly payment is now under $1,100.

    Today it is now worth somewhere between $290,000 – $300,000 and the other similar homes in the neighborhood are renting for more than $1,600 per month.

    We turned a $15,500 investment (3.5% down payment + closing costs + minor upgrades to the home) into $100,000 in equity in just 4 years AND we now have a property that will have a decent positive cash flow when we convert the house into a rental property.

    The power of real estate is absolutely amazing.

    • retirebyforty February 1, 2017, 8:17 pm

      Real estate is a great way to grow your wealth. It’s the easiest way for regular people to leverage. Of course, the market has been pretty good lately. I’d hate to be over leveraged in 2008.

  • Vicki@MakeSmarterDecisions January 31, 2017, 5:17 pm

    Great in-depth article Joe! We own 11 units and I just wrote a post about how we are ending the lease of a 22 year tenant. Your advice here is very sound – and I also rented out my first home instead of selling it. The one thing I would add is that it is really important to understand discrimination laws if you are going to screen tenants and advertise apartments. You don’t want trouble before you even get a place rented! I was just on the Realty Shares website looking at some options. We haven’t done that kind of investing before, but this year we plan on putting in about the same amount you are planning on.

    • retirebyforty February 1, 2017, 8:21 pm

      Wow,that’s a lot of units. I’ll drop by to check out your post.

  • The Grounded Engineer January 31, 2017, 7:27 pm

    Thanks for sharing! Investing in real estate is something I want to do in the very near future. Have you read the book: how to build wealth one house at a time? I’m writing a review for this book the next week or so. There is some good insight on how to get starter.

    I’m checking out this crowdfunding site – I’ve never seen one like that for real estate investing!

    • retirebyforty February 1, 2017, 8:22 pm

      I haven’t read that one yet. I’ll see if I can find it. Realty Shares is one of the better platforms. I just made an investment and I’m excited to see how it will go.

  • Desi Hisab February 1, 2017, 1:36 am

    I think real estate is the best form of investment. Whether you invest in a real estate or give property on a rent the benefit is there. I think its similar to building pipeline for the future.

  • Benjamin Davis February 1, 2017, 1:52 am

    Joe, great article. I will write about the differences between the US market and other markets, such as Portugal, where I invest. Its funny to see that these markets can be so different and it certainly takes different skills to persevere on each market 🙂

  • Al February 1, 2017, 4:09 am

    Joe,
    Excellent article and treatment of various ways to invest in real estate. The comments are almost as valuable as the article.

    We rented our house almost 6 years ago and downsize to townhome by the ocean.
    We experienced a 40% net profit.

    A couple of things to add. We use a home warranty policy for fixes when necessary and always reserve the right not to do the repair. We also maintain our properties and repair right the first time. Seen a lot of people that do not mantain their houses and expect just cash to flow out. In our view this is bad Karma. We follow the principal to treat others as you like others to treat you. With respect and dignity.

    My career mentor thought me that anything you do in life requires an entry and exit plan. You cover the entry part but not the exit.

    A you invest in rentals, its important to have an exit plan such as when do you plan to sell. We use our rental as MrsAl retirement plan and have a date identified when we plan to sell as part of our financial planning.

    We take advantage of a 20 year property depreciation schedule in our taxes and the plan to use the one time life exception for capital gains.

    We use a property manager but that requires a long list of different criteria than tenants. Clear and crisp communication with defined expectations is key.

    For tenants we run credit, get their numbers and prepare a budget to identify if they are suitable. Tenants have a period to pay on time, if they do not, we initiate the eviction process with a three day notice immediately. We interview the people and required everyone that is going to live in the property to be there. No one is perfect and our last tenants for example didn’t met the strict budget required to rent and we show them in paper. They acknowledge and show us how they were planning to get there. They acknowledge, had a credible plan, and where willing to do it. So we rented to them.

    Remember, it’s better to be in a bad deal with good people than a good deal with bad people.

    Rents and property values here are crazy. We always buy in great locations near shopping centers. Our house is rented at 0.5% of its value. This is significant since the avg. value of the properties in this area is over $1M. We look at Zillow and other site but set our rent based on a real estimate from a realtor. Zillow is getting better but we find it to be off by as much as 10% at times.

    A good portion of our net worth is real estate. Similarly to you, we been blessed and fortunate to be lucky. It’s better to be lucky than good but you can only be lucky if opportunity meets preparedness. So be prepared. Good article.

    • retirebyforty February 1, 2017, 8:30 pm

      I have never heard of the lifetime capital gain exception so I checked the internet. It’s a Canadian rule, interesting.
      You’re running your rental like a business and I think that’s the simplest thing. I give my tenants a little more leeway. Sometime they are out of town and ask to pay a few days late. That’s not a big deal for me because they are good tenants.

  • Alex Coleman February 1, 2017, 6:59 pm

    My uncle was a landlord and it is a really, really tough job. Thanks for the in depth advice!

  • David Michael February 2, 2017, 10:53 am

    Great article on Rental Property investments. As a backup to this advice, all…that’s all of my teaching colleagues who purchased two houses, as you have suggested, today are multimillionaires. They purchased their first home. Then, held onto that and purchased a second, larger, more attractive home as their family increased in size. Some did the landlord thing themselves, and others hired a management company because they couldn’t stand the hassle. One never knows how property will appreciate.

    We purchased our first home in Los Altos, California (1966), a mile from the community college where I taught, for $37,000. A fantastic location so I could walk or bike to work. By the year 2000, the value had skyrocketed to over one million. Then, two million. Then a Google employee puchased it, demolished it (on half acre), and put up a new, four million dollar house. We sold it in the 1980’s for $240,000 as part of a divorce settlement, so I never made it for long into the multimillionaire class.

    Nonetheless, we built a beautiful dream house on three acres in Oregon and have no regrets.
    However, I do wish we would have purchased a small house or condo for retirement at the time and used that as a rental over 20 or more years so it could pay for itself.

    • retirebyforty February 2, 2017, 10:50 pm

      California real estate was so affordable back then. It’s amazing how much a house in northern CA cost now. Pretty crazy.

  • Andrew @ Dollar After Dollar February 2, 2017, 12:29 pm

    We are doing the same thing by turning our primary residence into a rental home once we move out. I am enterataining the idea of an AirBNb since we are 1 mile from the beach.

    Two homes On my street are going to auction. I’m trying to decide whether I am crazy or not for putting bids on rentals on my own street!

    Thanks for posting!

  • Fiscally Free February 2, 2017, 7:34 pm

    We are in the process of selling our house right now. We thought about keeping it as a rental, but eventually decided against it. If you’re interested, you can read about our decision process in a post I just wrote: http://www.fiscallyfree.com/2017/02/why-we-are-selling-our-old-house.html

  • Keith Gumbinger March 1, 2017, 4:10 am

    Successfully (and profitably) renting out your home requires good choices in terms of location when you acquire the property. It also means refinancing to the lowest possible rate when the opportunity arises and before you exit your residency; this can lower the carry cost of the property, making it easier to generate positive cash flow; It’s also considerably more hassle to refinance a mortgage on a rental property than on a primary residence. If you are thinking about converting your existing home to a rental and moving on, study the rental market in your area beforehand to make sure that what your property might bring on the rental market meets your cash-flow needs and investment goals.

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