The 3 Things Every Landlord Should Know BEFORE Purchasing a Rental

The three rules below have allowed me to purchase almost a dozen properties a year for the past several years and manage my properties with confidence and efficiency.

1. Goal of the Property

   • Appreciation/cash flow? – Are you expecting to live off the cash flow of the property? Or use it to fund your next deal? Or are you okay with little to no cash flow and hoping to complete an equity capture in the next few years?

   • Exit strategy? – If the property is not performing to your standards, what do you plan to do with it? Can you sell it to a retail buyer or investor? Will you spend the money to upgrade and sell at retail? Do you need to spend money to sell at retail? Will you owner finance the property? Can you survive if rents drop for a few years? Will you hold onto it if this happens? Do you have the cash reserves?

   • Role in your portfolio – How does this fit into your overall portfolio? Is this property for diversification? Is this the cash flow machine of your portfolio? Is this the equity play in your portfolio? Is this the random property that was a good deal? Is this in a new area you are planning to get into? What are your success metrics for this property?

2. How to Analyze the Property

   • ROE vs ROI – For most investors, Return on Equity (ROE) is more important that Return on Investment (ROI). ROE is real money and should be treated as such! You wouldn't let a big pile of cash sit in your house and collect dust, so why would you neglect the equity in your properties?

     • Example: Invest 20k into a house that has annual net income of 5k for a ROI of 25%. That's great at first glance. When you look further you notice you have 75k of equity in the home which equates to a 6.7% ROE (5k/75k).

     • Notice these are two very different numbers and equity is REAL MONEY. Always ensure you are maximizing your equity. We aim for at least 15% ROE.

   • Leasing costs – New investors seem to leave out one cost that will eat your lunch; leasing fee. If you plan to lease your own property, it would still be advisable to include this cost for when you scale.

     • A standard lease fee is the first month’s rent which equates to 1/12 of the annual rents or 8.3%. You are giving up 8.3% right off the top of your monthly rents!!!

     • Everyone has different rules, but we include this fee every year as a tenant can move every 12 months. It is uncommon you will have every tenant move after a 12-month lease, but it can happen, and we want to error on the side of caution.

   • CapEx – Capital expenditures are the costs that will come up overtime to maintain the integrity and safety of the property. Brandon Turner did an excellent study on BiggerPockets where he determined the monthly CapEx for long term holdings. We round his number up to $200/mo for all our properties.

     • Example: we purchase a single-family property. The monthly CapEx budget would be $200/mo or $2,400/yr.

     • These numbers vary by region, but you would be surprised how accurate they are over time.

1. Team

   • Realtor/Leasing Agent – This is the person who shows your property, takes the phone calls and appointments, and finds you a qualified tenant that meets or exceeds your standards. A quality leasing agent will reduce vacancy, problem tenants and evictions.

     • Leasing agents can be the most valuable player on your team. You won't know how valuable your leasing agent is until you have a bad one.

   • Contractor – A trusted contractor is an essential member of any team. The best contractors quickly handle repairs at reasonable times while maintaining a quality relationship with the tenants. Your reputation as a landlord depends on handling repairs and issues in a timely manner. There is no quicker way to damage your reputation than neglecting repairs.

   • Technology – One of the biggest areas you as a landlord can leverage your time is with technology. We use a property management system called Buildium, where you can accept online payments, handle maintenance requests and generally keep track of all aspects of your properties.

     • Properly implemented and utilized technology will reduce stress, time involved, late payments, disagreements with tenants and overall disorganization. No matter if you have one or 100 properties, you should be utilizing technology to make your life easier.

I hope you found this information valuable. If not, I hope you develop your own rules and use them to create real estate success for you and your family, friends, partners, etc.

- Cam