Recently we have had a number of past clients reach out to us about potentially purchasing a rental property or a rental portfolio. After seeing friends and family members do well in the real estate rental market they want to try their hand in this wealth-building space. This makes perfect sense to our team, and we have helped many clients build their portfolios and increase their passive income throughout the years.
The subject of rental properties has a multitude of avenues, so we have decided to do a mini-series on building your portfolio.
Whether you are buying your first rental, have become an accidental landlord, or are getting ready to buy a 15 unit apartment building with a 1031 Exchange, the initial steps are more or less the same for each endeavor. The most successful people started by building a team of trusted advisors around them. The rental space provides multiple opportunities and abundant ways to do things. Taking on this task requires you to leave your sacristy mindset at the door. The best investors in our market have no problem sharing tips and tricks with fellow investors, and we want you to build your portfolio with the mindset that there are plenty of deals for everyone.
Like anything in life, if you want to go fast, go alone; if you want to go far, go with a team.
After speaking with a number of successful investors, we have identified four types of people you absolutely need to find and have a good working relationship with before you ever try to start buying properties.
The first is someone to find you the deals to buy. That is where our team comes in to set you up with an MLS search and to keep you in the loop on possible off-market options. Wholesalers can also help you find a potential property to buy. This option can be a good one for a savvy investor that has a lot of cash and does not need a loan, however, for most first-time investors this is not an option. Finally, there are real estate forums where people will buy and sell between investors such as Bigger Pockets or Local Real Estate forums. This option is usually not advisable for a newer person as the deals come and go quickly. If you do not have your underwriting criteria set in stone, this can be an overwhelming option with properties that seem great on the surface but might not be good once you dive deep into them.
Once you have found the right source to find deals, then you need to find your construction advisor. This might be a General Contractor or Handyperson. This is the person that can help you judge the property for what it is and what will need to go into it to make the property perform at its best rental rates. These people act as a safety net to keep you from buying a property that will have a renovation cost in the tens of thousands of dollars more than you expect.
Additionally, they may be the only chance you have for an inspection due to a short time frame or the number of deals you are trying to do. We also advise that they or their subcontractors are who you plan to use for any or all of the renovations to the property. Remember that contractor pricing varies widely, and as you work with the same people time after time the stability of your work can lead to discounts up to a certain point.
Next, you need to find the manager of the property. We know a lot of people would like to self-manage their rentals, however, when you are first starting out think of them as a sage advisor rather than simply someone who will take 8% of your profits every month. The right property manager can tell you what you need to get the house rented at top dollar and what a typical area will rent for. They also have many contacts that a normal Realtor might not need to have such as a cleaning company, pest removal company, or the plumber that will answer the phone at 2 in the morning. They are also someone who can help identify and set criteria for the tenant that are right for your property. They are required to stay current with all tenant-landlord laws that the rest of us might not know or be up to date on. Think of it as another layer of protection for your business investments.
The final position to fill on your team is a finance person. When we discuss finances there may be a few different people, but we will put them in the same category for ease. This is a long-term investment strategy. Keeping track of where the money comes in and goes out is a critical part of any business. This person could be your accountant, bookkeeper, or a tax person. No one wants a surprise visit from the IRS. Finally, the person that may have been first on your mind: the lender. Your lender might be a partner that is putting up the money, an institutional lender, or a hard money or private lender. We will discuss these options later on in the series. For now, just know that this is something to have in your back pocket for your underwriting of the deals.
Once you have picked your team, the deals will come. Next up in the process of understanding and underwriting the deals to see if they fit within your investment strategies comes in. In the next part of this series, we will discuss the ins and outs of what people look for when underwriting and understanding the cash flow of an investment property.