I thought it couldn’t get any better. I had a $600 monthly mortgage payment on a fantastic single-family home which I’d rented to a wonderful and responsible young family. The tenants were paying me $1,000 each month in rent. I’d already rehabbed the home, secured a great loan package, and even negotiated a substantial savings off of the property’s list price. And now, all that was left to do was kick back and cash my tenant’s rent check every month.
That’s a cool $400 every 30 days without lifting a finger. What could be better?
I’ll tell you what’s better: cashing two rent checks every month—or three or four or more. As I got deeper and deeper into closing and managing cash flow rental properties, the earning potential seemed limitless. And what’s more, all of that income could happen without the hustle and bustle that comes with wholesaling and rehabbing. If I did my job as an investor and a landlord in the beginning, I could literally just sit back and wait for the checks to roll in, occasionally hopping in to tackle a minor repair or negotiate terms with a new tenant.
Investing in rental properties is a great way to generate significant monthly income, in addition to rehabbing or wholesaling—or, as a solo endeavor. If you’re considering this type of real estate investing, it’s essential to understand the landscape—specifically, the types of properties out there and the pros and cons associated with each. Depending on your resources, investment goals, assets available and experience, once or more of these property types will likely align best.
This chart from Trulia shows the increasing number of renters in the U.S., as property prices continues to increase.
Single family homes
Single family homes are the most over-the-plate option in terms of cash flow rentals. You buy the house, condo or apartment unit and rent it out to a single lessee for a predetermined period of time—one or two years, typically. During that period, you honor a set rental fee that never increases or decreases, ensuring that you’re generating consistent income month after month.
Another major draw of these cash flow rentals—especially for first time investors—is that they’re easy to manage and maintain. You have one tenant and one property to oversee. This almost guarantees time spent will be minimal as long as the house is in good repair when the lessees move in—so if rehabbing has to be done, be sure you’re investing the time and resources now to create a more passive income experience later.
HOW TO…DETERMINE A MONTHLY RENTAL PRICE FOR YOUR PROPERTY
While there are many ways to determine a good monthly rent, here’s the easiest way I’ve found:
1. Divide the home’s market value by 180. This should be its value, not necessarily the amount you paid.
2. Add up all monthly expenses for the property including mortgage payments, property taxes, homeowners association dues, homeowners insurance and any other ongoing fees that you, the owner, will be responsible for.
3. Subtract the value of #2 from the value of #1.
Got a positive number? If so, check the value you derived in #1 against rents for comparable properties in the area. If it checks out and leaves you with a positive value in #3, it’s a good jumping off point in terms of rental price. Let’s try it with real numbers:
PROPERTY VALUE: $250,000
$200,000 / 180 = $1,389
TOTAL MONTHLY EXPENSES:
Homeowners insurance $64
Property tax $151
$1,389 – $1,153 = $236/month
While the monthly income potential is lower on a single family home than on a multi-unit building, there’s a huge long-term upside to the solo property. Once your mortgage is paid off, your monthly income will grow considerably. This paired with property value increases—and standard rental increases that follow—means you’re building steady, consistent wealth over time. And if you do need to move on, it’s easy to sell a single family home—you can find a qualified buyer or investor to take the property off of your hands.
The major downside? If your property is vacant, you’re still paying the mortgage while not generating any rental income. This is definitely something to consider as you’re assessing properties—is this single family property in a hot neighborhood, great school district or otherwise situated to continuously be occupied, year after year?
Take it a step further and consider offering qualified tenants multi-year leases—two or three, for example—to help keep your property revenue-generating for longer set periods of time. Or consider investing in a duplex—it’s not much more work than a single family property, but if one side is empty, you can still count on the other side to deliver monthly income.
The next stage of cash flow rentals? Multi-units. The perk is clear: more units means added rent checks each month—bonus! If you get a good deal on the building or you’re able to fund all or most of the purchase price in cash, that monthly revenue stream can be significant from day one. And besides all that, you’ll also always be generating at least some income once all the units are filled—it’s very unlikely that all will be vacant at the same time.
The downside? Renters in multi-unit buildings tend to be less tied down than those who rent bigger, more costly single family properties and duplexes. Your building will likely be in-demand among younger renters and those without the financial means to purchase a home. With some careful vetting, credit checks, solid security deposits and co-signers (if needed), you can likely dodge many of the potential pitfalls of these lessees, and keep your income on track.
Another consideration when investing in a four-plex or other multi-unit property? What’s your short- and long-term plan, as a landlord? Do you plan to hold onto the building for the foreseeable future, or are you hoping to sell it in a year or two? Single family homes and duplexes are almost always easier to sell, because you can sell to a fellow investor or a prospective homeowner. With buildings, you’re going to be selling to an investor who, depending on market conditions, can be few and far between.
Another key consideration is your lending status. Banks and lenders consider anything that exceeds four units to be a commercial property, and your financing options will change considerably. It’s not necessarily bad, but just something to keep in mind when it comes to planning. Commercial loans can often be harder to come by than residential loans.
Still kicking around the idea of investing in a cash flow rental? Come to one of my seminars or workshops—where we’ll dive into more detail. Check out upcoming dates and cities, or be on the lookout for the next session of my Real Estate Academy. Don’t go it alone—I’ve invested in cash flow rental properties, and I’ve successfully coached countless graduates to do the same. Come and learn all about the landscape and how to be a power player in this industry—and earn serious income in the process.