Are you interested in learning how to start a rental property business? Today, I have a great guest post from Nikki, a reader of Making Sense of Cents, on how she started her own rental real estate business with just $30,000. She now owns 28 rental units!
How early do you start to think of saving for retirement? Though it may not be on your radar now, there is a way to start saving without even thinking about it. Now how does that make sense?
By investing in real estate.
That is exactly what my husband and I did!
We started with a small investment of $30,000 to purchase one rental property and less than 10 years later, grew that one investment into 28 units!
All of which are intended to help us retire early and continue bringing in passive income!
Now let’s start from the beginning…
My husband and I married back in 2009. Now, most newlyweds don’t just jump right in to buying a house after shelling out the money for a wedding, not to mention we were only in our early 20’s to begin with, but we were ready to make the leap into home ownership!
We were fortunate to have some, albeit small, savings for a down payment to get us started. If you can recall, in 2009, we were still feeling the ramifications from the Great Recession.
This unfortunate time was a result of the housing bubble, where prices of homes were run-up in the early part of the decade enticing a flux of homebuyers with low interest rates.
Unable to sustain this trend, the market soon after crashed, leaving many borrowers at the mercy of the banks unable to afford their loans.
The reason I explain this is to bring full light to how we could purchase a nice, 1,900 square foot home at the ripe age of 24.
Though I hate that it was at the expense of someone having to default on their loan, we were able to pick up a foreclosed home. A foreclosure is just as I explained; it is the bank’s way of recovering the balance of a loan that a borrower has stopped making payment on.
So, the purchase price was down as a result and we quickly bought our first home.
Related content on investing in real estate:
- How This 34 Year Old Owns 7 Rental Homes
- How This 29 Year Old Is Building A Real Estate Empire
- How We Reached Financial Independence Using Airbnb & Real Estate
- How To Invest in Real Estate Through Publicly Traded REITs
Here’s how we started a rental property business.
The house was dated, but nothing we could not tackle. Might I add that my husband is handy? Having worked beside his Dad as a kid, he was fully aware how to tackle the DIY stuff!
Over the course of the next 2-years, we did some renovations to the house, paint, new flooring, updating the bathrooms and kitchen, and even installing an awesome outdoor entertaining area.
I think it might have been the moment we put the last stone on our fireplace that my husband had the itch to pick up another foreclosure and fix that up, too!
So we decided to sell!
Now that we were out of the recession, we were able to get some good traction on our home.
With the renovations we completed and listing at fair market value, we sold our house for a profit of $70,000!!
Our first flip was a success!
Related content: 11 Tips For Renovating An Abandoned 115 Year Old House On A Budget
The first rental property
Once you make a profit like that from flipping a home the wheels start to turn in your head, and turn they did in my husband’s. Not only is my husband super handy, but my brother in law is as well.
They got to talking and a business plan was developed!
Flipping homes has its benefits but has high capital gains tax associated with it. Rather than flip and sell, flip and rent came to be!
After doing extensive research on the housing market they landed on a double home. That is where a home is split in half and occupied by two different families.
We took $30,000 from our $70,000 sale and purchased half of the double home to rent out. Geographically, you may be thinking it is near impossible to buy something for only $30,000. Living in central Pennsylvania, I too, would not have thought it possible. However, if you research long enough and keep your eyes open you will find the potential.
This home actually already had an active tenant so finding a renter was no problem.
Obviously, purchasing something at a low cost will come with its disadvantages. There were A LOT of maintenance issues. With the skills that both my husband and brother in law have, they were able to save the cost of maintenance and repair. You will want to consider this factor in the beginning. This will add to your cost. If you can do the work yourself, you can save yourself a lot of money. But, how valuable is your time?
Creating an LLC
Before I go any further with our story, it is important to point out that as soon as a business plan was developed, the next course of action was to create an LLC.
An LLC or Limited Liability Company is a legal entity created to operate your business. It limits your own personal legal liability and the liability then falls under this new legal structure. Hence the name Limited Liability Company.
This is important because real estate requires collateral and once we moved the first rental under the newly developed company, my personal collateral was now out of play.
The second rental property
With the first rental running smoothly and by smoothly I mean fully rented and payments coming in monthly, it was time to consider another.
It wasn’t as if thousands of dollars were flowing in with one rental so we were not well suited to just toss tons of cash around.
Our best alternative was to pull a line of credit on the initial rental property.
Line of credit
I know it seems as though I am throwing around a lot of definitions and acronyms, but I want to be fully transparent on the steps we took.
A Home Equity Line Of Credit (HELOC) provides you with a credit line secured by your home.
Back when we were looking to pull our first line, we could secure about 90% of the home’s value. If the home was valued at $30,000, we could receive a loan of $27,000. Rates have since changed and are not offered at such high values now but still something to consider if your cash flow is lacking.
My disclaimer, this is what worked for us! It may not be a one size fits all approach, as a line of credit requires you to incur more debt. But, if you have your ducks in a row and have good credit, this option can certainly be feasible and better than racking up credit card debt or taking on personal loans! Knowing full well we would do what it takes to make this work, we were willing to take this risk!
Growing your portfolio
With this method, more single family homes were added to the portfolio.
All of which were foreclosures and purchased with a HELOC, piggy backing off one another.
Again you could see the risk if one catastrophic issue were to occur we could potentially lose our entire portfolio!
Each of these homes required a lot of fixing. In the early days, my husband and brother in law spent hours upon hours working on these rentals.
Fortunately, they are both schoolteachers so this allowed for some decent summer employment. With continued maintenance issues at the first rental, they knew it was time to put it up for sale.
There are two things you must consider when selling a rental property.
- Will you sell the home as a rental and therefore allow the tenant to remain in the home or
- Will you sell the home with the expectation it will be occupied by new homeowners? WHEN GOING THIS ROUTE YOU MUST ENSURE YOU GIVE THE RENTER ADEQUATE NOTICE TO FIND A NEW HOME. I put this in all caps because it is super important! You are legally obligated to give your tenants appropriate notice when your rental relationship has ended. Inform yourself of the laws applicable to your situation! Not to mention you never want to put someone in this situation and not allow them the proper time to find other arrangements.
The decision is a difficult one. You never want to displace someone living in a home. So when making this determination you want to first ensure they are adhering to the law, making timely payments, and taking adequate care of your place. These should routinely be monitored. This is your home after all.
The sale of the first rental went through with no profit after paying off the line of credit. However, it was a great way to get our feet wet and understand the industry.
Establishing an ideal monthly profit is crucial.
Because we could do all the maintenance and repairs ourselves, $200 profit, per unit, per month was an attainable goal. This allowed for breathing room should an unexpected issue occur, a tenant miss a payment, insurance was due, or taxes were payable.
After being able to secure $200 per month profit on the current rentals, we decided looking for multi-units would be a great way to scale the business.
When you buy your first multi-unit it feels as though you are officially in business, you are officially a landlord. Not that that wasn’t the case before, it just now felt more big time! I say multi-units as if we were buying a large community of apartments or townhomes but that simply was not the case. We were not equipped to buy at such a large magnitude and stuck with two or three, if we were lucky, four, rental units.
Property management does not solely consist of the maintenance of the properties though it is an important factor.
There are eight things to take into consideration when running a property efficiently.
You will want to maintain adequate books for each property. This will include invoicing properties for their monthly rental payments as well as any utilities they are responsible for. You will want to reconcile cash and credit card statements and review your monthly profit and loss statement. You will also want to make sure you have payment scheduled for quarterly and annual taxes.
If you do not feel comfortable with this or are simply not a fan of the administrative tasks, you can outsource a bookkeeper. But that again, needs to be applied against your bottom line.
Note- some utilities are lienable, meaning the home can be seized should your utilities not be paid. You will want to read the laws of your local jurisdiction to gain a better understanding. My suggestion, pay the utilities upfront and bill the tenant for the charges. That way you know you are covered.
If you have ever purchased a home of your own you know how extensive it can be to secure a loan.
From closing to ensuring you have loan terms you are comfortable with.
Will you do a 15-year loan? 20? 30? When is a good time to refinance?
Weighing out the principal cost and interest payments is all part of the game. You will want to build a strong banking relationship. A bank that you can rely on and that will help you with all of your needs.
3. Rental Agreements
When you rent out your properties you MUST have your tenant sign a rental agreement.
This agreement should be thorough and detailed outlining the expectations for both tenant and property owner. My suggestion here is to have a lawyer on retainer. Someone well versed in the real estate industry who can write and review the language of your agreements.
Note- if you are purchasing an already occupied home, you will want the tenant to sign your new agreement. You will also need to make sure they are fully aware of any potential raise in rent. Not only are new tenants entitled to sign a rental agreement at the beginning, but should also sign a new agreement at the expiration of the old. You will need to make the necessary changes to the terms and rates and fully convey those to your tenant. More often than not they will sign based on standard of living increases. However, you will come across those who may refuse. You will then be faced with the eviction processes and finding new tenants. That is the not-so cheery side of the industry.
4. Finding Tenants
Finding tenants may be one of the more difficult parts of the business. Let me rephrase that, finding GOOD tenants is no easy task. Your phone may be ringing off the hook with potential renters, but you have to decide who will be the best fit for your home.
You can ask for credit checks and request payment history or referrals from previous property owners. The more you time you take to get to know the potential tenant as you are showing them the rental, the better. This really gives you an opportunity to know if they will be a good fit.
Marketing note- we found that listing the vacancy on Facebook Market Place brings in a huge audience. And the good old fashion sign in the yard with your phone number seems to do well!
5. Real Estate Agent
Having a great real estate agent that can get you in to see new listings quickly, within 24 hours, would be ideal!
If you can get in before some of the other investors, you can get your offer out there first! Some properties do have some contingencies and only allow first time buyers to view before investors are allowed. You will just want to be aware of this and know what your viewing potential is.
Note- if you have the opportunity to buy without a real estate agent, you may want to consider. Saves you some cost!
It is essential to have a contractor who does heating and air conditioning. Based on all of the maintenance issues from our experience, this is one of the biggest problem areas. You will get calls at all hours about heating.
Air conditioning may not be a dire need but in 15-degree weather, heating is!
So make sure you have someone you trust on call. You will not regret it!
Note- small business contractors have been amazing to work with, someone fair and reasonably priced.
Both my husband and brother in law have no issue working on plumbing themselves. If you choose to go it alone, make sure you are doing everything correctly and to code. Otherwise, you will want a good plumber in your contact list.
Note-A water jetty is a tool that has come in handy from time to time. This helps with a majority of the plumbing clogs they have run into. Something to potentially save you a couple hundred dollars on drain cleaning.
Along with a good HVAC technician and plumber, you will want a good electrician. I highly suggest outsourcing this unless you are a professional. You do not want to run into electrical issues, work to code is key!
When determining what to set your rent at you will need consider a few factors. Beforehand, make sure to always do your research in understanding the real estate market.
- Location- location, location, location! If you are renting in a high traffic, popular, area you have some wiggle room. People will pay more to be in a great area!
- Number of beds and baths- Are you offering a three bedroom? Is there more than one bathroom? These additional features of the home widen your opportunities.
- Utilities- are utilities baked into the cost (see my recommendation above when considering how utilities are to be paid)?
- Pet fee- are you allowing pets, and if so, what is the monthly pet fee? Non-refundable deposit?
- Parking/garage costs- do you offer a garage? Will they need to pay for a spot?
- Renters insurance- do you ask renters to cover insurance for their belongings?
- Deposit- what are the terms of your deposit? First and last month’s rent?
I want to revisit the importance of creating actionable goals for your business.
Our goal is more of creating a retirement incentive. So all profits that have been attained to this point have been retained in the company. Allowing for more buying power.
In recent years, all 30-year mortgages have been refinanced to 15-years.
Quicker payoff, less interest!
Once the loans are paid off, your profit will jump dramatically. We have been fortunate to be able to continue buying properties at the right time. Our method of buying more fixer upper style homes has done us well.
Don’t get me wrong, things have not always been perfect. Like any business, you will face hard times.
Turnover among tenants is common. There were times where we had to use personal funds to stay afloat.
And as I said, all the money has been retained in the business so we are not at it to receive a monthly personal gain but merely to grow the business and reap the benefits in the long-term.
That can be a hard pill to swallow when considering the long hours worked without immediate reward.
Current state of the company
At the time of this writing, we have 28 units.
As you may know, home prices have increased and are projected to continue increasing in the near future. That leaves us open to make some strides in the business.
Currently, the business plan is to sell off all single-family homes. This should create a healthy profit to work with. With that profit, we will then purchase a large rental complex.
No longer picking up the small duplexes or four unit rentals, an actual complex with a large rental capability.
It has been nice to reminisce about the beginning of this adventure and how far we have come.
Starting a rental business can be a slow progression if you aren’t starting out with tons of cash, but it is possible.
Begin checking out what is for sale in your area and gather your list of experts to consult. Sit down and write out your business plan that you can check in with daily. Be clear on your mission and set actionable goals. Determine what your income potential is and how much you want to make after considering all expenses. Make sure to have a contingency plan in place should any unexpected costs arise.
And remember, you can do it! Becoming an entrepreneur is an exciting journey full of hard work and perseverance but one journey I personally say is worth taking!
Author bio: The Founder of Pumpkin to Polished, a blog focusing on personal transformation. Passionate about small business and entrepreneurialism, I created Pumpkin to Polished to tell my story of what I have learned in my journey to find personal fulfillment. Uncovering secrets in home design to creating small businesses of my own. I want readers to understand you can have a life you love! You just have to get started!Wanting to start a rental business but not sure how to track all the expenditures? We got you covered! Snag your free tracking spreadsheet here!
Are you interested in owning rental real estate? Why or why not?