Over the past few years, our investment team has been able to find really good deals in single-family homes that we have converted into rentals. So, I've put together five basic strategies to help you find the best possible deals and start building your rental portfolio. If you're reading this blog, it means you're already in the low percentage of the population that is actively looking for a better life and a better future. I got inspired to write this blog based on a great conversation I had with my friend jeff over lunch, he brought up great questions and realized the need of an appropiate strategy.
Here are the top known benefits of having rental properties:
Steady Income: As long as your rental properties are consistently rented, they can provide a steady stream of income and positive cash flow. If you have a mortgage on the property, the lower the mortgage, the higher your cash flow will be. For example Monthly property mortgage of $1400, Monthly Rent income of $2400, resulting in a "Net Cash Flow" of $1000 a month.
Appreciation: Real estate tends to appreciate over time, meaning the property's value can increase, leading to higher potential profits if sold in the future. A great example is a duplex my family purchased in El Paso, Texas for $80,000 in 1998. It had two units with three bedrooms, two bathrooms, and 1000 sqft each. This duplex was worth and sold for $240,000 in 2022, making a net profit of $160,000.
Tax Advantages: Rental property owners can take advantage of various tax deductions, including Mortgage Interest Deduction, property tax deduction, depreciation, repairs and maintenance, travel expenses, professional services deductions, and 1031 Exchange (Owners can defer paying taxes on the sale of the rental property by exchanging their property for a similar property and deferring capital gain tax).
STRATEGIES TO FIND THE BEST DEAL
Here are a few very important tips that we have used to help you find the best deal on buying a single-family home to convert into a rental property. Full disclosure, finding the best deals that are truly worth it requires quite a bit of work, expertise, and time.
Determine your budget: Before you start searching for properties, determine your budget and/or financing options for your purchase. Although “cash is king,” it is always wise to leverage debt and positive cash flow. The most common ways to finance investment properties are: using a bridge loan such as a short-term hard money loan, or a 20% conventional loan, or if it's your first or second property, you may also have the opportunity to upgrade your primary residence property and rent the current home you are living in.
Work with a real estate team with investment property experience: A real estate team with effective experience in acquiring and negotiating investment properties is the most valuable relationship you may have. The negotiation skills necessary to get the lowest price possible are hard to find. Your real estate team has access to investment properties on the market, off-market, coming soon, real estate wholesale relationships, distressed properties, foreclosures, or short sales.
Distressed or turn-key property: Depending on your rehab or upgrade budget, it is vital to identify if a distressed property or a ready-to-move-in property is a better choice. Distressed properties are commonly known for needing full remodels, which may take months and thousands of dollars, but are also the lowest-cost properties you may find. On the other hand, a turn-key ready-to-move-in property may also be available at a great deal, and even though your monthly mortgage payment may be higher, you can still benefit from positive cash flow, appreciation, and tax benefits.
Find the best opportunities currently listed on the market: Once you have contacted and built a relationship with your real estate and lending team, you need to be clear on the type of property you are looking for and the amount of work and money you can afford to spend on repairs and upgrades. Realtors have access to and many times their websites with all the listings available in the market in your area. Start with searching for properties that have had the biggest price reductions and the most days on the market. Once you find one that you may consider a good opportunity, ask your realtor to run a comparative market analysis to determine the market value. Do your research on the average rent prices in the area for properties similar to the one in question. Compare the possible rent to your mortgage payment to gauge what the possible positive cash flow could be. Once your due diligence, research, and analysis have been done, you can ask your real estate team to contact the listing agent and negotiate the best possible purchase price before making a formal offer.
Consider off-market properties: Sometimes, the best deals are not listed on the open market. Wholesale properties are usually marketed directly with real estate wholesale organizations and are available at very low prices. However, when buying wholesale off-market properties, the majority will be either cash or hard money finance purchases. Once again, this is where working with real estate teams with experience in investment properties is vital to represent you in negotiating the best possible price, assisting you in the due diligence necessary before committing to the purchase, and keeping your monetary expectations and return on investment in check.
Remember, finding the best deal on a rental property requires patience, research, and a very strong negotiation team. Don't rush into a purchase, and be willing to walk away if the numbers don't make sense. Creating a strong real estate portfolio is one of the best ways to generate wealth and passive income. If you're interested in learning more about how to start your real estate rental portfolio do not hesitate to call, text, or email us and we will guide you through your real estate journey. You deserve it and your family deserves it!
Any questions, comments, suggestions or any information you would like to share about this topic please comment below! I always appreciate the feedback.