Master the Rental Property Niche
I’ve been blessed to have several investors as clients. While it takes extra effort to serve them, they will pay you in spades through extra commissions. Investors come in two sizes – flippers and landlords. Here’s a few lessons to help your land-lording clients build a profitable portfolio.
Kenny Rhoton was an old, crusty real estate investor back in the day. While others were stuffing money into 401(k)s, he amassed rental property. By the time he passed away, he owned more than 250 properties. “I don’t care what a house is worth because I am never going to sell it”, he’d say. His long-term plan was building a cash-generating machine and that’s exactly what he did.
“The rental property niche
needs good agents.”
He had a few quirky rules about land-lording that would seem odd by today’s standards but his reasoning was solid. For example, he personally knocked on every door to collect the rent. He staggered rent due dates by the area of town so he could walk through each neighborhood, talk to folks, find new properties and get the “low-down” on the area. He, as they say, “kept his ear to the ground.” When collecting the rent, he always brought a gift or two such as candy for the kids and fresh air filters for the furnace. “Getting clean, fresh air is important for good health”, he’d say. Truth is, he liked walking through his rentals each month to check maintenance and upkeep. Tenants kept things in order because they knew Kenny would soon stop by. Also, when a potential tenant met him at a house, he took the time to walk that person out to their car. “Seeing how a person maintains their vehicle is a good indicator how they’ll treat my house.” Good point. Sure, he had his shares of difficulties – all landlords do. But keeping good, consistent relationships made his real estate investing successful.
Valuing investment property is a key ingredient to serving investment clients. It sets you apart from most other agents. If you want to become an expert in the rental market niche, use Kenny’s 5 step plan:
1. Know the neighborhood’s average rental rate. Investigate the actual rent charged in a neighborhood – don’t focus on a CMA. Rental rates change from block to block and a tenant will move from a property just to save $25 each month.
When estimating annual income, calculate 11 months. Never expect the house to be filled 12 months each year. Sometimes it takes a week or two to clean, repaint, market and rent it again. This is where most investors fail. They fall into the trap of calculating 12 months of rental income rather than a more reasonable 11 months.
2. Calculate the property’s expenses. There are 4 expenses a landlord should budget: cash-flow/maintenance, water & sewer, taxes and insurance. You need cash-flow to operate any business. Put back $100/mo for each unit to cover maintenance. Since water and sewer are lien-able items, pay those expenses yourself. Estimate $50/mo. Let the tenant pay other utilities like electricity and natural gas. Property taxes are more expensive for rentals (around 50 mils) because they are not subject to a homestead exemption. Calculate property tax expenses based on municipality/school district rates. Lastly, don’t forget property insurance.
3. Estimate the cost & work to make it “rental ready”. Consider the condition of the property. Every investor should know their own skill level before diving in. Having a clear, realistic budget of improvements will help eliminate over-improving and pricing a house out of the rental market.
4. Know your investment requirements. Money is never free whether you borrow from a bank, from some guy named Loanshark Larry or your own savings account. Requiring a 7% -10% return on your investment each year is reasonable. Make sure your plan includes a return on investment.
5. Calculate the Trigger Price. A rental property’s value can be determined after knowing its income potential and carrying costs. Drilling down to that one number removes all emotion from the equation. Pull the trigger on properties selling under its rental value, otherwise keep walking.
Through my foreclosure classes, I’ve met investors who struggle to make money. When explaining this simple plan, they say no one – not even their agent – explained it to them. Be the agent that explains it to them.
You can win the loyalty of your clients by helping them prosper.