A Beginner’s Guide to Rental Investing

I love passive streams of income from real estate, and property appreciation for that matter. But before you learn how to become a landlord, you need to know exactly what you’re getting yourself into.

Forget the cultural stereotypes about greedy, rich, lazy landlords. They’re not true. Becoming a landlord means taking on a real estate side hustle: you become a small business owner. It requires both labor and skill — and it takes time to learn those skills before you ever buy your first rental property.

Before making any offers on rental properties, make sure you understand the labor and skills required to become a landlord.

 

Key Takeaways:

• • Rental properties can generate cash flow, appreciation, and tax benefits, but being a landlord requires some labor and expertise.
  • If you just want to diversify into real estate and earn passive income, consider passive real estate investing instead.
  • Landlords don’t earn as much cash flow as lay people think. Learn how to accurately calculate cash flow before even browsing rental properties.

 

Active vs. Passive Real Estate Investing

First and foremost, ask yourself a simple question:

“Do I just want to diversify my portfolio to include real estate and earn passive income, or do I want to start a real estate investing business?”

If you just want sources of passive income and to diversify into real estate, there are easier ways to do it. Namely, by investing passively in real estate syndications or real estate crowdfunding. Consider real estate crowdfunding investments the “training wheels” of passive real estate investing. When you’re ready to level up, switch to passive real estate syndications.

To reiterate: you don’t need to become a landlord to get all the passive income, appreciation, and tax benefits of real estate investing. We aim for 15–30% returns on passive real estate investments in our Co-Investing Club. All investments include full tax benefits and then some, with accelerated depreciation.

If you have a passion for building your own real estate investing business, where you have total control over your assets — in exchange for working nights and weekends to build and manage that portfolio — then read on to learn how to become a landlord.

 

How to Become a Landlord

I spent 15 years as a landlord and owned dozens of rental properties. Follow these steps to become a landlord with minimal risk and maximum returns.

 

1. Learn How Rental Cash Flow Works

Be honest: do you think that the cash flow on a rental property is just the rent minus the mortgage?

Before you ever even browse rental properties on real estate websites like Zillow, you need to know exactly how rental cash flow works. Otherwise, you’re about to enter a world of pain.

(Walter gif from The Big Lebowski)

Landlords refer to a rule of thumb called the 50% Rule: you can expect around half of the rent to go to non-mortgage expenses. Those expenses include, but aren’t limited to:

• • Vacancy rate
  • Repairs and maintenance
  • Property taxes
  • Landlord insurance
  • Property management fees (more on these momentarily)
  • Accounting and bookkeeping costs
  • Legal and marketing costs

Add them all up to average around 50% of the rent. And that’s before you talk about principal and interest on a rental property loan.

When new investors first learn about the 50% Rule, many scoff. “How am I ever supposed to find a property that cash flows well if half the rent goes out the window before even talking about the mortgage payment?”

How indeed. The answer: it’s a lot of work to find good deals. They’re not just sitting around the MLS, waiting for newbie investors to come along and start earning money from Day 1. Professional real estate investors go to great lengths to find deals, such as driving for dollars or digging through preforeclosure listings. Then they send out thousands of letters to those leads using direct mail campaigns.

The stark reality of becoming a landlord should be starting to come into focus.

Oh, and don’t dismiss property management costs by saying “I’ll just manage the property myself.” Property management is a labor expense, whether you do the labor or someone else does. Besides, the day will come when you are no longer willing or able to manage rental properties yourself anymore.

 

2. Choose a Market (and Learn Local Landlord Laws)

Here’s another wake up call: the city where you live may not be a good market for real estate investing. Mine certainly wasn’t.

Different cities and towns have different cap rates and gross rent multipliers (GRM). In some markets, like San Francisco, property prices cost far too much money compared to rents for landlords to reliably earn cash flow. Check out this interactive map of the best cities for real estate investing by GRM.

But price/rent ratios don’t tell you everything. Some markets impose extremely tenant-friendly laws, stacking the deck against property owners. I started my real estate investing career in Baltimore, MD, which has extremely antagonistic landlord-tenant laws.

Word to the wise: don’t invest in a market with anti-landlord laws. That goes for both the state and city levels of government.

If you decide to invest long-distance, prepare for extra challenges. It’s harder to network with all the support personnel you’ll need, from contractors to property managers to real estate agents. And it’s even harder to screen and vet them properly.

 

3. Choose a Strategy to Find Deals

How do you plan to find properties that cash flow well? You can work with a realtor of course, but you’ll pay market value for any properties listed for sale on the MLS.

You could buy foreclosures or look into other ways to buy distressed properties. Tools like Propstream and Foreclosure.com make this easier, but you still need a systemized marketing plan to contact these owners. Check out our full Propstream review and Foreclosure.com review for more details; here’s a quick preview of how the latter works:

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Or you could buy turnkey properties through an off-market turnkey seller, such as Norada Real Estate or Asset Column. You could browse turnkey properties on a marketplace like Roofstock.

Or perhaps you buy fixer-uppers and renovate them, to refinance and keep using the BRRRR strategy. Or any number of other strategies to find bargain deals.

Pick an investing strategy, and learn everything you can about it from people who have actually done it.

 

4. Network with Lenders

Too many novice real estate investors start making offers before they have a plan for financing.

Sure, you could probably get away with using your home mortgage lender for your first investment property or two. But you can’t scale that way — to begin with, conventional mortgage loan programs have a cap on the number of mortgages allowed on your credit report.

Start networking with portfolio lenders such as Kiavi, Visio, New Silver, and RCN Capital. The more loans you do with them, the better the loan terms they’ll offer you, and the more flexible their underwriting on your loans.

Portfolio lenders keep the loans in-house, in their own portfolio, rather than bundling them and selling them off like conventional mortgage lenders. Compare investment property loans and lenders for more options and information.

You can get more creative as well. For example, Fund&Grow helps you open up to $250,000 in unsecured business credit.

Start building your “financing toolkit” of options to fund real estate deals.