As it turns out, looking at everything everywhere all the time for your first rental property is not possible with a family and a day job. I will cover the “how” (tools and websites I used) in future posts, but for this post, I want to tell you what I started out looking for and why.
Time
This is something that worries me a lot. I have a day job, and I worry that my excitement for real estate will bleed into my concentration at work. Losing concentration at this point I can’t haveecause my salary is a lot more meaningful than what I can generate from real estate in the short term.
Another concern is that I travel for work. My wife has no interest in real estate or managing properties, so I have no “free” backup for taking care of issues at a rental when I’m away. This really eliminates anything that’s going to be high maintenance unless I’m willing to pay for property management. It also means a rehab where time is of the essence and frequent visits/supervision is off the table.
Did I mention I travel for work? This severely limits my ability to get away to work on a property. I’m pretty handy, but the price of me going to a rental property to fix a leaky faucet would be quite high in time away from my family (not to mention spousal frustration).
Traditional Rentals
There are a couple of ways you can rent a property: traditional rentals or short term (AirBNB). AirBNB can probably be profitable in the right location with the right management, but it seems a bit more advanced and probably a bit more hands on. There’s that time issue again. I do want to tackle this someday, but not for my first property.
Traditional rentals just means owning a property and leasing to a tenant. There are lots of ways you can do this, but for my first property I wasn’t interested in multi-family. I can’t tell you how often I wish I had started out decades ago “house-hacking” a multi-family unit while living in one of the units, but here in 2021 there are a lot of dollars chasing just a few deals and the returns aren’t great in multi-family in my area.
Even within just single family homes, there are a few ways to do it. I’m looking for turnkey at this stage in my career because I don’t have the time to add value with a rehab or flip. I can hire someone to replace a carpet or maybe a water heater, but I’m not looking for a big project.
The best returns tend to be in the lower end of properties, but it makes sense to me that tenant quality is also lower. Lower quality tenants means more time and money fixing properties. I suspect that in this space, good property managers really earn their keep (typically 10% of rent before considering tenant placement fees). A chunk of rent is a lot more palatable when the rent is low.
By process of elimination, I ended up looking in higher quality single family homes. Someday, I absolutely hope to be looking in lower quality or multi family seeking better returns. Today I’m looking for a nice neighborhood with homes just a bit above the median home value in the area.
Appreciation vs. Cash Flow
Both please! Realistically you probably will accomplish both in single family homes with time. While looking at homes and talking with some other investors, however, there seems to be a pretty clear divide between the two. You will hear about an area being nice with appreciation potential, but that tends to be pretty clear code for “poor cash flow.”
When buying for appreciation, unless you’re in well before the trend, the price tends to already be higher. Higher price for the same rent as you can guess means less cash flow for the money you need to invest.
If you read my previous post covering why I want to invest in real estate, you already know why I’m looking for cash flow!
Location
Prices are crazy in real estate right now. Mortgage rates are low, inflation is relatively high, and both home prices and rent are going up. I live in the metro area of a big city. To invest in a home here slightly above median value would clean me out plus the return on rent wouldn’t be great. Needless to say, proximity is not a high priority for my first home.
Smaller surrounding towns have also experienced some growth in prices and rents, though not as much. The rates of return are better (cashflow, anyway), and I won’t have to refinance my home to come up with the money down. Though, investing in these smaller towns likely reduces the potential for appreciation in real estate.
What I’m Looking For
So there you have it. I want a home that:
- Is a single family home
- Has good potential for cash flow
- Won’t turn into a crack den (or at least is less likely to turn into a pain in the ass)
- Is located in a more affordable small town
- Won’t break the bank despite being a bit above median home value for the town
