I have bought 16 rental properties since late 2010. My rentals have performed awesome, and made me a lot of money, but I stopped buying rentals in 2015. In fact, I even sold two rentals in 2016. While the Colorado market may not be ideal for me to buy rental properties in, this does not mean you can’t make money with rentals. I have really high standards when it comes to the rental properties I buy. I look to make at least a 15 percent cash on cash return from the rental income. There are investors still buying rentals in my area (including my team manager Justin) and there are many great markets outside of Colorado for rentals as well. While some markets in the United States have shot up in value and made it tough to cash flow, you can still make money with rental properties.
Why did I stop buying rental properties in Colorado?
I bought my 16th rental property in September of 2015. I bought that property for $92,000, put less than $5,000 of work into it, and rented it for $1,100 a month. This sounds like an awesome rental, but the house is not perfect, since it’s over 100 years old. I try not to buy rental properties over 40 or 50 years old. The older the house is, the more maintenance it will need and the more major problems it could have. When I analyzed the last few rentals I purchased, I was stretching my buying criteria to find them. One was a college rental duplex (I like single family rentals). One was very old, and one was in need of a lot more work than I like to complete on rentals. The reason I could not find great rentals was the market in Colorado has been one of the hottest in the country. Our median price went from $110,000 in 2012 to over $260,000 in 2016. Rental rates went up, but not did not rise nearly as much as prices. I can’t make as much money on houses I buy today as I could a few years ago.
I could have kept stretching my criteria to buy properties in my area. One reason I want to keep buying rentals is I have a goal to purchase 100 rentals by January 2023. I am way behind on that goal since I stopped buying rentals, but I am not giving up. Instead of stretching my buying criteria, I took a break to assess my situation, my market, and to figure out where and when to buy new properties.
What plan did I come up with to buy more rentals?
My first plan to find more rentals was to find a new location to buy single family rentals. I really like single family homes, because they are easy to rent, easy to manage, and easy to sell. I studied many markets, talked to many investors and decided on Florida. Southern Florida was too expensive for me, but I found a few really great markets in the Northern part of the state and even visited in March of 2016. I really liked what I found in Florida, but it is hard to invest out-of-state. I found some decent agents, some property managers, and some lenders, but I never pulled the trigger. The numbers were great with rent to value ratios close to what I bought my rentals at a few years ago in Colorado. I still didn’t buy for some reason, in fact I sold a couple rentals here!
Why did I sell some rentals in Colorado?
I sold two rental properties in Colorado in the summer of 2016. I sold those houses because the market was doing so well, and I did not like those properties very much. One was the college rental and another was a house that had a weird layout, and was hard to rent. I thought about using a 1031 exchange to sell those properties and buy new properties in Florida, but I didn’t do it. Instead I put that money directly into my flipping business.
While I have not been buying rentals, I have been flipping houses like crazy. I have 14 flips going at the moment and will have 16 at one time in a few weeks. I have been taking the money I would usually invest into rentals and used it to buy more and more flips. I love flipping, but I also love rentals. I average about $30,000 in profit on every flip I do, but once I sell a flip I am done earning money with that property. With rentals, I keep earning money from that property for years and years. I can even refinance it to take cash out and still earn money from it every month. I definitely want to keep buying rentals, but the question is where or what kind of rental property do I want?
Why are rental properties so awesome?
Before I get into the details of my future plans, I want to touch base on why I love rental properties. I have 14 rentals, which make me about $7,000 a month in cash flow. Cash flow is the money I make after all expenses including maintenance and vacancies. You can calculate the cash flow on any property using my cash flow calculator here. The awesome part about my rentals is that I don’t do any work on them. I have a property manager and they handle all the tenant issues, maintenance, and leasing hassles. I just sit back and watch my checking accounts grow (I have each rental in its own LLC with its own checking account).
You may be thinking that is great, you had millions of dollars in cash to buy your rentals with, and make a measly $7,000 a month. Actually, after refinancing my properties, using loans to buy them, and selling two properties, I have barely invested any of my own money to buy these properties. Not only do they provide $7,000 a month in cash flow, they have over one million dollars in equity thanks to appreciation and buying them well below market value.
Can you still make money with rental properties?
I did fantastic with my rentals, but I bought them after the housing crisis when prices were much lower. Did I just get lucky, or can you still make money with rentals? I have to say I was spoiled when I bought my rentals. Prices were low, rents were relatively high, and I did great. My returns on rentals were through the roof. Something like 30 percent per year or greater just from the cash flow and not counting the equity increases, or tax advantages (rentals have awesome tax treatment from the US government). Obviously you don’t have to make that much money with rental properties to have a good investment.
I like to shoot for 15 percent cash on cash returns on my rentals, but that return does not include tax advantages, equity pay down, or the instant money I make when I buy below market value. Many people would be happy with much lower returns. If you can make 10 percent cash on cash return or even 8 percent, that might be a great investment for you. I see people buying rental properties in my area, and doing very well when they take their time to get an awesome deal. Just because I am not buying does not mean it’s not a good time to buy for others.
You still have to be careful when buying rentals
Even though I just said other people may be happy with smaller returns, that does not mean you should not be careful. If you are making too little with a rental, or nothing at all, it can be very risky. Most people make the mistake of under-estimating the money they will make on rentals. They also under-estimate how much cash is needed to buy a rental, and they don’t have enough reserves in case there is a problem.
If you are buying rentals with the sole hope that they will go up in value, you must have the financial stability to hold properties for a long period of time. There are many markets in the country where it is really hard to make any money with rentals from cash flow. Investors are hoping for appreciation which is risky. There is no guarantee prices will go up, and if you want to invest solely for appreciation make sure you can withstand the downturns. That means have a lot of extra cash! There are still many areas of the country where you can make money with rentals, although it takes more work to invest out of your area.
What are my current plans with rental properties?
I am still planning to create as much passive income as I can with rental properties. I may still invest in Florida, or I might invest in my own area using a different strategy. I have been looking at commercial or industrial buildings to invest in. I have shied away from commercial in the past, because they can be very complicated investments, but I have learned a lot the last few months. Many of you have asked me why I don’t invest in multi-family in my areas as well. The problem with multi-family properties in Colorado is they are super expensive as well!
I know I will be buying more rentals in 2017, I just don’t know where or what kind yet.
To learn more about my investing strategies, my rentals, how to buy properties, manage them, and much more, check out my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.