I love rental properties, even though I have not bought any residential rentals for two years! I have been spending all my time flipping houses because our market in Colorado has changed so much. Prices have gone up incredibly, but rents have not come close to keeping up. Rental properties are a great investment when the number make sense, but not every market has good numbers for rentals. Many people in areas with high house prices can’t find rental properties that actually cash flow. Just because you cannot buy a good rental property in your area does not mean you cannot buy a rental. I have been forced to change my real estate investing strategy. I have looked at out-of-state rentals, turn-key rentals, and decided to buy local rentals by switching to commercial properties. I am buying a commercial rental in the next couple of weeks in Colorado, and I am planning to buy another out-of-state rental before the end of the year (I own one in Cleveland now).
Why did I switch from buying rentals to flipping more houses?
I bought my last rental property in September of 2015. You can see all the numbers on that rental here, but I paid $92,000 for the house, and it rented for $1,100 per month after I made minimal repairs. Those are great numbers, especially when you consider the property taxes in Colorado are very low. That same house is worth about $190,000 now and rents for $1,200 per month! I may be able to get $1,250 per month if I were to raise the rents, but as you can see, the rent-to-value ratio is not nearly as good as it was. I also got a really good deal on that house since it was worth about $130,000 when I bought it. But even if I got a really good deal on that house now, I would be paying $150,000 for it. Instead of buying more rentals that would not make me very much money, I decided to flip more houses while I found new markets to invest in.
I went from flipping 7 to 12 houses per year to flipping 18 houses last year, and I may flip up to 30 houses this year. Flipping houses takes a lot of money, and one reason I have been able to grow so fast is I am investing the money I used to buy rentals into buying more flips. I had up to 20 flips going at once earlier this year, and I have 15 going right now. I have 5 more flips under contract to buy in the next month! Finding contractors, financing flips, and managing that many properties is challenging, but it is also a lot of fun. I love rental properties and the long-term wealth they can provide, but flipping houses can also make you a lot of money. I have averaged about $30,000 in profit on each flip I complete, and I have been building up a lot of cash that I can invest into more flips or more rentals. It is also easier to flip houses in any housing market because you are not counting on rent-to-value ratios to make money.
For more information on how to flip houses, check out my book: Fix and Flip Your Way to Financial Freedom. The book is available as an eBook, paperback, and will soon be an audio book.
Why do I want to buy rentals when I am making money flipping?
Even though you can make a lot of money flipping houses, it is more of a job than an investment. I make money on flips just once—when I sell them. Once I sell a flip, I must buy a new one, fix it up, and repeat the process over and over again. If I stop buying properties, I stop making money. I have had no problem finding properties to flip in one of the hottest markets in the country, but I also want to build as much passive income as I can. Rental properties have been one of the best investments I have ever made because they make me money with very minimal work:
- Every property I have bought has made me about $500 per month after all expenses. I own 15 rentals now, although I have sold a couple in the last year.
- Rental properties have incredible tax advantages that allow you to lose money on paper even when you are actually making money.
- You can use loans to buy rentals and still make money. Leverage is one of the best tools to get more bang for your buck and increase returns.
- The longer you own properties, the more your loans are paid off and the more valuable houses become.
- You can refinance rentals or use creative financing to get most or all of your investment back and still make money.
- As time goes on, rents will go up, which provides a natural hedge against inflation while your loan payment stays the same.
- You can buy houses below market value, which you cannot do with stocks. You can instantly come away with a huge return on your money simply by buying a great deal.
After selling a couple of properties and refinancing a few more, I have gotten my entire investment back. I wrote all about it in this article. Basically, the returns on my rentals are infinite because I have invested none of my own money into them, and they make thousands every month and have increased my net worth by over one million dollars.
What about the risks that come with buying rental properties?
Owning rental properties has not been all smooth sailing. I have had to evict tenants, and I have even had tenants trash some of my properties. However, the way I figure cash flow, I prepare myself for disasters, and they are included in my calculations. You can check the returns on rental properties by using my cash flow calculator. One thing I have done to reduce the risks and work that come with rental properties is hire a property manager. Agents on my team manage the rentals for me, which saves me a ton of time. Unfortunately you will have problems with tenants when you own enough properties over enough time. Below, you can see a video of one of my rentals that got trashed.
You can read the full story about the house here. We spent over $20,000 fixing up that house, but the repairs are done, and the house is rented again. That kind of repair figure shocks a lot of people, but we also improved that property by putting in new windows and upgrading a few other items. The best part is that I made sure my insurance covered tenant damages a couple of years ago. This may sound sad, but I forgot I had done that until an insurance agent mentioned you can get insurance that covers tenant damages after seeing my post on the property! We submitted a claim with my insurance company, and most of the repairs may be covered. The insurance may even cover the eviction costs and the lost rent.
Rentals can be risky if you buy the wrong properties. If you are buying rentals that make no money, hoping that they go up in value, it can be very risky! That is why it is tough to buy rentals in areas where housing prices are high. I made a lot of money from the rental that was trashed. Cash flow, refinancing the property, and buying below market value all led to great returns. Even if the insurance company does not cover the repairs, it would be a good investment. For more information on buying the right rentals and how great of an investment they can be, check out my best-selling book: Build a Rental Property Empire. It is available in eBook, paperback and as an audiobook.
How can you invest in rental properties when prices are high?
I have not given up on buying more rentals, even though prices are very high in my area. I made a plan to buy 100 properties a few years ago, and I still want a lot of rentals. I have looked at buying rentals in different markets like Florida. I took a trip to Florida and found markets that I really liked. I never bought a house in Florida because I was so focused on flipping, and buying houses out of your area is a lot of work. You need to find a lender, a great real estate agent, a property manager, and contractors. Buying out of your area is not impossible, but it takes work. With national property management companies like Renters Warehouse, it is easier to buy out-of-state. I recently went to Iowa to visit with some of my wife’s family, and there were rental-property possibilities there as well. Many markets all over the country are great for rental properties.
I also bought a house in Cleveland from a turn-key rental property provider. That property was bought, repaired, rented out and managed by the turn-key rental property company. Buying that house was an experiment for me since I had money in my IRA that I did not want to put in the stock market. Normally, that house would not fit my investment strategy because I bought it for cash, it was a cheap rental, and I did not buy it below market value. I would not buy another rental property like that, but I might buy another turn-key rental property if I financed it and was able to get a good deal on it. Lucky for me, I have found a company that provides turn-key rentals that can actually be bought below market value as prehab properties. That means you buy the house and pay for the repairs, but the company handles the management of the repairs, finds renters, and still manages the properties. Because the investor pays for the house and the repairs, the turn-key company can sell houses below market value since it takes less of their money to make the deal happen. This company has also put me in touch with a portfolio lender, sells houses in a higher price range, and the properties have good cash flow. There is a very good chance I will be buying a rental property from this company very soon. I may even by an out-of-state rental myself in another market to compare how the processes differ.
Another thing I have done this year is look into buying commercial rental properties. I bought a small commercial shop a few months ago to store supplies for my houses that also could be a good investment if I ever rented it to someone else. I have also had a commercial rental property under contract for months that we finally were clear to close on last week! The property has 1,200 square feet of retail space plus a 2,000-square-foot shop, which I am buying for $110,000. The property should rent out for at least $1,500 but hopefully much more. Investing in commercial properties is much different from residential. I will have a full write-up on that rental property soon with pictures and videos. I have another commercial property under contract that is much more expensive which I may or may not buy. I also had a much larger project on a 250,000 square foot building under contract earlier this year that recently fell apart. I will also write about that deal soon and why it did not work out.
When housing prices are high, it may not make sense to buy residential rentals in your market. However, there may be other markets that are great to invest in or other types of properties that you can invest in locally. A lot of people ask me why I do not buy multifamily properties in my market. The answer is simple: you cannot make money on multifamily properties in my market either because the prices are so high compared to the rents. I would also add that just because housing prices are high now does not mean another crash is coming soon. It may take some work and sacrifice, but there will always be ways to take advantage of the awesome benefits rentals offer. I will be writing more about my personal experiences with rentals the last part of this year.