Rental Properties

How Can You Save For Your First Rental Property?

One of the hardest aspects of buying rental properties is saving enough money to afford them. There are ways to buy rental properties with little money down, but these techniques usually make it harder to cash flow than putting 20 percent down. Putting little money down also involves buying as an owner occupant in many cases, which is not easy to do for those with families. The most profitable way to buy rental properties is to put 20 percent down, make repairs and have money in a reserve for maintenance and vacancies. However, it is not easy to save the money needed to pay for all the expenses that come with buying a rental property with 20 percent down.

How much money do you have to save to buy a rental property with 20 percent down?

The rental properties I buy cost from $80,000 to $135,000 in my market in Colorado. I put 20% down on my rentals and use an ARM to finance them. I also buy properties that need repairs to buy my rental properties below market value. If you add all the costs including carrying costs, repairs, down payments and closing costs, I need about $30,000 to $35,000 in cash for each rental property I buy. I also need to have money in reserves for repairs or vacancies. I figure I need to have at least $40,000 in cash before I buy a rental property.

How can someone save $40,000 for a rental property?

$40,000 is a lot of money and an unthinkable amount of money to save for many people. I was in that boat early in my real estate career; I could not save any money to buy a rental. One of the first steps to saving money is actually believing you can save money!  Once you get it in your head that you can save money, it becomes much easier. Then you can start planning, setting goals and working towards those saving goals. It may sound cheesy that believing you can save money will help you save, but it works. If you tell yourself over and over you can’t save money because you don’t make enough, you have a family or your taxes are too high, then you won’t save any money. If you get the idea into your head that you can save money, you will start to see places where you can cut back and build up your savings account.

Are their alternatives to saving $40,000 for a rental property?

There are ways to buy a rental property with less than $40,000.

  • The easiest way to use less cash to buy a rental property is to buy cheaper houses. The price of a rental property will be largely determined by your market prices. If you can cash flow on a rental property that is only $50,000, in an area you would want a rental, then you won’t need $40,000 you may only need $25,000 or less.
  • You can also buy a rental property as an owner occupant, live in the home a year and then rent out the property. This technique definitely saves upfront cash, but your payments will be higher due to higher loan amounts and mortgage insurance. This makes it harder to cash flow, because of the higher payments.
  • Another owner occupant strategy is to buy a multifamily property and live in one of the units. If you buy a 1-4 unit property, you can get an owner occupant loan if you live in one of the units. You could move out and rent the unit after one year or continue to live there.
  • Seller financing can also be used to reduce the amount of cash needed to buy a rental. The problem with seller financing is finding a seller willing to loan money back to you. If you can find seller financing in my experience, the sellers willing to do this are looking for top dollar on their properties and I want a great deal when I buy.
  • Partnering with another investor may allow you to put less money down, but you will have to share the profits and decision-making.  If you partner with someone, make sure everything is in writing and crystal clear.
  • A very risky strategy is to buy a rental property with a hard money loan and then refinance that property into a conventional mortgage. This strategy requires a lot of experience and is very risky because hard money loans have to be refinanced within a year or less

What is the easiest way to save more money for rentals?

I can say this from personal experience, the easiest way to save more money than you are now is to make more money. Many personal finance experts suggest saving as much as 50% of your income. That is very hard to do if you don’t make much money and hard to do even when you do make a lot of money. Our society and economy is based on consumers spending money and it is tough to save. Making more money makes it easier to save if you don’t raise your spending habits with your additional income. So many people automatically start spending money when they get a raise or a bonus.

I am not saying you should never start raising your spending habits. I am not a frugal person and I think it is good to spend money on things that make us happy. Before you start raising your spending habits, save money and save a lot of it. The more money you save the better off you will be financially, whether you invest in real estate or something else. If you have money saved up and have investments, you will feel better about spending money on things that really make you happy as well.

How can you make more money to invest in rental properties?

  • Start a business.  When you own your own business you have control and a lot more opportunity to make more money. I am a real estate agent and I run my own real estate team, fix and flip houses, run this blog and I have rental properties which are also a business. Make sure when you start a business you run the business and don’t let it run you. The point is for the business to make money without you, not for you to work 80 hours a week doing everything yourself.
  • Ask for it. The easiest way to make more money is ask for it. Ask for a raise if you are in a position where you work for someone else.  You better be able to justify your raise from work performance. If you have no basis to ask for a raise start working harder and smarter and show your value.
  • Change careers. Have you reached a ceiling in your current field of employment? Do you hate your current field of employment? Are you burned out and not doing of good a job as you should? Think about changing career paths to something you may actually enjoy.
  • Educate yourself. The most successful people never stop learning. They take classes, seminars, read and listen to audio books.  Don’t be afraid to go back to school if that will give your career a boost.
  • Do something you love. There are varying opinions on doing something you love versus getting paid. Some say it is impossible to do what you love and make money in some fields. I think anyone can make money in any field doing what they love. It may not be the exact job you envisioned if you wanted to be a professional baseball player, but that doesn’t mean you can’t make money in that field.  You could work as a trainer, coach, manager, or product designer. When you love what you do, you have more passion and work harder at what you do. You don’t wait for quitting time everyday because you can’t wait to leave. You get excited to go to work everyday and are disappointed when you run out of time to work because you are having so much fun.

Whatever you do to start making money, make sure you set goals. Set goals and plan how you will make more money because it won’t happen without hard work and change. Go out and make things happen, don’t wait for it to come to you.

How can you use a refinance to get money for rental properties?

I have refinanced my personal house in the past as well as two rental properties to get more cash for investing. A cash out refinance can be a great way to generate the cash needed for a rental, but you have to make sure you have thought the process through.

1. You must have enough equity in your home to be able to do a cash out refinance. If you are refinancing your personal house you can usually refinance up to 95 percent of the value.

2. You must be able to qualify for a rental property after you refinance. If you refinance your house and your loan amount goes up, it will reduce the amount you can qualify for.

3. There will be closing costs and other costs that are associated with a refinance. Make sure the amount of money you are getting is worth the costs associated with the new loan.

4. Make sure you can afford the new payment with the refinance and still be able to save money.

The first step to saving money for rental properties is to use a budget

Hopefully you found a way to make more money, but you also need to spend less. The first way to spend less money is to realize what you are spending money on.  A budget starts by tracking everything you spend money on; food, clothes, gas, housing, cars, entertainment, travel, etc. Most people never track their expenses because they are scared to see what they spend their money on or they are worried they will have to spend less money on things they love.

By tracking your spending, you will see a few things right away that you can save money on. You may be spending too much money on housing, food, clothing or entertainment. Once you see what you spend, use a budget to limit your spending each month. Cutting back just a little on some expenses will go a long way to helping you save the money you need. A great tool for tracking the money you spend and your net worth is Personal Capital. They offer a free app that links all your accounts and tells you what you are worth and what you spend.

Pay yourself first when you save money for a rental property

It is very hard to get to a point where you can save 50 percent of your income unless you make a lot of money. Your first goal should be to save more money than you are saving now. A good rule of thumb is to save at least 10 percent of your income, but you should work to increase that number as much as possible.

Pay yourself first means you save 10 percent or whatever percent you choose of your income before you pay any bills. As soon as you get your paycheck you put 10 percent in a savings account that can only be used for investing. Make yourself live on what is left over after you have put away your savings.

Save money for rental properties by spending less on your house

Lenders will tell you exactly how much house you can qualify for when you talk to them about getting a loan. But qualifying and affording a house payment are two different things. I think if you buy the most expensive house you can qualify for, it will make it very hard to save any money. It will also make it very hard to buy a rental property because you have maxed out how much you can qualify for. I like to spend about 10 percent of my income on my house payment and that leaves me plenty of money to save. That’s not easy to do if you don’t make a lot of money. Spend more on your house if you have to, but try not to buy the most expensive house you can afford.

Quick tips to save money for rental properties

There are many books out there on saving money, I highly suggest you read them. I don’t know every technique and I can’t go over everything in one article, but hopefully this helps you start saving more than you are now, which is the only way to start.

  • Pay off credit card debt by paying of the lowest balances first.
  • Compare rates on insurance. Check different companies for rates and move all policies to one company to get a multi-policy discount.
  • Eliminate or shop around for cable and cell phone services. Many times simply calling your company you currently use will lower your bill. Threaten to leave and they may give a better price. You could eliminate cable all together as well.
  • Turn the temperature in your house down a couple of degrees in the winter and up a couple of degrees in the summer to save on heating and cooling.
  • Carpool to work, walk or ride a bike on short trips that don’t require a car.
  •  Stop drinking or smoking and don’t go out to eat every night.
  •  Use credit cards to pay for everything. Yes, I said use credit cards for everything, but you must be very disciplined. I have a credit card that pays me 2% cash back on every purchase. If I pay my balance off every month I am not charged any interest. It is like getting 2 percent off everything I buy with my credit card and it adds up.

How Much Money Do You Need For Reserves On Rental Properties?

Rental properties have been a great investment for me, but they can be expensive to buy. Although you can make a lot of money from rental properties, it takes a lot of money to buy rental properties and you must have money in reserves to handle vacancies and maintenance. I have 16 rental properties and it has taken a lot of cash to purchase them. They also have maintenance that comes up or will go vacant at times. I have to keep money in reserves for maintenance and vacancies and the bank will also require me to have money in reserves for rentals as well.

You have to have money set aside to handle vacant months and repairs. Most repairs are minor items that do not cost a lot of money, but some repairs like replacing a roof can cost $5,000 or more. Many times repairs are done when a house is vacant, which means you will not be receiving rent and you have to pay for repairs.

For more information on my rental properties and investing strategies check out my complete guide to investing in long-term rentals.

How much money will a bank require to have in reserves on rental properties?

The money you need to keep in reserves depends on many factors. Older homes will need more maintenance and some homes will have more vacancies than others. One rule of thumb is what lenders will require investors to have in reserves before they will give them a loan. Most lenders require at least 6 months in reserves for all mortgages in an investor’s name. To figure how much cash you would need add up all your mortgage payments, including your personal residence and multiply them by 6.

A bank will require all the minimal costs required on an investor’s mortgages to be accounted for when calculating reserves. Taxes and insurance will be counted when calculating the reserve requirement as well as the mortgage payment. On my rental properties, my mortgage payments which include taxes and insurance range from $450 to $650 a month. I also have to account for my personal residence mortgage payment which is over $2,000 a month. I have 16 rentals, but two of those properties have no loans against them. In total I need over $50,000 in cash reserves to show my bank that I am in a good enough financial position to purchase more rental properties.

Is 6 months of mortgage payments enough reserves for a rental property?

How much in reserves you need will vary with each investor and the properties they own. A huge factor when considering how much money in reserves you need is how much cash flow your rental properties are producing. If you have minimal or negative cash flow you will need much more in reserves. Having to cover part of a mortgage payment on top of paying for vacancies and maintenance can add up quickly. Most banks will also consider the cash flow an investor has on their rental properties when making loans. If you have little to no cash flow it will be harder to qualify for more loans. I suggest buying rentals for cash flow and not appreciation, but if you do have negative cash flowing properties you should have more in reserves than 6 months of mortgage payments, taxes and insurance.

If you have a lot of cash flow coming in from your rental properties you should be able to build up reserves quickly. If you find you are short on cash, I would save cash flow you have coming in until you have a decent amount of reserves saved up. Many of the problems investors run into are easily solved if they invest for cash flow!

If you have one or two rentals you may need more in reserves

If you have one personal residence with a mortgage payment of $700 a month and a rental property with a $500 a month mortgage, you would only need $7,200 in reserves according to bank requirements. However, that is not much money if you have to make major repairs on your rental property. If you have to replace the roof that could wipe out the entire reserve you have in place. You better hope the home stays rented and no other repairs come up while you build the reserve back up again. I think an investor should have at least $10,000 saved up in reserves for their rental properties no matter what the bank says your reserves should be. This assumes your rental properties are basic houses that are in decent condition. If you have old rental properties that are in need of maintenance, you may need to save even more.

The money you keep for reserves on rental properties should not be used for other things

When you have a reserve for vacancies and maintenance on your rental properties, that money should not be used for personal items or buying more rental properties. You never know when you might need to evict someone or make major repairs. If you don’t have the money to complete an eviction or make repairs, you could have major problems renting the home. If you can’t rent the home, you will not be able to bring in more money to cover the expenses. You may find yourself in a big heap of trouble and forced to sell the property.

Should You Buy Cheap Houses for Rental Properties?

Buying rental properties is a great way to invest your money, and cheap houses can seem to have great numbers. I prefer single family rental properties that are slightly below the median sales price in my area. Other investors make money buying multifamily rentals or commercial properties. There is not a best way to invest for everyone, but there may be a best way to invest for you based on your market, goals, money available and many other factors. Cheap houses can look great on paper, but often have more unseen costs when you by them for rentals. They can have more maintenance, more vacancies, and be harder to get financing on.

What is a cheap rental property?

In my market in Northern Colorado, the median price is just under $200,000. I have bought my rental properties from $80,000 to $135,000. I buy my rental properties below market value so even though I bought them below the median value, they are worth from $150,000 to $200,000. I would not consider these cheap rentals, because they aren’t the bottom of my market. In my market, the lowest priced homes are $70,000 to $90,000, but prices have gone up significantly over the last three years.

Even though some of my properties were purchased for under $90,000, it is almost impossible for me to buy properties that fit my criteria for under $110,000 today. When I was buying my first rental properties I could have purchased a number of properties for under $50,000 and as low as $30,000. I did not buy these cheap properties for rentals at the time, but I wish I would have bought a couple looking at prices now! The definition of cheap rental properties varies in every market, but if I had to define it I would say properties under $50,000 are generally considered cheap rentals. Here is a great article on how to buy rentals below market value.

How does the ROI change on cheap rental houses versus expensive rental houses?

Rental properties that cost $50,000 will have vastly different returns than properties that cost $200,000. The returns vary due to obvious factors like higher rent, but also due to different levels of maintenance and turnover. Typically the lower priced rental will have more maintenance and more turnover, as well as lower appreciation over time. There are exceptions to this rule, which can be seen in my market. If I would have bought $30,000 rentals in my market a few years ago I would have made a killing today. Those properties are now worth five times what they were worth just three or four years ago.

My market had not seen prices as low as they were four years ago since well before 2000. I would not expect every market with $30,000 homes to see the appreciation we did. Many places that have $30,000 homes for sale have seen low or stagnant prices for years. They most likely will not see the huge price increases my market saw. When buying cheap rentals properties you are usually not betting on appreciation, but investing for cash flow. Many times the rent to value ratio on lower priced rentals properties is better than on more expensive rental properties. That high rent to price ratio is what makes low-priced rental properties attractive to buyers even with more maintenance and turnover.

How do you know what a good rental property is?

Why is the rent to value ratio higher on cheap houses?

Rent rates are determined by the supply and demand for rentals properties in a given market. Rental rates are not determined by housing prices or the cost to build houses. The lowest rent rates are usually seen in large apartment buildings. If there is a shortage of apartment buildings in a given market you will usually see rental rates increase. Eventually, when rental rates get high enough new apartment buildings pop up very quickly to meet demand because investors see the need for more units and will make money if they build more. However, no matter how many apartments are for rent, there will always be people who want to rent a single family home.

When there is a shortage of single family homes for rent, builders usually do not build more homes to meet that demand, especially in the low-end of the market. Builders simply cannot build cheap enough in most markets to make new construction rental properties a viable business. Builders target owner occupant buyers when they build new homes. When there is a shortage of single-family rental properties in an area the rent rates will increase, but unlike apartment buildings, new construction does not ease the supply shortage.

Most markets with low-priced rental properties are found in the Midwest and you may see properties sell for $30,000 that can be rented for $600 to $700 a month. The properties would meet the 2 percent rule, which is very hard to do in most markets. $700 rent on a $30,000 house is a great margin when you consider my properties rent for $1,200 to $1,500 a month and cost $100,000 or more. Here is a great article on the advantages of single family homes versus multifamily.

What is the actual cash flow on cheap rental properties?

The rent to value ratio may be higher on low-priced rentals, but that does not mean the cash flow is higher. The expenses on a lower priced rental are most likely going to be a higher percentage of the value of the property. Here is an example of how an investor might figure the costs on a higher versus lower priced rental property. These numbers were generated from my cash flow calculator. I am using these numbers based on a higher priced rental property I could buy in my area and a lower priced rental that could be bought as a turn-key rental property in another state.

Higher priced rental bought for $130,000:

Rent                   $1,500

Maintenance    $225

Vacancies          $150

Taxes                  $60

Insurance          $60

Property Man   $120

Total expenses $615

Cash flow          $885

Lower priced rental bought for $35,000

Rent                  $700

Maintenance   $140

Vacancies         $70

Taxes                 $40

Insurance          $50

Property Man.  $56

Total expenses $356

Cash flow          $344

The cash flow on a more expensive rental property is much higher, but that is because I assumed both houses were bought for cash. That isn’t fair because the high-priced rental takes four times as much money to buy! Looking at these number the low-priced rental blows away the high-priced rental when bought for cash. If I were to get a loan on the high-priced rental property I would have a mortgage payment around $500 a month. That would drop my cash flow to below $400 a month on the high-priced rental property and if I had to make repairs to this house before I bought it, my cash investment would be similar to the $35,000 the low-priced rental property costs. The returns are not that different between the two properties, but slightly higher with the high-priced rental property. We do need to look at the numbers closer to see why cheap rentals have different expense ratios than high-priced rentals.

  • Age: In my cash flow calculator I devote a higher percentage for maintenance costs on older homes. It is likely the older house will need more maintenance due to it being an older home. However, with lower quality tenants you may need to factor in an even higher maintenance allocation.
  • Lower expenses due to lower rent: The rent is much lower on the cheap property, which makes the expenses much lower for vacancies and maintenance. The entire maintenance allowance for the year on the cheap property is $1,680, while it is $2,700 on the more expensive property. If the properties were the same size it would make no sense to have the maintenance that much higher on a more expensive home, but the cheaper rental is much smaller so I think those figures are a decent representation.
  • Maintenance: I used the same maintenance percentage for the cheap and expensive rental, but this may be misleading. It is true the more expensive rental is rented for more money and lost rent would be higher than the cheap property. However, in my experience, the more expensive rentals have more stable tenants. Evictions cost the same no matter what type of rental you have and the chances of an eviction are higher with the cheaper rental. The vacancy cost for the expensive rental comes to $1,800 a year and only $840 a year for the lower priced rental. I think the costs should be similar for both properties.
  • Insurance: The insurance costs on a house are based on risk and replacement cost. The insurance cost on a smaller home will be less than a larger home, but it will be higher as a percentage on the less expensive home. If my insurance is $600 a year on my $130,000 house, it will not be $200 a year on the $30,000 house. It may be $400 or $500 a year, which is a higher percentage cost compared to the rent.
  • Property Management: The property management fees should be similar on each property.

When looking at the percentage cost of the expenses on the two properties the cheap property expenses are over 50 percent of the rent and the expensive properties expenses are just over 40 percent. The expenses may not be high enough for the cheap property, because the vacancies and maintenance may be more than what an investor assumes they will be.

In my experience, my expenses have not been as high as this scenario figures, because my vacancies and maintenance have been lower historically. While the cheap rental property may look like a slam dunk on the surface, it does have more expenses and may take more management. That doesn’t mean they still can’t make money or be a good investment. Here is an article on how to find a great property manager.

What are the disadvantages of cheap houses as investments?

There must be a reason everyone doesn’t invest in low-priced rentals with ratios this good. In fact, there are many reasons many investors don’t like low-priced rentals.

  • More turnover: when you are renting the lowest priced homes in a market you tend to get less than ideal tenants. There is a better chance of evictions, damage, and problems when renting the lowest priced homes in a market.
  • More maintenance: often times the lowest priced rentals in a market are older homes. The older a house the more maintenance a home will need and lower quality tenants can do more damage to a house.
  • Less appreciation: I don’t like to invest for appreciation, but it doesn’t hurt to have houses go up in value. In most cases the lower the value on a home the less appreciation it will see.
  • Buy below market value: I buy all my houses below market Value. It gives me instant equity, but 20 percent on a $30,000 house is only $6,000, while 20 percent on a $100,000 house is $20,000. You gain less equity when buying cheaper homes below market value.
  • Getting a loan: most banks do not want to lend on cheap properties, because they see more risk and less profit. It is very hard to get an investor loan on a $30,000 house.

What are the advantages of buying cheap rentals?

Buying cheaper properties is not all bad. Besides the higher rent to value ratio lower priced rentals have other advantages.

  • Smaller homes: lower-priced rentals are typically older, which means more maintenance. They are also typically smaller which means the maintenance will cost less. Painting a 700 square foot house will be a third the cost of painting 2,000 square foot house. There are fewer windows, smaller furnace, smaller roof, less floor space. Even though the home may need maintenance more often, that does not mean the total maintenance costs will be more than a larger rental.
  • Can buy with cash: with the low price of inexpensive rentals you can spend the same money to buy the entire house with cash as you with a loan on a higher priced home. It is difficult for many investors to get loans who already own multiple rentals, are foreign investors, are investing with an IRA, or have low income on their taxes. Paying with cash is an easy way to buy rentals when you can’t get a loan.
  • Less chance of loss: with less expensive homes there is usually less appreciation, but there is also a smaller loss with depreciation as well. Inexpensive homes can go down in value, but if the values drop 30 percent on a $30,000 house versus a $100,000 house, your losses will be much less.
  • No loan needed: If you are unable to get a loan, you can pay cash for a cheap property. This may be perfect for those looking to invest with their IRA or 401K.

Here is a great article on why rental properties are such a great investment.

Is it better to buy cheap rentals or higher priced rentals?

There is no right answer to this question for everyone. You have to figure out for yourself what type of property is right for you. I like higher priced rentals because they have less maintenance, are not as old, less turnover and sometimes better appreciation. I have no problem getting loans on my rentals, even with over ten mortgages. That makes it easier for me to buy higher priced rental properties because I can get a loan.

If you are in a position where it is harder to get a loan, then maybe lower priced rentals are a better option. I have been seriously considering buying a low-priced turn-key rental property over the last few months because it is so hard to find good rentals in my area. I wrote about the advantages and disadvantages of buying a turn-key rental property here. I prefer to buy rentals locally that I can buy below market value, but if those aren’t available I think I would try buying an out-of-state cheap property. If you are having a hard time finding good rentals in your market, maybe buying a cheaper turn-key property would be a good option.

I think if you are looking at cheaper versus more expensive rentals in your market you have to look at many factors. Run the numbers on how much money you will make with both properties, look at historic values on both property types, which property can you get a better deal on, how much management will each property take. If you still can’t decide which type of property to buy; buy one of each and see which one you like better!

Are New Construction Rental Properties a Good Investment?

A few people in my coaching programs have asked about buying newly constructed houses as rental properties. I personally have never bought a newly constructed house as a rental, and I do not think most new houses make good rentals. There are a number of reasons why I do not like newly constructed houses for rentals, but the biggest one is it is really hard to get a good deal on them. When you buy a new house, you usually pay more for the newness of it than you would pay for a similar house that is a couple of years old. One of the biggest advantages of buying real estate is the possibility of getting a good deal. It is also usually tough to cash flow with these houses, and you cannot assume there will never be any repairs just because it is new.

What are the main benefits of buying rental properties?

I love rental properties for many reasons, but there are a few qualities that make them an awesome investment.

  • The ability to buy below market value. When you buy real estate, you can buy it for less than market value. That is how I make money flipping houses, and you can do the same with rentals. I can make back 100% of the money I invest in the form of equity by getting a good deal.
  • The ability to cash flow every month. The right rental properties will make money every month, even after accounting for all expenses as well as maintenance and vacancies.

There are other advantages to rentals, like favorable tax laws and the ability to leverage your money. Most advantages work with newly constructed rentals, but it is really hard to get a good deal or positive cash flow with new houses.

How to get a great deal on a house.

What are the cons of buying new construction?

Many people like new houses because no one else has lived in them and everything is new. However, there are disadvantages to new houses as well. Here is why I have never bought a new house.

  • You will pay more for a new house. Newly constructed houses cost more than similar existing houses. Because they are new, the builders can charge a premium, just like you have to pay more for a new car. Not only are you not getting a good deal on a new house, but you are also paying more than you would for similar houses selling at full retail value.
  • Not everything is included in a new house. When you buy a newly constructed house, it is rare that everything you need is included. You often have to put in the landscaping, a fence, an air conditioner, finish the basement, install a deck, buy window blinds, and other things depending on the builder.
  • Many of the fixtures are very cheap. Many new houses come with the cheapest materials and fixtures unless you pay for upgrades.
  • There is no guarantee a new house is built correctly. While a new house should be perfect since everything is new, that is not always the case. I always encourage buyers to get an inspection on new houses, and often the inspector finds things were done incorrectly. The builder should fix all these items, but you cannot find everything.
  • When you buy a new house, you are taking on more risk. A house that has been around awhile has had a chance to encounter problems. There could be water-table issues, soil issues, or other problems that were not known when the house was built. If the house has been built for a few years, the chances are those problems will show up, and the seller is legally obligated to disclose them.
  • The quality of the house may not be known for a few years. Some houses are built well and others are not. It is hard to tell how well a house is built when it is brand new. After a few years, you see how well the finishes hold up, the quality of materials, and any other issues.
  • When you buy a new house, you have to use the builder contract. Almost every builder will require you to use their contract, which may not protect the buyer as much as a state-approved form that real estate agents typically use.

Buying a new house is not always bad, and running into major problems is rare, but it is possible. Buying a new house does not guarantee you will be problem free.

Why do newly constructed houses make bad rental properties?

The biggest problem with buying a new house is you cannot get a good deal (in most cases). The builder will charge a premium, and most buyers have to wait a couple of years before they have any equity in the house. This eliminates one of the biggest advantages of buying real estate.

It is really hard to cash flow with a new house. Prices are rarely low enough compared to market rents to make money on a brand new rental (single family). There may be some areas of the country where you can cash flow with new houses, but they are rare. Many people who say you can make money with new rentals may be ignoring costs like maintenance because the property is new. You will still have maintenance when you own rentals, whether the house is 100 years old or brand new. Hopefully, there is less maintenance involved with new houses, but tenants can still trash it. If you do run into tenants who treat your property poorly, it hurts much more when it happens to a new house you paid full retail value for.

When would a new construction property make a good rental?

There are some cases where it might make sense to buy a newly constructed property as a rental.

  • If you are a general contractor and manage the job yourself. If you can save $30,000 being the general contractor on a new build, you will have bought the property below market value (hopefully). You still need to be concerned with cash flow and how much time it takes you to GC the job.
  • If you buy multifamily new construction, you may be able to cash flow better. Multifamily new construction may cash flow from the very beginning, but you also may be paying full market value. If you can GC a multifamily property, it might make sense to buy new-construction rentals.

I need to warn you that general contracting a new construction project is not easy. It is easy to go over budget on time and money. That is another risk that comes with buying new properties.

How to Protect Your Rental Properties From Liability

Many people worry about the liability associated with owning rental properties, but there are simple ways to protect your assets. I want to make it very clear that I am not a lawyer and I am not giving legal advice, these are simply tactics I use to avoid liability, and I urge everyone to speak to their attorney about any legal questions.

Rental properties are a great investment

I believe buying rental properties are one of the safest investments you can make, because you can buy them below market value. However, there are some risks involved and you should take steps to protect rental properties. Whenever you own a business, you run the risk of being sued for monetary reasons or physical injury. With rental properties, the biggest risk is someone getting hurt at your property. It could be a freak accident or neglect by the owner, landlord or tenant that causes someone to get hurt.

My returns are high enough on my rental properties that I am willing to take on these risks, but I also do a few things to protect myself and my assets. To see how I find properties, get mortgages and detailed numbers on my rentals check out my complete guide to investing in long-term rentals.

Use a property manager to protect your rental properties

If you are managing your own properties or someone else’s properties your liability increases greatly. I have seen a property manager get sued after a tenant was hurt while being evicted. The tenant fell in a window well and claimed the landlord broke the tenants TV and left the broken glass in the window well. The tenant claimed to have been permanently injured by the TV and sued the landlord.

Long story short, the case went to court and a jury had to decide the outcome. After two years and over $40,000 in legal fees the court ruled in favor of the landlord.  This landlord learned a valuable lesson, make sure you have proper insurance!  Unless you want to pay it out to Christopher Ligori & Associates or someone else with associates on a billboard. If the landlord would have had liability insurance to cover issues like this, the insurance would have paid the legal fees. If you are a property manager make sure you talk to your insurance agent about liability insurance. In many states you must be a licensed real estate agent to be a property manager.  All Real Estate agents must have E and O insurance, but E and O may not cover issues like this one.

If you are managing your own properties, there are many state and local ordinances you need to know. Please take the time to research exactly what forms and documents you need. In my state we have to have the tenants sign a lead based paint form and give them a lead based paint flyer on every house built prior to 1978. The state can fine you $10,000 per occurrence so make sure you pay attention to all laws in your area.

Create corporations or LLC’s to protect your rental properties

Many investors protect their assets by creating one or multiple corporations for their rental properties. I create a separate LLC for each property I own. I let my wife name them silly animal names and she gets to take part in the fun of the business as well.  So far we have Llama Lane, Penguin Place, Porcupine Point and a few others. For every property, I open a checking account and all money going in and out for that property goes through that checking account. I create or have my assistant create all my LLC’s to save some money. I asked a lawyer to create my first LLC, and he wanted to charge me $750! I decided at that point it would be well worth it to learn how to do it myself. It is actually a very simple process that takes less than 30 minutes, and there are online companies that will help you do it as well like Incorporate.com.

Always check with your bank who finances your properties before you transfer a property to an LLC. Some banks have due on sale clauses, which mean they call your loan due in full immediately if you sell the property. Transferring a property from an individual to an LLC, even if the LLC is owned by that individual can trigger the due on sale clause. It also may be difficult to refinance a property if you transfer your rental property into an LLC.

Protect rental properties with home owners insurance

Many things can happen to a rental property to cause damage. Pipes can freeze and break, a tree can fall on the house, a sewer can back up or a natural disaster can destroy a home. I always carry plenty of insurance on all of my rental properties. I talk extensively with my insurance agent to insure my properties are covered properly. Many insurance policies do not cover many events such as floods, sewer back up or acts of terrorism. Not every property will need every coverage available, but you need to weigh the chances of an event occurring versus how much your insurance will cost. Here is a recent story on how I had to use a lot of insurance on my rental properties.

Be careful about having free and clear rental properties

Some people go through a lot of work to con others out of money. If you own a $100,000 rental property with a $90,000 loan or a $100,000 rental property with no loan; which one do think people will look to sue you on? Many people are more inclined to file a lawsuit on a property that is free and clear than one with a loan, because they have a better chance of getting paid off. I am not saying you should not pay off your rentals, but there is a simple way to help protect yourself. If you get a line of credit on paid off properties, the full amount of the line will show up in public records. Even if you owe nothing on the line, public records will show the full amount of the loan owed on the property.

How to Protect Your Rental Properties From Liability

Many people worry about the liability associated with owning rental properties, but there are simple ways to protect your assets. I want to make it very clear that I am not a lawyer and I am not giving legal advice, these are simply tactics I use to avoid liability, and I urge everyone to speak to their attorney about any legal questions.

Rental properties are a great investment

I believe buying rental properties are one of the safest investments you can make, because you can buy them below market value. However, there are some risks involved and you should take steps to protect rental properties. Whenever you own a business, you run the risk of being sued for monetary reasons or physical injury. With rental properties, the biggest risk is someone getting hurt at your property. It could be a freak accident or neglect by the owner, landlord or tenant that causes someone to get hurt.

My returns are high enough on my rental properties that I am willing to take on these risks, but I also do a few things to protect myself and my assets. To see how I find properties, get mortgages and detailed numbers on my rentals check out my complete guide to investing in long-term rentals.

Use a property manager to protect your rental properties

If you are managing your own properties or someone else’s properties your liability increases greatly. I have seen a property manager get sued after a tenant was hurt while being evicted. The tenant fell in a window well and claimed the landlord broke the tenants TV and left the broken glass in the window well. The tenant claimed to have been permanently injured by the TV and sued the landlord.

Long story short, the case went to court and a jury had to decide the outcome. After two years and over $40,000 in legal fees the court ruled in favor of the landlord.  This landlord learned a valuable lesson, make sure you have proper insurance!  Unless you want to pay it out to Christopher Ligori & Associates or someone else with associates on a billboard. If the landlord would have had liability insurance to cover issues like this, the insurance would have paid the legal fees. If you are a property manager make sure you talk to your insurance agent about liability insurance. In many states you must be a licensed real estate agent to be a property manager.  All Real Estate agents must have E and O insurance, but E and O may not cover issues like this one.

If you are managing your own properties, there are many state and local ordinances you need to know. Please take the time to research exactly what forms and documents you need. In my state we have to have the tenants sign a lead based paint form and give them a lead based paint flyer on every house built prior to 1978. The state can fine you $10,000 per occurrence so make sure you pay attention to all laws in your area.

Create corporations or LLC’s to protect your rental properties

Many investors protect their assets by creating one or multiple corporations for their rental properties. I create a separate LLC for each property I own. I let my wife name them silly animal names and she gets to take part in the fun of the business as well.  So far we have Llama Lane, Penguin Place, Porcupine Point and a few others. For every property, I open a checking account and all money going in and out for that property goes through that checking account. I create or have my assistant create all my LLC’s to save some money. I asked a lawyer to create my first LLC, and he wanted to charge me $750! I decided at that point it would be well worth it to learn how to do it myself. It is actually a very simple process that takes less than 30 minutes, and there are online companies that will help you do it as well like Incorporate.com.

Always check with your bank who finances your properties before you transfer a property to an LLC. Some banks have due on sale clauses, which mean they call your loan due in full immediately if you sell the property. Transferring a property from an individual to an LLC, even if the LLC is owned by that individual can trigger the due on sale clause. It also may be difficult to refinance a property if you transfer your rental property into an LLC.

Protect rental properties with home owners insurance

Many things can happen to a rental property to cause damage. Pipes can freeze and break, a tree can fall on the house, a sewer can back up or a natural disaster can destroy a home. I always carry plenty of insurance on all of my rental properties. I talk extensively with my insurance agent to insure my properties are covered properly. Many insurance policies do not cover many events such as floods, sewer back up or acts of terrorism. Not every property will need every coverage available, but you need to weigh the chances of an event occurring versus how much your insurance will cost. Here is a recent story on how I had to use a lot of insurance on my rental properties.

Be careful about having free and clear rental properties

Some people go through a lot of work to con others out of money. If you own a $100,000 rental property with a $90,000 loan or a $100,000 rental property with no loan; which one do think people will look to sue you on? Many people are more inclined to file a lawsuit on a property that is free and clear than one with a loan, because they have a better chance of getting paid off. I am not saying you should not pay off your rentals, but there is a simple way to help protect yourself. If you get a line of credit on paid off properties, the full amount of the line will show up in public records. Even if you owe nothing on the line, public records will show the full amount of the loan owed on the property.

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