Buying Rental Property Tips and Risk Reduction

By Troy Schuyler

You’re considering buying rental property so now it’s more of a business decision.  As with any good business plan, you should not only consider your need to make sure the numbers pencil out, but you should also have a plan for minimizing risk and an exit plan as well.  As an investment, you’re looking for a good buy on a good rental investment home with predictable cash flow.

If you are considering buying a home to live in, read my article titled: Is It A Good Time To Buy A House?

I love the real estate industry and I love investing! When done correctly, it can truly be one of the best investments you ever make!  Unfortunately, many do it incorrectly. Over my past 18 years as a realtor, I have seen many investors make subtle, yet costly mistakes that often times costs them all they have. It can be a risky, yet equally as rewarding.  I do not feel that it’s near as risky, though, as other types of investing.

Why Real Estate?

1. I can use money that belongs to someone else.  With stocks you need cash to be a player. When buying rental property, you use bank funds to pay most (if not all) of the investment (with the exception of the down payment).
2. With stocks: You watch the earnings go up and down. With a rental, you know how much you will receive each month in rent. Yes the value may adjust with the market, but in the end, you own it!
3. As an investor, your tenants provide the future funding of your investment house creating something we like…CASH FLOW!
4. And the added benefit of potential tax write-off, interest deductions, wealth building, etc.

Where else can you do that?!?

I believe that we, as real estate investors, are in a time or a window of opportunity with the condition of the housing market. I believe that for the next 1 or 2 years, we could be facing not only a very attractive time to buy, but possibly the best time in history to buy a rental property as an investment.

Minimizing Risk Tip #1

Be careful! It’s easy to get caught up in the excitement of investing in real estate and as I mentioned before, I’ve watched over zealous real estate investors leverage themselves to an unacceptably risky position. I’ve warned over and over about mixing personal and business funds. I’ve also warned about mixing one rental investment fund with another.

My rule is to NEVER rob Peter to pay Paul. Eventually Peter runs out of money! This broken business model leads to the investor going broke, bankrupt, and back to being a renter again with absolutely nothing.

Minimizing Risk Tip #2

1. When borrowing money on a rental purchase, never exceed 70% LTV.  If you only owe 70% (or less) of what you think the property is worth, you have a comfortable cushion in case you ever need to dump the price to sell.  This is my personal exit strategy and it’s never failed me.

Minimizing Risk Tip #3

1. Know the vacancy rate!  I can’t tell yo how many times I’ve had real estate investors factor their numbers without estimating a vacancy and repair rate.  Even if it’s only vacant for one month, it’s still a factor and can even be enough to eat up a whole year worth of profit.

Buying tip #3

1. Factor in an expense account!  Again, this is commonly overlooked by overzealous investors.  Personally, I use an 70/20/10 approach.

70% of my cash flow goes into my general rental account, 20% to an expense/vacancy account, and the remaining 10% to cash savings to build money.  This keeps me profitable and able to build towards buying rental property.

For example:

If my rental cash flow (after expenses) for a given property was $250 per month, I would deposit $175.00 into my general account, $50.00 into my expense/vacancy savings, and $25.00 into cash savings.

Troy’s 7 No’s to real estate investing:

1. Don’t ever leverage your personal house in order to buy an investment property! You don’t ever want to come home and tell your wife that you’re moving because you’ve lost the house.
2. Don’t over mortgage your investment property.
3. Keep the maximum loan to no more than 70% of what the property is worth.
4. Do not pull equity out of your rental properties to buy more properties. This is a common mistake that many newbies to real estate investing make and it can be very costly indeed.
5. Let your rental income pay off your rentals.
6. Don’t mix your rental income with your personal income. Keep them separate and let your rentals pay off themselves.
7. Set aside money each month for unexpected repairs and future investing.

My advice? If you feel secure with your income and job situation, desire to start buying rental property, have discipline, and a little cash in the bank, now may be the best time you’ll ever see to invest in real estate.

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