Why Include Rentals in Your Real Estate Portfolio?
As I’ve gained experience in the real estate world and my business has grown, I have expanded my focus to include as many steps in the real estate process as possible — acquiring distressed properties, expediting short sales, rehabbing and selling properties, and I also include rentals and property management as part of my business model. Some call this ADD. I call it smart growth! And since people have asked me recently why we’re putting such a focus on rentals, I figured an article was due!
So, why include rentals?
Once purchased and renovated, rentals provide stability and cash flow to ALL lines of business, smoothing the months between the sale of our rehabbed properties. Rental properties as we acquire them are intended to be held long-term and provide a “passive” (though anyone who believes rentals are completely passive, has never actually held any!) system of generating cash flow for the long-term operations.
I’ve always recognized that rehabbing was just one facet of the business and that if the market changes, deal flow dries up, or a loss is sustained on a rehab deal, without a foundation of rental properties, there would be nothing left. So my goal was to include rentals as one piece of the pyramid to sustain longer term operations. They also provide some peace of mind and a break from managing the time-consuming contractor/ management roles and day-to-day tasks of rehab projects. I firmly believe that if you do rentals right and set up your processes from the beginning, they’re less time intensive or stressful as some rehabs and development projects turn out to be.
I’ve always believed in the concept of turning “quick cash” into “long-term wealth building,” but I had to accomplish this slowly and in different ways than many other investors have done. My strategy was to pick up one rental building for every 4 rehabs, which sounds easy enough, but it was very rarely simple. Because of my rough start in the beginning, I was out of the credit game for a long time and had to find other avenues for generating rental income.
So, working with private money and cash generated from my wholesale and rehab deals, I began buying single family homes in markets outside MA. And let me stop here for a minute to give some street cred to local power couple Linda and Nyrik Huuskonnen, who introduced me to my first “out-of-state” experience beyond MA and NH — welcome to the Pittsburgh market! It was here that I could invest some cash from my rehabs without having to chase down bank financing, and began purchasing single family homes for between $5-15K, investing an additional $20-30K per unit, and then renting them out for $500/month. Pretty good deal, right? There’s a separate story on the challenges of running an out-of-state investment company (Coming soon!), but it certainly beat paying $300K in Mass to only make $3000/month in gross income.
Now that I have re-established my credit and my business is financeable, AARE Group is acquiring both local and out-of-state rental units at a more aggressive pace, making sure that we set aside the cash to cover down payments. Our typical rental lending relationship will fund 75% of the acquisition price as an investment.
Another key to the success of this process is property management, which we have folded into the AARE Group as well (while not publicly marketed as of yet). As with everything that we do, I find a solid system makes all the difference. Key points we exercise here are all about tenant screening and pulling from a greater tenant base to ensure we get the best of the best. Our goal is to attract better tenants with better properties. This, along with treating everyone as customers instead of just “tenants,” are a couple of the ways we are able to retain our good customers and, when we have a turnover, we use it as an opportunity to refresh the unit and bring it one step closer to “flip quality.”
I’ll wrap up with an analogy. In our office, we talk about the difference between firing cannons and pistols. A rehab is like shooting a cannon ball’s worth of cash at a project, expecting a return of 1 1/2 cannon balls, roughly 12 – 20% ROI, or 25 – 50% Cash on Cash ROI (depending on location, and market conditions).
A rental is like firing a small bullet of cash at a project to create a net cash flow of $150-300/month per unit (after expenses, repairs, mortgage, taxes). THEN, we work to make money on the cash flow, as well as getting a slight benefit from the depreciation we claim through the investment and principal paydown, and over time, the asset increases in value (although we NEVER count on this happening) — a win – win – win – win!
If you have the resources and are willing to set up a system to maintain your properties, rentals will serve your real estate investment business well.
https://aarealestategroup.com/wp-content/uploads/ForRent.png185247Nick Aalerudhttps://aarealestategroup.com/wp-content/uploads/aa_real_estate_logos_final_group-300x112.pngNick Aalerud2016-09-15 18:30:462016-09-15 18:30:46Why Include Rentals in Your Real Estate Portfolio?
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