rental property investing for newbies

Rental Property Investing for Newbies & 4 Tips for Success

Backstory to the Four Secret Tipsrental property investing for newbies

Let me know if any of this sounds familiar to you:

Looking for a PASSIVE INCOME? 

Want to get FILTHY RICH overnight?

NO RISK to any of your own capital?

Then this isn’t the place for you. Sorry.

Actually, I’m not sorry. Not. At. All. 

I know, I know, the marketing hype of gurus and experts have said certain things you might have taken to be true. 

I’ve probably heard 99% of the same marketing hype that you’ve listened to, and it always sounds convincing – but then, that’s the point of marketing, right? To convince you of the dream? Naturally, you can have this dream. All you need to do is buy this course or coaching, or that thingamajig. 

Many come to the real estate investing universe expecting good things to miraculously fall in their laps, with one or all of the above promises and little to no effort. Maybe they can even land a zero capital investment (except for that pricey course/coaching or thingamajig you’re being sold on). 

That hasn’t been my experience. 

Speaking from personal experience, the process of investing in rental properties is simple enough to understand, but not easy to implement for newbies. Rental property investing can be very passive and is the financial bedrock of many investors, myself included. The majority of people can achieve some degree of success if they play their cards right. 

Let me share how it began for me. 

Back in the day when I was working a full-time Jay-Oh-Bee (job), I was up at the crack of dawn (usually before 5 am) to hop on a train for the morning commute (which I dreaded) to work in a job that I didn’t find particularly inspiring. 

Perhaps you know how I feel. It’s pretty common; most of us do it. In fact, many of us will continue to live like this for the majority of our working lives. If this is you, I strongly encourage you to think of ways to escape the rat race. 

Nothing wrong with working a job. In fact, if you enjoy your job, please stay in that job and continue to feel happy! For the rest of us, we need to find alternatives. 

This is where I started my journey.

I researched different business and investment strategies and decided to try my hand at rental property investing. The main attraction to investing in rental properties was the potential for a reasonable return (let’s call it 5% or more) on my capital, along with the investment to be genuinely PASSIVE. By passive, I mean MINIMAL time to manage it once the leg-work is done. 

Would it be such a bad idea if I were to share some of the factors that have worked for me? 

With your permission, I’ll elaborate on the top 4 factors that have made my property investment journey easier to handle. Some people refer to it as “secrets,” but really, these secrets are all over the interwebz. 

I’ll call these “not-so-secret” tips instead because they won’t be a secret by the time you’re done reading this blog. ☺

If you prefer to digest content in video format, please check out this video on my YouTube channel that I did on this subject – it’s got animated doodles and everything!

Top 4 Tips for Rental Property Investing Success

Not-so-secret tip 1: Rental Yield

This is a mathematical formula that I like to use to QUICKLY decide if a property is worth adding to my watch list. If it doesn’t make the cut, I move on.

The rental yield formula is:

Total Rent / Property price * 100

The rental yield is a percentage. I personally look for a rental yield of 5% or higher to make my watch list of potential real estate to invest in, which is simply a starting point. 

Feel free to use your own rental yield criteria – if you use your criteria, you’re more likely to stick to it!

By filtering out only the crème de la crème, it reduces time spent on properties that you’re unlikely to invest in. If you’re going through a list of properties in an area, you’re going to want to use this rental yield formula to quickly filter out only the properties that deserve more of your time. 

Do yourself a favor and do NOT use this formula on its own. Use it as PART of your arsenal of tools in evaluating what good rental property investment is for YOU. You’re an investor, and no two investors are the same. Do what’s right by you, and if you want to set the bar higher than my measly 5% of rental yield minimum, more power to you!

*Note: Strictly speaking, this should be called “gross rental yield” because we’re using gross rent, but it’s commonplace to refer to this as rental yield in the real estate universe. 

Not-so-secret tip 2: Cash Flow is King

There’s a famous quote: “Cash is King.” Sadly, this is outdated and somewhat incorrect, as cash is definitely not king if you consider inflation. I digress…

Instead, “cash flow is king” should be the new saying. 

Cash flow is the difference between your total income and total expenses. If this figure is POSITIVE, then you are cash flow positive – congratulations, you’re making a profit! If, however, this figure is NEGATIVE, then you are cash flow negative, meaning you’re losing money and getting poorer. 

Some things to look out for when performing your cash flow calculations: 

  • Are your figures realistic?
  • Have you taken into account ALL income and expenses?
  • Have you consulted with professionals, like a mortgage broker, to get more accurate numbers to factor into your cash flow calculations?

Ultimately, the question we need to answer is this:

Are you getting richer or poorer with your rental property cash flow position?

I’m a big fan of highlighting the obvious. Some might say it’s “common sense”, but believe me, common sense is sometimes nowhere to be found! 

Perhaps you dug into the weeds too much and can’t see the forest for the trees. Or maybe you’ve got rose-tinted glasses on, and all you can see are rainbows and unicorns. Reality isn’t always pretty, and darkness might be just around the corner, waiting to pounce on you. I’ve been there with every one of these situations, from lacking common sense, getting into the weeds, and having rose-tinted glasses. 

Allow me to point out the obvious when it comes to cash flow calculations. There are TWO sides to this equation. A positive side – that’s your income – and a negative side – that’s your expenses.

To make your cash flow positive, or more positive, then you need to do one of the following:

  • Increase your income
  • Decrease your expenses
  • Or do both – increase income AND decrease expenses.

That’s it. I’m done with my “Captain Obvious” and the “No-Sh*t-Sherlock” moments. 

Strive to be cash-flow positive. 

Strive harder to make this a number that accomplishes the goals you set out. 

Not-so-secret tip 3: Funding Your Investments

This one always tickles me; you’ll see why at the end.

There are a few ways to fund the purchase of a rental property investment, and these are the most common:

  1. savings you might have
  2. release equity (if you own your home)
  3. none of your own money (aka other people’s money, OPM)

The first two are fairly self-explanatory. 

The first is that you save up money to use as a down payment for an investment property. Start saving if you don’t have any savings. Every dollar you save is a soldier that you might put to work later to generate long-term wealth.

The second is where you own your own property, or properties, and you’re essentially refinancing the mortgage on your home. Perhaps your home’s value has appreciated, or you’ve paid down the mortgage on your home and are now in a position to release some of that pent-up equity. 

If you’re releasing equity with the second option, be cautious and make sure you consult with qualified and experienced professionals in real estate investing. For example, run the numbers by an experienced and qualified mortgage broker to balance an increased mortgage on your own home with a mortgage on a rental property investment; make sure you understand the risks involved. 

The final option is what I call “none of your own money,” a term more popularly known as Other People’s Money, or OPM for short. 

I always chuckle at this last option as a funding option because the vast majority of newbie investors want to use OPM from the start. 

While it IS possible, it’s NOT common. Just because there’s money floating around waiting for good investment returns does NOT mean anyone will give you their money. To attract OPM, you have to demonstrate significant skills and experience – someone new to the real estate industry is unlikely to have proven experience and results that attracts OPM.

The question ultimately is: What do you bring to the table? If you’re not bringing capital to the table, then you better bring lots of skills, experience, and knowledge. This isn’t unreasonable.

Put yourself in the investor’s shoes. Here’s a newbie who has zero experience and probably read some articles online but asks you to invest in a rental property deal. What would you think? 

Phew. Glad I got that off my chest. Rant over on newbies looking to use the OPM approach from the start. 

If you’re new, it helps to have some experience and skills before you approach potential investors. 

We are moving swiftly to the final tip!

I’ve saved the best for last because this is what I credit to making rental property investing as passive as humanly possible. 

Not-so-secret tip 4: Have a TEAM

This is probably the most significant Not-So-Secret sauce of mine, and certainly the secret to making rental property investments as passive as can be: TEAM.

Having a competent team of experienced professionals will set you apart from any other “regular” investors who try to do everything themselves. 

Most investors start off thinking that they need to do everything on their own. Things like

  • Managing the property
  • Finding great tenants
  • Legal documents
  • Finding the cheapest mortgage rate in the country
  • Fixing the plumbing, roofing, tiling, bathroom, kitchen, electrical faults, etc

The above are simply samples of potential areas to outsource. It shocks me to think that investors really want to do it ALL themselves. 

Before you get your pitchforks out and say, “Andy, you have a budget to outsource, I don’t!” Let me say this. 

I get it. We do the best we can with what we have, no problem. Work with what you have budget-wise, and do the best you can. 

If that means getting hands-on with property management and other things to get started with a rental property investment portfolio, then so be it. But have a plan. PLEASE have a plan. 

Like Benjamin Franklin said: “If you fail to plan, you are planning to fail.” Those are wise words from Ben. Battles are won through practice and planning, never “on the fly.” It’s no different to building wealth. You must have a plan!

Eventually, there comes a time when you cannot physically manage every property on your own. Why not build the systems to handle an extensive portfolio from the start? Thinking long term, everyone should consider outsourcing where they can to free up time and leverage the expertise of, well, experts in those areas. 

On a personal note, I want my investments to be as passive as possible, since time is precious (said in my Gollum voice from Lord of the Rings). My approach, therefore, is to outsource as much as I can to free up time. 

I’ve got a few team members that I absolutely cannot live without and shared them in this video here. Do you agree with my selection, and are there any other team members you feel are equally or more important? Let me know in the comments on that YouTube video!

Conclusion

We all get suckered in with the “passive overnight bazillions with zero of your own money” marketing hype that is everywhere in the real estate investing universe. By its very nature, marketing is there to sell something. I’ve been suckered in many times! 

It’s therefore essential that the realities and truth are shared. There was a time when I was struggling in life. I wanted to escape my job for a lifestyle that was anything BUT working a job for the rest of my life. 

I turned to rental property investing. After much trial and error over the years, these are the factors that have played the most prominent part in making all my rental property investments extremely passive. 

I can’t promise you’ll be successful with rental property investing. It takes a lot of hard work at the start to get going, but once you get things set up, it can certainly be rewarding and passive.

Rental property investing is and will always be very close to my heart. Still, it’s vital that you keep diversification in mind and never be reliant on one source of income (like a job or one rental property). 

I’m a big fan of diversification as another means of success in a manner that you will succeed regardless of different industries going up or down. I discuss some of this in this video here and also in this blog article

In the meantime, feel free to check out my other blog articles here and follow my journey, rambles, and doodles at:

YouTube

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I look forward to connecting with you. ☺

PS: I’ve put together a free property checklist that you can download here

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