Wondering how you can still buy great rental investments in today's hot real estate market? You can! Real estate expert Stephanie Dupuis shares her secret tips.
*Free Rental Pro Forma located at the bottom of the page
Today, we're going to talk about rental investing for cash flow in today's market. There are three simple rules I use for buying rental properties, and they still apply for today's market:
- Added Value
- Pro forma
The first rule is location. As cliché as it sounds, this is a truth. The reason is that whether you self-manage your rental properties or hire a property manager, owning rental properties is a hands-on business. I recommend when you're starting as a rental property investor that you purchase properties within driving distance of where you live. Now, what is driving distance? Well, that's up to you. For some people that's within 15 minutes of where you live and for some people it's within three to six hours. But think through this carefully because you may need to drive to your property, and you need to know that area well. Also, when considering your location, look at the stability of the area. What's the economic stability? Do you anticipate future growth? How are the businesses? What's influencing the location and the housing stability of the area?
The second rule is Added Value. This is my favorite of the three rules because it takes some observation, some thinking through your options, and some creativity at times. So today for the added value section, we will be talking about a Bremerton home, a property that was purchased with the intention of turning it into a rental. We'll do our best to explain how the property was prior to the renovations, and talk about some of the work that's been done since.
I call the added value rule the “plus-one” rule. It's always looking for something in a property that currently isn't there but could be there -- a “plus-one.” There are two things you need to remember about added value. Added value needs to ultimately increase and improve the value of the property. So it needs to do one of two things: 1) increase the cash flow of the property, or 2) increase the equity of the property. An example of added value would be a property with a carport that you could easily box in and turn it into a garage, the garage has more value than a carport for two reasons: 1) you could possibly rent the home for more and increase your cash flow, and 2) it also increases the equity of the home.
My favorite way of adding value when purchasing a property is to find properties with basements. The reason why I like basements is there's so much you can do with them. Most basements, especially in older homes, are plumbed for bathrooms because the sewer lines often run through the basement and it's easy to tap into the plumbing. Adding a bathroom in a home, especially if it's a one-bath home, is a great way to add value. You'll increase both your rental income and your equity. The other thing I like about the older basements is it's easy to add a kitchen because the plumbing is right there. And if you can find a basement with the exterior access, you can create a duplex, an ADU, or a mother-in-law. That is the added value lottery ticket.
Earlier I promised to tell you about a Bremerton home that we are working to turn into a rental. This is a one-story house that had a basement with nothing in it. It was a blank slate except for: 1) exterior access (perfect for a duplex, a mother-in-law, or an ADU), 2) it had the sewer line running into the basement, and 3) it had plumbing.
What we did was easily add a bathroom in this basement. We were able to section off the basement stairs and add a door, creating access to the laundry room for both upstairs and downstairs residents. We will be tapping into the plumbing to add a kitchen as well. For less than $20,000 in today's market, we're able to duplex out a house. We went from a single-family property to a duplex and doubled the rental income on one purchase. That's called added value, and that's one way in today's market to maximize your rental purchases in today’s market.
The third rule is pro forma. A pro forma is simply a financial data sheet that shows expected or potential income. It's simply an educated guesstimate. The thing with a guesstimate is that you want to guesstimate well. Some people call real estate investing risky because they don't guesstimate well. The reason is because they struggle to use a pro forma or they use the wrong pro forma. Pro formas follow a very basic formula:
Income – Expenses = Cash Flow
You’ll need to understand all that goes into your income, as well as what expenses to expect, such as taxes, insurance, and property management, for example. The types of expenses you're going to have depend on what type of rental you have.
When you do this formula, you're going to come up with your expected cash flow.
Finally, here are some tips that will help you in your rental investment journey. First practice finding potential rental investment properties. You can do this easily online. Second, take the numbers from those properties and run the numbers through your pro forma. And the third tip is to do tips one and two over and over and over again until it's easy, seamless, and sequential for you.
Good luck and happy rental investment purchases!