The Do’s And Don’ts Of Operating And Managing Rental Properties

5 min read

Steve Davis, CEO — Total Wealth Academy.

My experience with operating and managing rental properties began with one little house. Within four years, I was managing over 100 single-family homes. I was rather aggressive with this new business endeavor because I had taken a significant pay cut at work and was looking to establish a second stream of income. As a result, I learned a lot rather quickly from both failures and successes.

If you are looking to make money from operating and managing rental properties, here are some do’s and don’ts that I have found to be invaluable.

Do get an education.

For those looking to get started with rental properties, the most important thing to know is that real estate investing is not intuitive at all. You cannot just dive in with plans to learn from trial and error. If you do, you may make so many mistakes that you begin to think real estate doesn’t work.

To be successful, it’s crucial to know what you are doing from the start. Finding an expert who can teach you the applicable laws and best practices can dramatically increase your odds of success.

Do start with a plan.

Another key to being successful is starting with a plan rather than a property. Operating and managing rental properties is a business that should have a fully developed business plan.

Don’t dive in with the mentality that you are going to manage a property. Start with a plan for managing 25 properties. Until you know how you are going to do that, you are probably not ready to purchase your first rental property.

Think about scaling from day one. Don’t settle for making an extra $500 per month on your investments. Create a plan for scaling from $500 to $5,000 and beyond.

Do stay focused on the big picture.

Even with a good education, the first few rental property deals can be difficult because the process is new. It’s easy to feel the beat up a little bit, but don’t get discouraged.

The key is to stay focused on the big picture. Remember that you are not just benefiting from the monthly cash flow; you are also picking up equity and paying off the mortgage while the property is appreciating.

It might seem like you are struggling to make $500 a month, but you could actually be making $1,500 to $2,000 per month when you consider all of those other factors. Remaining focused on the bigger picture will help carry you through the challenging times.

Don’t take a high-tech approach to find renters.

There are plenty of online platforms that can connect you with renters. I don’t use any of them. I’m what you would probably call “old school”—I use a sign in the front yard and an ad in the local paper.

Online platforms give people all the information they need to make a decision. If someone is interested in the house, I want to make sure they call me for information so I can close the sale once I get them on the phone.

Don’t pay cash for a property.

You have probably heard some financial advisors say that all debt is bad, but this is not always the case. Consumer debt is often bad, but income-producing debt can be good.

For example, if you take $300,000 and purchase one rental house, by charging $1,500 per month and spending $500 on expenses, you could have $1,000 per month in cash flow. However, if you take $300,000 and secure mortgages on 10 rental houses that cost $150,000, with the same rent charge and expenses, you could have $4,000 a month in cash flow. By leveraging debt, you can increase your monthly cash flow.

To dig deeper, you have the following expenses for a mortgaged property: principal, interest, taxes, insurance, maintenance, vacancy. If you have $400 a month left over, that is your cash flow: $4,800 a year. If your total out of pocket is $25,000, then $4,800 divided by $25,000 gives you a 19% cash-on-cash rate of return.

Meanwhile, you have the following expenses on a paid-in-full property: $300,000, taxes, insurance, maintenance, vacancy. You might have $1,200 left over or $14,400 per year. So $14,400 divided by $300,000 gives you a 5% rate of return. So you could make almost four times higher rate of return by using a mortgage, 19% compared to 5%.

Paying cash also slows down the process. If it takes seven to eight years to save up $300,000, you can limit yourself to buying five to ten rental houses in your lifetime versus buying that many in one year.

Remember, there is no such thing as “debt-free” investing. Even if you pay in full, you still have taxes and insurance to pay. The risk arises if you mismanage the property and leave it vacant. If you do that, you lose the house either way. Either the mortgage company forecloses, or the city forecloses due to taxes not being paid.

Related to this point is the best practice of not paying the full price for a rental property. If you buy a house at full price expecting it will go up in value, that is speculating, not investing. I focus on buying houses that need work at 40% to 50% below market value, then roll the cost of rehabbing the house into the loan. That way, I have equity the day I buy the property.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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