I meet one on one with at least 1,000 clients a year to discuss their business ventures, tax planning and most importantly their rental properties. Inevitably, we are going to talk about wealth building and rental property is going to be critical to the discussion. Every year I learn more and more from my clients regarding what is working and what isn’t. I truly am the lucky one!!
As your attorney and CPA I need to speak up!! I need to share these common themes and strategies that my successful clients are using to buy rentals. I’m not a realtor, I’m not a broker…but I am an investor, I too own rental property, and am consistently looking for rentals and study all I can on the topic. Please accept my humble opinion on 6 strategies that can help you find the ‘best rental property’ you can this year.
1. Buy Local IF you can. Let me repeat the words “if you can”. That’s the key. Don’t get hyper focused on buying local so you can ‘check on the property’. It’s OK if you don’t buy local. It’s far more important to buy QUALITY rental properties, RATHER than LOCAL. But, if you are lucky, and you truly live in an area where there are good returns and rental markets, where the return on investment is legitimate without having to own it outright or put down a fortune…then consider yourself lucky. Gain some experience, put in some sweat equity and shop till you drop!!
2. Learn to Manage your Property Manager. Yes…unless you are a full-time real estate investor and one tough SOB…get a property manager!! If you don’t have the temperament to be tough and start eviction proceedings 3 days after a tenant is late, have a personal intervention with yourself. You may not be cut out to be a property manager! You may not have the time, skills or system to be your own property manager, EVEN IF THE PROPERTY IS LOCAL! Be a realist. Your time could be better spent looking for other rentals, doing the books and earning income with your day job or operational business. So with that said, always and I mean always, put a budget in your rental property analysis for a property manager (approximately 10% of gross rents). Even if you have visions of grandeur and start managing, you want the budget to stick in a property manager if you need to.
3. Don’t use a Shotgun approach. I recently met with a client that had 5 properties in 4 states. They were great properties, but seriously!! Look at the inefficiency of registering an LLC in 4 states, 4 state tax returns, 4 different property managers, 4 different trips to at least ‘occasionally’ check on your rentals, and 4 different markets to understand and follow. Now when you have 25+ rentals and you can afford to make your full-time job managing your rentals and property managers then tackle 4-5 markets…but if not, consider the alternative: Bundle your properties in 1-2 markets, maybe 3. Get to know your property managers, get to know the areas and try to be efficient with your tax and legal planning. Save time and money with ‘Bundling’.
4. Have a Master Rental Property Analysis Spreadsheet. This is the Excel spreadsheet to analyze any and all possible deals…that’s right…you’re not going to buy the first rental you see this year!!! Run every property through the gauntlet of your spreadsheet. Own your spreadsheet. Know every column. Start with FMV, money down, improvements and mortgage/carrying cost…then move it through rental income, expenses, and wrap it up with a cash on cash ROI figure. Base your decision on this key factor generated by your Spreadsheet. This is why you took 5th grade math, embrace it!
5. Remember you are buying”Numbers”. I attribute this quote to my good friend and amazing investor, Chris Albin. He has repeatedly taught that too many investors get emotional about their purchase and can even ‘envision’ themselves living in the the rental property they are analyzing. This is a terrible mistake. In these situations, the investor often ‘over improves’ the property, investing far too much time or capital and blows their ROI out of the water. Don’t think your rental property needs granite counter tops and realize you aren’t buying a property, you are buying numbers. What do your dollars get you in ‘dollars and cents’? Not what cute neighborhood or yard do they get you.
6. Do your Research. Let me say that again, do your research and then do it again. Don’t look at a property as to why ‘shouldn’t I get this’…look at it as to ‘why should I get this property’. Make the numbers prove it to you. Don’t assume you’re going to buy it unless you find something wrong with it. I love a positive attitude and glass half full approach, and thus, this has been one of my greatest learning experiences. I have trained myself over the years to be a lot more skeptical…at least when it comes to analyzing rentals.
I hope these 6 tips may help you. I didn’t come up with these myself. I learned them from YOU my clients, students and investors that I have the wonderful pleasure of working with. These are key themes, strategies and approaches to real estate my successful clients use. I LOVE crowd learning. Thank you for making me a better investor!
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.