So you want to own rental houses?
Birmingham, Alabama is a hot market if you want to own rental houses. It has so many benefits to offer an investor. But, I'm not here to talk about why you should buy in Birmingham. I'm here to tell you why you should buy MORE than one house when you start your investing career. One principle of investing I've learned is to purchase more houses, rather than fewer, to be successful. I purchased my first investment home in 2004 and have owned as many as 30 rentals at one time. Currently, I own 23. I purchased my first house when I was 24 and did the work on nights and weekends to fix the home up. Fortunately, I no longer spend nights and weekends painting and repairing plumbing, but I have learned some really valuable lessons in the last 12 years. This lesson is one of the most commonly misunderstood. So let me see if I can help you understand why owning 10 houses is better than one.
1. Cash Flow
This actually could be the only reason. . . it is why professional investors prefer to buy multifamily (apartment) buildings. If one person moves out, it doesn't have such a tremendous effect on your cash flow. 9 people are still paying rent while you spend the necessary money working on your home for the turn and re-letting the property. If you only had one property, you are not only not receiving rent, but you are coming out of pocket (hopefully using some of the cash flow you received previously) to perform the turn.
2. Law of averages begins to work in your favor
You are going to have a bad resident when you own rental houses. Statistically speaking, there are bad residents out there and regardless of how well your manager or you underwrite their application, someone is going to slip through - or even change over the course of time. When you have one house and you have this unlikely and unlucky situation happen to you, it can be devastating. If you have 9 good residents and one bad resident, it is frustrating . . . and it stings, but it is never terminal.
3. Discounts for volume
If you can believe this, people (like us managers) will actually give you a discount for giving us MORE work! Therefore, it is cheaper to have a house managed, a pipe repaired and a roof put on a house when you have more houses than just one. Having the work of 10 houses reduces your cost to operate your business significantly. This holds true operationally in management, getting work completed and even in your accounting. So now that we've established three reasons to own 10 properties, let's take a look at a plan for you getting there. I've seen a number of these plans over the years and I'm going to share a few with you . . .
1. Buy a house a year
I like this kind of disciplined approach to investing. Basically, you use the "Warren Buffett punch card approach" to purchasing homes. I'm only going to buy one house, the right house, every year. I have one punch every year, so I'm going to be disciplined to make sure it is the right house, on the right street, in the area I really understand. While I understand this doesn't get you to 10 houses immediately, it does get you there over time and is something almost anyone can achieve.
2. Be willing to use debt
Debt can multiply your return . . . it can also divide your return . . . so you must be very careful with how you use it. I'd suggest putting a minimum of 20% down on a house and I like the idea of putting much more than that on it. I've seen programs as high as 50%. Money is currently so cheap to borrow, it makes sense to use it as a tool in your investment belt. When you own rental houses, debt is your friend.
3. Convert a huge sum of money into houses
There are times in SOME people's lives that they inherit, receive a bonus or (for whatever reason receive a large sum of money). I'd like to suggest you investing that into owning homes. One of the things I like about the homes I own is that I can drive by and see a tangible asset. I have a lot of say so in how that asset operates. Thus I have a lot of power in how much money it makes. Try getting that from owning Apple stock. . . "Hey Tim, I've got an idea for a few products I'd like to see you working on." I'm not saying everyone is a candidate to own 10 rental homes. What I am saying is that owning 10 is a lot less emotionally draining than owning one. Birmingham is currently as hot of a market as I've seen in my 12 years to invest in real estate. If you are thinking of doing it, all you need is a good plan. Best of luck to you as you seek to own rental houses in whatever area you live!
