We interview Chris Clothier from Memphis Invest to explain real estate investments without the mess. Collect the rent check while someone else does the dirty work!
If you’ve listened to LMM for any length of time, you know how much we emphasize the importance of passive income. One of the keys to building wealth and achieving financial independence is to have more than one source of income and because there are only so many hours in a day, some of that income should be passive.
Passive income is income generated with minimal effort on your part. Good sources of passive income can include your investments and retirement accounts, making money from things you already do like driving, shopping, or going out to dinner and our favorite, rental property income.
Becoming a landlord can generate significant passive income. But how can owning rental property be considered passive income if you’re searching for homes to buy, tenets to live in them, and handling any repairs that have to be done and the whole list of other things a landlord has to do?
The secret to making rental property a source of truly passive income is hiring a management company and using the right tools to deal with the day to day hassles of being a landlord.
Turnkey rental property means that the home is ready to be rented out as is. Any needed repairs or upgrades have been completed and it’s ready for occupancy. This is the best kind of property to buy if you’re going to be an out of state landlord. It’s hard enough to deal with renovations when you’re local, almost impossible if you’re trying to do everything from a distance.
There are turnkey management companies too. The right turnkey management company can do nearly everything for you from finding the property and renovating it, to putting a tenant in place and dealing with any repairs and maintenance that might need to be done.
They collect the rent and send you a check. They also handle the sometimes protracted process involved when a tenant has to be evicted. You pay a management fee which is typically 8-12% of the monthly rent, some charge additional fees to cover expenses, and some charge a flat monthly fee.
You can’t just blindly turn such a big investment over to anyone. You need to do your research when looking for a management company. Are there any real estate centered Meet Ups you could attend either in your local area or the area you want to buy in?
It might be worth a trip to talk to some local investors and get recommendations for a management company. If you can’t travel, the internet has plenty of reviews for management companies so you at least have a starting point.
Once you have a few recommendations you can start interviewing companies. The preliminary round can be over the phone but once you have your list further narrowed down, you probably want to make a trip down in person.
Some key questions are:
- How long has the company been in business in the local area?
- What services do you offer?
- How many properties do you manage?
- Can the renter and I reach someone 24 hours a day?
- What are the fees?
- Under what circumstances can I cancel my contract?
- Do the fees change when there is no tenet in the property?
- How do you screen tenets?
- How is rent collected?
- How often will I get updates on my property?
- How long is your average vacancy?
There are dozens more but this are some of the most important questions to ask.
A Wider Net
You want to get into the rental property game but you live in New York City or San Francisco or Los Angeles, or any other city where property prices are sky high and you can’t afford to buy a home locally. You don’t have to miss out on that passive income.
When you hire a property management company, you can cast a wider net than if you had to invest locally and you can be an absentee owner. That doesn’t mean you should never visit a property before you buy it.
This is a big investment and you want to do your research on the local area; You can’t just go into any town or any neighborhood, buy rental property and expect to make money. It takes a lot of research to choose the best location to invest in.
A strong buy and hold neighborhood is important. This isn’t about flipping houses, it’s a long term investment. There are five key factors that can help you choose the best neighborhood:
Median Home Value: In regard to list price, half the homes are listed above this price and half below it.
Median Income: Median income is the amount that divides income distribution into two equal groups, half with incomes above that amount and half below.
Percent Employed: This is the rate of employment in an area. A number above 70% is considered high, under 50%, low.
Percent of Owner Occupied Homes: This is the number of people in the area who own rather than rent.
Average School Rating: Whether or not an area has good schools is one of the most important factors when considering rental property.
A management company can provide you with most of this information but if you are able, it’s ideal if you can see the property before you make the investment. If you set up an LLC for your rental property, the trip can be written off as a business expense. Just make sure you choose a company that has experience dealing with out of state investors.
Because you are hands off, it’s all the more important to receive regular updates. Some owners want to know every time a light bulb needs to be changed, some just want a monthly update on their portfolio.
Make it clear to potential management companies how often you want to be updated and what kind of detail the updates should include. Some examples of the types of reports that are customary are lease expirations, security deposits, tenet profiles, open work orders, rent roll analysis, and delinquency summaries.
Owning rental property doesn’t have to be labor intensive. So much of the research from finding the right location to the right house to the right management company can be done on-line from anywhere in the world. And once you have the right management company, your rental properties will truly be a source of passive income.
Memphis Invest: A turnkey real estate management company.
Instavest: Follow an investor.
Investable: Research and evaluate rental properties.