Buying a Rental Property: A Step-by-Step Guide Investing in rental homes is a lucrative business, but it s not a get-rich-quick scheme. In this report, we take you step by step through the process of selecting the right properties, in the right places, at the right prices, so you can generate solid returns and positive cash flow.
98% of the 10.8-million rental property owners/investors are actually small entrepreneurs, with five or fewer units not large-scale players with hundreds of units in their portfolio. Single-family rental properties have proven to be a financially rewarding investment, but not if the investor chooses the wrong market, or the wrong neighborhood, the wrong property, or the wrong real estate investment firm. In this comprehensive guide, we ll take you step by step through the process of smart-selecting a cash flow investment property. 1. Choose a market 2. Choose a neighborhood 3. Choose a property But first, here are the top 5 reasons that the world s most successful entrepreneurs and investors from Warren Buffett to Dan Gilbert, and from Andrew Carnegie to Robert Kiyosaki have chosen real estate to grow their wealth and protect their portfolios. Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world. Franklin Roosevelt Competitive ROI In the last 16 years, real estate outperformed the stock market by approximately 100%. High Tangible Asset Value Since 1776, U.S. real estate has doubled in value every 20 years. Attractive and Stable Income Return While capital gains returns fluctuate with the market, income returns from real estate remain stable and have historically increased. Portfolio Diversification The industry sectors and S&P 500 show a nearly 90% correlation over five years; however, real estate stands uncorrelated from the rest. Inflation Hedging As economies expand, the growing demand for real estate drives rents higher, leading to larger capital values. And by responding to inflation by passing some of the pressure onto the tenants and absorbing the rest through capital appreciation, real estate is able to maintain its capital purchasing power. PioneerHomesUS.com 1
1. Choose a Market A. Invest for Profit Often, an investor s first inclination is to invest nearby, since it seems safer or easier; however, nowadays, with the likes of Rentometer, Mr. Landlord, PropertyWare, SmartMove and Dropbox, your research, and even your purchase, can be completed online without ever leaving the comfort of your home (or favorite poolside lounge). In fact, U.S. real estate investment from outside the country reached an all-time high in 2017. Furthermore, if you limit yourself to your local market, your initial real estate investment cost may be too high, diminishing any profit you might earn. As a general rule, you want to find a property with a rent that is close to 1% of the purchase price. For example, if you live in California, the median home price is $503,000 (according to Zillow). If you were to adhere to the common real estate purchase requirement of a 20% down payment, your initial investment would be nearly $101,000 before closing costs. For most people, that is a lot of money for one investment. Even if you do have a lot to spend, it might be a smarter investment to find positive cash flow properties in multiple markets. As Cervantes said, don t put all your eggs in one basket. In markets such as Detroit, MI, where the median home value is $42,600, not only will your downpayment be more affordable ($8,500, at 20%), it s likely you ll be able to generate positive cash flow even if you re fully leveraged. When you purchase a property outright, you can use all the income to generate wealth. If you finance the property, most of the rent you receive will likely go toward the mortgage until it s paid off, but you ll be building equity with little to no money out of your own pocket. A strong workforce, job opportunities and a low unemployment rate These high home prices also make it difficult, if not impossible, to produce positive cash flow. It s rare to find a tenant willing to pay $5,000 for a $500,000 property, but there are markets across the United States where $1,000 is fair rent for a property valued at $100,000. PioneerHomesUS.com 2
B. Conduct a Detailed Analysis Identifying the right market for your property investment requires careful scrutiny of a variety of factors, including: (i) market growth; (ii) the job market; and (iii) the housing market. I. Market Growth Is the market you re considering at its peak? Past growth draws attention, but it typically means you re too late. You know the tenet Buy Low, Sell High, so make sure you analyze the market s future growth, instead. Are people moving in or out of the area? If the market is still developing, you can probably expect rents and, therefore, rental income and appreciation to increase. Population (and popularity) growth leads to infrastructure development, the construction of schools, hospitals and hotels, and an influx of startups and entrepreneurship: major signs of increasing value and desirability. You want demand to exceed supply, especially in terms of housing, so you can be confident that your rental returns would be consistent or, better, increase over time. II. Job Market What s the unemployment rate in the market you re considering? Has it gone up or down over the last five years? What are the projections for the next half decade? People are attracted to areas that offer job opportunities, and they typically choose to live close to where they work. Avoid investing in areas that are tied to a single industry or corporation; if that industry shuts down or the company moves, your property will lose value quickly. Choose markets with low unemployment rates and show promise of job growth, as this will increase your chances of continued positive cash flow and appreciation from/of your investment. PioneerHomesUS.com 3
III. Housing Market It goes without saying that the housing market is a critical consideration when determining where you should invest in a property. And when analyzing a housing market, the two most important variables are home values and rental rates. Home Values Source: U.S. Bureau of the Census If you re looking for appreciation, there s nothing more important than the growth rate of home values in your market. If you re looking for cash flow, the same could be said, as rents typically increase parallel to home values. When determining whether a property will be profitable, calculate your costs compared to current and estimated future rental income. Be sure to incorporate costs for insurance and taxes, as well as property management and/or maintenance and renovations. As always, do your research: where have home values grown in the past half decade; and, where are home values expected to grow in the next five years. (In Detroit, for example, home values have grown at a faster pace than in any other city in the U.S., at more than 21% and Forbes still considers the City the most undervalued in the nation.) PioneerHomesUS.com 4
Rental Rates Once you ve found your market, you need to determine whether there are rental properties there that will meet your financial and investment goals. Whether you re using your IRA/40(k) or cash to make your purchase, you have to ensure not only that you can afford the sale price but that the home will provide you with the income, equity build and ROI to make it a valuable investment. Research the rental rates of the area to calculate the average rent you can expect to receive over time. Will that amount cover the purchase price and property management fees to generate the profit you seek? Median Rent in Detroit September 2016 - August 2017 Number of Rentals in Detroit September 2016 - August 2017 Source: Trulia PioneerHomesUS.com 5
2. Choose a Neighborhood You ve located your market (the right place) and decided on a max sale price and minimum rental income (the right price). Before you can isolate the right property and make an offer, you have to narrow your search to the neighborhood(s) that will provide you the greatest opportunity for immediate and long-term growth (in income, equity and ROI). And when analyzing neighborhoods, there are four traits that are most important. A strong workforce, job opportunities and Most Important a low unemployment rate Neighborhood Traits 1 Median income levels at or near 3x rent A highly rated school system Rich in all basic amenities Multiple forms of transportation The Neighborhood: A Closer Look Income Levels Check the median income of the residents. Areas where the occupants have a higher median household income have higher-priced homes. The high-priced areas are not ideal for investment, as they don t meet the 1% rule. The lower-end neighborhoods aren t perfect, either, as they often have a lower occupancy rate and come with greater risk. The investor s best bet is an up-and-coming area valued somewhere in the middle. Schools Find out how the schools rate nationally and in the state and city. Families want the best schools for their children, and others typically follow for the associated benefits (e.g., safety, amenities, transportation). Amenities If you find the amenities insufficient, chances are renters will too. You should look for shopping malls, hospitals, libraries, playgrounds, restaurants and theaters. Transportation Ask around. How long does it take residents to get to work? Is the area walkable? What public transport options are available? What about bike paths? PioneerHomesUS.com 6
3. Choose a Property When searching for the right property, you want to be sure the property is in good condition and, ideally, already occupied. This is where finding the most reputable real estate investment firm comes in. At Pioneer Homes, every property we sell has been fully vetted and, as needed, renovated using the finest quality materials. All homes are in clean, safe neigborhoods, and many are already occupied by long-term, pre-screened, rent-paying tenants. Whether you ve chosen to work with a real estate investment firm like Pioneer Homes, or do the legwork yourself, you must ensure that the property you select will meet your financial/investment goals. To find out, you have to run the numbers: Annual Total Income To calculate the total annual income you will receive from your property, take the estimated rent for the property and, if it is not already occupied, subtract the estimated costs for vacancy periods (typically two months). Expenses To calculate your total expenses, take into account your property taxes, insurance, and HOA, leasing, asset management and maintenance/property management fees. PioneerHomesUS.com 7
Annual Cash Flow/ROI To calculate the annual cash flow you will receive from your property, subtract your expenses, principal and interest payments from your total income. Once you have your annual cash flow, you can determine your annual return on investment (ROI). ROI is a measure used to evaluate the performance of your real estate investment. To calculate, divide your net profit by the amount of money invested, and express the results as a percentage. It s important to determine your investment cash flow for several years, as rental income can increase over time. Doing this research may sound tedious, but Pioneer Homes makes it easy by doing all the work for you and you can always check our work. A strong workforce, job opportunities and a low unemployment rate Personalizing and Simplifying Real Estate Investing with Pioneer Homes A. Listen. We re not a corporate machine, we re a small team of seasoned pioneers: real estate investment professionals who are passionate about finding the best investment property for each and every client. That means no cookie-cutter solutions to expedite the process. We consider your investment goals in the context of your greater investment portfolio and immediate and long-term financial needs. B. Perform Due Diligence. Based on the information you provide, we recommend investment properties that fit your criteria. But first they must meet ours. Before recommending any investment, we ensure that the property is: (i) in good rental condition; (ii) already tenant occupied; (iii) located in a clean, safe neighborhood; and (iv) likely to produce ROI. C. Present Investment Options. As soon as we know how much you re looking to invest, and what type of rental property (e.g., Section 8, Colonial, Tudor, duplex, two-family flat) you want to own, we narrow our focus and show you your recommended investment options. PioneerHomesUS.com 8
A strong workforce, job opportunities and a low unemployment rate D. Connect You with the Experts. Whether you re a domestic or foreign real estate investor, we ll make sure you have all the professional support you need to secure the legal purchase of your investment property and receive the income you earn from your tenants. This includes U.S.- and internationally focused lawyers, mortgage and title agents, and property investor support and service companies. E. Facilitate Your Purchase. Once you have selected your investment property and confirmed your legal right to its purchase, our transaction team coordinates the sale on your behalf. F. Manage the Managers (while you sleep). We use only a few trusted local property managers to manage and maintain your property to the highest standards, giving you peace of mind that your hands-off real investment is safely and securely earning you income. And, should a problem arise, we can help you resolve it. If you re thinking about investing in real estate, Pioneer Homes can help. Building wealth with rental properties is as easy as 1-2-3... If you invest wisely. And hire the right real estate investment firm. Let us help you get started today, and guide you from start to finish. PioneerHomesUS.com 9
As featured by Bloomberg... The Detroit leader in cash flow real estate. 500 Griswold Street, Suite 2420 Detroit, MI 48226 United States +1 586 574 5939 info@pioneerhomesus.com https://www.pioneerhomesus.com @PioneerHomesUS