What Makes a Good Rental Property
We’re firm believers in the role real estate can play in helping finance your travels. But, you also don’t want to find yourself overseas dealing with a nightmare of a home on the other side of the world. So, we’ll use this article to outline what makes a good rental property.
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In addition to writing about his and Jenna’s travel and work adventures, Chipp is a CPA and founder of Walutes Capital, a real estate development and accounting firm. Wearing this “other hat,” Chipp offers real estate investment and development consulting services to clients. If you’d like help with your own real estate investing journey, contact Chipp here to set up an appointment!
Best Practices for Managing Rental Properties While Traveling
Before outlining the characteristics of good rental properties, we’ll provide a little context. That is, why should you listen to what we have to say on the topic?
Prior to heading out on our first year of full-time travel and work, Chipp had been a landlord for just over a decade. From “house hacking” a spare bedroom in his first townhouse to leasing a portfolio of properties, he’d seen the good and bad of real estate investing (and made plenty of mistakes along the way!). So, we had some experience going into our travels of what makes a good rental property.
Armed with that experience, we embraced the following best-practice techniques to help “travel proof” our rental operations:
Extend / re-sign all leases before leaving the States. Replacing a tenant from the other side of the world is not easy. Before heading out, we made sure to make sure all of our leases extended through our projected return date.
Acquire townhouses and condos to minimize exterior maintenance requirements. In addition to changing tenants, replacing a roof while overseas poses some challenges (slight understatement). Recognizing this, we’ve chosen to invest in townhouses and condos to minimize owner responsibilities for exterior maintenance. Yes, you lose some money and control to HOAs, but you gain time and a reduction in stress. The latter two items are far more important to us than a few extra bucks.
Empower tenants to address interior maintenance items on their own. We firmly believe that, if you treat people with respect, they’ll treat you with respect in return. As a landlord, this means treating people like responsible adults. In each of our lease agreements, we empower tenants to address interior maintenance items under a certain dollar amount on their own. They coordinate with the contractor, pay the bill, send us the receipt, and we credit the ledger. This A) speeds up response time in addressing an issue, B) provides the tenant a sense of ownership, and C) reduces the time we as landlords need to spend on maintenance issues. Over our decade-plus of doing this, have we been taken advantage of? Yeah, probably a few times. But, all-in-all, this is a win-win for landlords and tenants - and it’s made our lives significantly easier.
Having outlined the above best practices, here are four traits of good rental properties.
Rental Property Trait #1: Positive Cash Flow
More than anything else, a rental property needs to generate positive cash flow. That is, the money you take in via rents every month needs to exceed the money that goes out in housing costs. If you need to take money from other “pots” to cover a rental property’s costs every month, that means you have few dollars to apply towards A) your travel expenses, and B) other investments.
While each situation differs, common recurring housing costs include:
Mortgage and associated escrow payments (principal, interest, taxes, and insurance)
Miscellaneous maintenance costs
Property management fees, as required
HOA fees, as required
Landscaping paid by landlord, as required
Utilities paid by landlord, as required
Other miscellaneous costs paid by landlord, as required
But, landlords also have to account for replacement costs with a reserve fund. You may not need to replace an HVAC system or roof every month, but when you do, it’s going to cost a ton. If you don’t set money aside every month (typically 5% to 10% of rent), you’ll be in a world of financial hurt. Accordingly, when you include this monthly reserve amount in the above costs, you should still be generating positive cash flow.
Rental Property Trait #2: Strong Neighborhood
In addition to positive cash flow, rental properties generate wealth for their owners through appreciation in value. In theory, the longer you own a home, the more it increases in value (albeit in market-tracking fits and starts).
While macroeconomic factors (e.g. the Great Recession) may be outside of your control, you can control the neighborhood where you purchase a rental. Let’s look at two extremes. On one side, you can buy a home for pennies on the dollar in a dying neighborhood. Sure, you get a good deal on the home, but it’s likely not going to increase in value due to the collapse of the surrounding neighborhood.
On the other side, you pay a premium for a home in a strong, growing neighborhood. This allows you to reap the benefits of long-term property appreciation, as you know that the surrounding homes and area will continue to thrive economically.
Unfortunately, not all landlords can afford to pay a premium to buy rental properties in the strongest neighborhoods. This is where local market knowledge comes into play. The savviest landlords identify areas that are trending upwards but still have some affordability. Finding an investment property in a spot like this lets you A) take advantage of lower price points, while B) hitching yourself to a strong neighborhood with tons of appreciation potential.
Chipp's first rental property
Rental Property Trait #3: Low Maintenance
We touched on it above, but the more maintenance you as the landlord need to handle, the less time you have for doing other things (e.g. traveling). Recognizing this, we place a premium on investing in rental properties with lower maintenance requirements. Practically speaking, this means buying newer townhouses and condos as opposed to free-standing single-family homes.
Most townhouses and condos include some sort of homeowners’ association (HOA). You pay a certain amount of money in HOA fees each month, and the association handles some level of maintenance and administrative responsibility. Every community differs, but we’ve sought townhouses where the HOA handles exterior landscaping and maintenance tasks. Essentially, we’re trading cash for time and peace of mind. Leak in the roof? HOA handles it. Home exterior needs painting? HOA handles that, too.
And, when you buy a newer townhouse, the interior items you are responsible for are less likely to quickly break, minimizing maintenance costs and headaches.
WARNING: When you buy a home in a HOA-type community, you need to research the HOA itself. At a minimum, you should confirm: 1) monthly fees and projected increases, 2) HOA vs owner responsibilities, 3) any pending lawsuits with the HOA, 4) the HOA’s reserve and operating budget (i.e. does it have enough money set aside for long-term replacement and capital expenditures and to conduct its daily business). Additionally, as a landlord, you’ll also want to confirm that the HOA doesn’t impose any limitations on renting your property - can’t have a rental property if you’re not allowed to rent your home!
Rental Property Trait #4: Quality Tenants
At the end of the day, your tenants dictate the quality of your rental property - regardless of the above three items. Awful tenants will make the best-seeming rental a nightmare, while outstanding ones can turn a less-than-ideal property into a strong situation.
First and foremost, screen your tenants. At a minimum, this should include credit and criminal histories and one or two prior landlord references. If an applicant refuses any of these items, that’s an immediate red flag that should automatically disqualify someone. Unfortunately, we’ve been burned for not heeding this advice in the past.
But, as a landlord, you should also carefully review each situation on its individual merits. For example, one of our best tenants has a bankruptcy on her credit report. Instead of automatically disqualifying her, we discussed the situation, learned about some extenuating circumstances, and realized that she’d still be a great tenant. Bottom line, the screening process should be ironclad, while your interpretation of the results should depend on your judgment and the unique situation.
Related, we have embraced the philosophy of prioritizing tenant reliability and lease duration over rent. Rather than squeeze a potentially flaky tenant for as much money as possible, we look for reliable, long-term tenants - even if that means charging a little less each month. Once again, if you prioritize free time and peace of mind, it’s better to bring in a little less cash each month but have a great tenant in place!
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