You’re probably already familiar with the classic “snowball” effect. A snowball, rolling downhill, will accumulate snow around its exterior, and grow larger. The effect continues, but the larger total area of the snowball means even more snow is accumulated. The snowball rolls faster and faster, picking up snow at a faster rate, until it reaches massive proportions.
There’s a strategy you can apply to real estate investing that gives you access to the same kind of exponential return; once you build momentum, and choose your direction, you should be able to accumulate more and more revenue, eventually establishing you with independent wealth and a wide portfolio of different properties in your possession.
The concept is simple. You’ll start with one investment property, with the intention of maximizing its monthly profitability. For example, let’s say you bought the house for $150,000, and after all expenses, including your loan payment, property taxes, insurance, maintenance, and repairs, your monthly total is around $1,200. You then charge your tenants $1,700 per month in rent, resulting in a profit of $500 every month.
After a year of ownership, assuming you set aside this extra profit, you’ll have $6,000. After two years, you’ll have $12,000—and more than enough for a down payment on another property. So let’s say you find another property with almost the exact same specs as the first one. It’s $150,000, with $1,200 in monthly expenses and a profit of $500 per month. Now you’re making $1,000 per month in rental profits, and it only takes you one year to accrue another $12,000, which you can use to buy a third property.
Follow this pattern a few more times. Soon, you’ll have 5 properties, each making you $500 a month, for $2,500 per month, total. Hypothetically, you’d make $30,000 that year, potentially enough to provide a down payment for 2 or 3 additional properties. At 10 properties, you’d pull in $60,000 a year easily.
The approach has several advantages:
- The model doesn’t require a significant upfront capital investment. As long as you have a few thousand dollars set aside for the initial down payment, you can scrape by as long as you have tenants filling your property.
- The model is also appealing because of how it scales. When you first start, you’ll only have to worry about one property, which is a relief to newcomers. If at any point you feel overwhelmed with the number of properties you have, you can back out or sell some of them, meaning you’ll only ever manage as many properties as you want to manage.
- Obviously, people love this strategy for its practically unlimited potential as well. As long as you keep adding properties to your portfolio, your revenue is going to grow. There’s no strict upper limit here.
Your First Property
One of the lynchpins of this strategy is your first property. It needs to be a near-perfect investment because it’s going to provide the initial foundation for your future. Assuming you’re new at this, your property needs to be exceptionally easy to manage; try to find a single-family home, and one that’s been recently built or renovated. The fewer instances of maintenance and repair, the better. You’ll also want to choose something with strong long-term growth potential, since this will soon be the oldest property in your portfolio. Carefully examine multiple candidates, and don’t jump the gun; wait until you find the right fit for you.
Making a Profit
You also need to make sure you can turn a profit consistently with your first property, or you won’t be able to accrue the down payment you need for the second. There are a few things you’ll need to ensure to make this happen:
- Plan for all your expenses. First, make sure you’re accounting for every conceivable expense you could face. That includes your loan payments (principal and interest), your property taxes, your insurance payments, and ongoing expenses such as property management, emergency repairs, seasonal maintenance, and other items. Build in an extra cushion to protect yourself from unforeseen expenses as well.
- Set the right rent. Make sure you’re setting the right rent. It’s tempting to post a rent that’s a few hundred dollars over your costs, but if it’s too high for the area, you’ll never attract tenants. Do your research before you buy, and make sure your neighborhood can support the rent you need to charge to make a profit.
- Choose good tenants and keep them happy. Finally, spend some time and effort recruiting the right tenants and keeping them there. It’s far better to find a stable tenant who will pay you consistently for months or years than to fill the void as quickly as possible at the risk of increasing your overall turnover.
The Long Game
Your first few properties should be easy to maintain, and “sure bets” in terms of profitability, but as you become more familiar with buying and managing properties, you might start taking bigger risks or experimenting with variations of the strategy. For example:
- Bigger profits. You could buy commercial property, or multi-family buildings that are harder to maintain, but have the potential to return you a much higher profit. The more properties you have in your portfolio already, the lower your overall risk will be.
- Minimized demands. You might also optimize your holdings and services to minimize the amount of time you have to spend managing your properties. Instead, you can hire a property management service, and spend your time doing what you want to do.
- If you’re tired of managing properties, or if you’d rather pursue other investments, you can always sell some of your older houses and rebalance your portfolio.
If you’re interested in becoming a landlord for the rental income, but don’t want to invest hours of your time every week, your best strategy is to secure the help of a property management service. If you’re interested in learning more about how property management can keep you profitable while sparing you effort, contact Green Residential today!