I have a friend who has considered rental property for years. He has read all the same books as me, attended a few seminars, and developed a robust knowledge base on the subject, but he has yet to buy his first rental house. He has the financial resources and the know-how, so what’s the hesitation?
I think it’s easy to fall in love with the idea of rental property and then just get stuck there. Another friend of mine was stuck for a long time because he was waiting for the ideal situation and perfect deal, which never came along.
In your own journey to buying rental property, you will probably be confronted with a few different stages, outlined below:
1. Disillusionment with your present situation
In this stage, you begin to realize that your current state will not get you where you want to go. Maybe you realize that you aren’t going to achieve certain financial goals or find the independence you want. Essentially, you recognize that you’re going to be stuck in the rat race, living paycheck to paycheck.
In this stage, you begin to realize that your current state will not get you where you want to go. Maybe you realize that you aren’t going to achieve certain financial goals or find the independence you want. Essentially, you recognize that you’re going to be stuck in the rat race, living paycheck to paycheck.
2. Investigation/due diligence.
After you reach a point of disillusionment, you begin to open your mind to other income possibilities and start a deeper exploration. This period of investigation and due diligence will involve the hard work of figuring out how to move forward with the resources available to you (books, websites, blogs, seminars, etc.). This journey of discovery will probably look different for every person. Some people will require a long period of due diligence, while others are ready to jump in pretty quickly. Either way, this investigation stage will help you process your thoughts on rental property.
3. Application.
Following disillusionment and investigation, you will then face the question of what you are going to do. You must decide if your idea will remain an idea or if it will turn into something tangible. If you decide on something tangible, then it’s time to act.
I’ve seen several people get hung up in the application stage. Sometimes their fear of loss overwhelms their ability to act. While everyone has a different risk tolerance, I think it’s important to look at some small, practical steps that can move you from the first two stages into application.
4. Self-reflection.
If you’re scared to get started, it’s a good idea to spend some time figuring out why. If you have fear in the beginning, it’s likely that you will encounter it again and again throughout your rental property experience. Rather than feeling bad or guilty about your fear, use it as an opportunity to figure out what is holding you back. By embracing your hesitations, you will learn a lot about yourself and whether or not rental property is really for you.
5. Find a support group.
There is probably a group of investors near you that could offer their advice and experiences to you. You can ask around at the bank about people who are involved in rental properties, and they can probably point you in the right direction. People with rental property experience will help lessen your fears and also serve as a support for you as you try to move forward.
6. Create a budget.
If you don’t have a budget, you don’t have any business getting started in rental property. Once you form a budget, you need to become financially disciplined and live within your means, using your leftover money for good investments.
7. Start saving for a down payment.
As part of your budget, you need to save money for a down payment on a rental house. You could even open up a savings account and title it “Down Payment.” Take a look at the type of houses you’re interested in, understand that you’ll need to save 20% of what they’re selling for, and give yourself incremental (and realistic) deadlines.
8. Start learning about your local market.
This can be as easy as downloading a couple real estate apps on your phone and checking them a few times a week. As you check, look at the rental market rates and the pricing of houses and get familiar with what is going on.
It’s also a good idea to drive around the neighborhoods you’re interested in. Take note of things that are questionable and look for good signs too-like kids playing out in front yards. If families are willing to live in a neighborhood, it may be worth investigating.
9. Start building professional relationships.
There are six critical relationships that you’ll need to develop as a landlord (see here), and it’s not a bad idea to start forming these relationships early. As you build a relationship with a realtor or banker, they may have properties in mind for you. The more your network grows, the more opportunities you’re likely to encounter.
10. Have someone hold you accountable.
Share your plan with someone who loves you. This person can check in on you from time to time and see how well you’re progressing. Perhaps this person is your spouse, a good friend, a financial advisor, or a mentor in your church. Whatever the case, an accountability partner is essential in encouraging and challenging you in your rental property endeavors.
In Summary:
- Don’t just fall in love with the idea of rental property. Ideas don’t produce any income if you never apply them.
- Evaluate where you fall in the three stages. Are you in disillusionment, investigation, or application?
- Once you identify where you are in your process, follow practical steps to keep moving forward.