350: Is Real Estate Your Next Income Stream? Rental Property Q & A

Buy a house.

Rent it out.

Tenants pay it off for you.

It’s possibly one of the oldest side hustles in the books, right?

Done right, owning rental properties can be an attractive long-term income and wealth-building strategy. But done wrong, it can be a recipe for headaches and a mountain of debt.

It’s a side hustle that I know a lot of the Side Hustle Nation readers and listeners are interested in (as am I).

For this one, I collected my own real estate investing questions, and gathered more from the Side Hustle Nation Facebook community.

On the other end of the line is Zach Evanish, a remote real estate investor and Director of Retail for Roofstock.

Roofstock is a marketplace designed to make it easy to shop for, compare, and purchase rental properties. (Zach was Roofstock employee #3 — and has bought 11 rental properties of his own through the platform.)

Why Direct Ownership? (vs. REITs)

“To me with direct ownership I have more control. When I’m buying through a REIT I’m generally buying a basket of homes,” Zach explained.

Zach prefers to buy single-family homes as he knows exactly where that home is, and how he can add value to the property, increase rent, and so on.

A lot of investors–myself included, at the moment at least–like buying through a REIT as they see it as more of a hands-off investment.

If you’re in the same boat, Fundrise might be worth a look.

But Zach said if you buy right and have good partners, single family homes can still be an almost-passive investment. He spends just an hour a week managing his 11 single-family homes.

Is There a Target Cash Flow or ROI You Look For?

There are some basic criteria Zach uses when looking for properties to buy:

• The 1% Rule – A guideline commonly used by real estate investors. The rule states the monthly rent should be equal to or greater than 1% of the total purchase price. For example, a $100,000 house would command $1000 a month or more in rent to meet the 1% Rule.
• Properties in the $100-$140k range.
• Properties where he can charge $1k-$1.3k rent.
• Focuses on B and C-Class neighborhoods with stronger school scores, and close to the downtown area.
• A cash-on-cash return of 6-10%

Overall, Zach said, “I’m not laser-focused on the current cash flow right now, I am building for the long term.” If he’s able to break even on the property at first, that’s good enough.

Zach looks at the potential for long-term growth and rent appreciation, and prioritizes buying great properties.

Is Property Management Worth It?

Do the benefits of working a property manager outweigh the drag on your cash flow? (These services typically charge 8-10% of the monthly rent.)

Zach looked at the cost of a property manager and weighed it against how he could use the time he would spend managing his properties. He didn’t want to be the manager — he wanted to be the investor.

He does say that there is a world of difference between a great property manager, and a bad one, however. That’s why Roofstock spends a lot of time at finding quality property managers who know the areas and are used to working with out-of-state owners.

Zach said even paying 15% is a great deal if you have a good property manager.

How Do You Align a Property Manager’s Interests with Yours?

Zach said at Roofstock, they look for property managers that have an investor mindset, so they understand how you’re running your business. It’s also important to work with a property manager that doesn’t profit from repairs. That way, they will try and find solutions rather than calling a repairman at the first sign of a problem.

You can also state in the contract that they only collect a fee when the property is occupied. This will increase the incentive for them to get tenants in the property, and do their best to keep them there.

How Hands-On Are You With Tenants?

Zach explained that 70-80% of the property listings on Roofstock come with tenants in place. Property managers have already vetted the tenants and looked though the lease for you.

Zach’s involvement with the tenants is very limited. He works with the property managers when selecting new tenants, but has no direct interaction with them.

(If you don’t like the idea of tenants at all, you might consider this unique raw land flipping side hustle.)

Why Long-Term Rentals Instead of Short-Term?

Short-term rentals have gained a lot of traction in recent years with the rise of Airbnb and others. Zach hasn’t explored vacation rentals with any of his properties yet.

Your ability to make money on Airbnb will depend greatly on traveler demand in a particular neighborhood.

Will I Need 20-25% for a Down Payment?

“On average, people are putting 25-30% down,” Zach told me.

The minimum a conventional lender requires for a rental property is 20% down. Obviously, the more you put down the higher your cash flow will be.

Most investors tend to maximize their leverage by putting down 20%, and with interest rates where they are now, you can get an attractive long-term fixed rate.

What Mistakes Do First-Time Real Estate Investors Make?

The mistakes Zach has made before was buying a home with rooms that we’re too small, or not having a nice sized yard. He said it’s important to ask yourself if you’d move into the home you’re buying, and not just look at it as a rental.

Zach’s tip is to have the home inspected by a trusted third-party vendor and look through the report thoroughly.

Is There a Rule of Thumb for Maintenance Budgets?

If you’ve had the property inspected before buying, you shouldn’t get any large unexpected repair bills. Zach takes a guess based on the age of the property how much he needs to put aside each month for potential repairs and maintenance. He typically puts $200-$300 into an account for his homes to cover any unexpected repairs.

When the accounts get up to a few thousand dollars, and it doesn’t look like he’s going to need that money for repairs, he’ll go ahead and use it to purchase another home.

What Do You Think of the Advice to Start with Multi-Family Homes?

“I like single-family better because it’s more liquid — there are multiple exit strategies,” Zach said. Single-family homes are easier to sell to investors, and if they appreciate in value he can sell them on to an owner-occupied buyer.

Multi-family homes can only really be sold to investors. Plus, there are fluctuations in the cap rate which are strongly correlated with interest rates. If interest rates are low, multi-family properties trade at a lower cap rate.

What Types of Investors Have the Most Success on Your Platform or Elsewhere?

Zach said people who are doing out of state investing have the most success on their platform. Zach does this himself, he lives in California and has investment properties in Florida, Georgia, and Ohio.

He said it’s expensive in California and harder to get a good ROI, so he looks for areas with better investment opportunities.

What Advice Would You Give to Out of State Investors?

It’s important to research the areas where you’re looking for homes if you’re not familiar with them.

Roofstock has a 1-5 star neighborhood rating, so you can look at the risk of an investment without seeing the area. But it’s essential you do some thorough due diligence when buying far from where you live and aren’t able to take a look in person.

Who Shouldn’t Buy Real Estate?

Roofstock offers a money-back guarantee, although it’s rare that it comes to that.

Zach remembered one instance when an investor got cold feet near closing. He was about to close on a deal but realized the acquisition costs would pretty much take his savings to zero.

If anything were to go wrong, such as unexpected costs, he’d be in financial trouble. So he (wisely) pulled out of the transaction.

Does the “Fix & Flip” Strategy As Seen on Late Night TV Ads Work?

Zach recommends staying away from the seminars and courses advertised in this manner. He said your money is better put to use as a down payment as an investment on a conservative property and learning through experience.

If you want educational material, check out the Roofstock webinars, get involved in the community, and feel free to reach out to their team.

(One fun “no money down” example from the podcast was Austin Miller’s discussion on free houses.)

How Does Insurance Work? How Do You Pick a Legit Provider?

Zach had one incident where one of his properties was broken into when it was vacant and he had a bunch of stuff stolen. He managed to get the insurance company to pay out, but it took 6-9 months of going back and forth with them.

The rule of thumb here is to do your due diligence and read through your coverage documents thoroughly.

If the premiums are cheap, they might not cover losses when your property is vacant. You can also seek loss of rent coverage and vacancy coverage to cover you if your property is vacant for long periods.

What’s Next for You?

“I’m looking to get to about 50 homes,” Zach said. “My passive income goal is $25k a month.”

He added, “At Roofstock, our long-term goal is to help as many people as we can build passive income in a database approach, and build long-term wealth through real estate.”

Zach’s #1 tip for Side Hustle Nation

“Plan before you buy. Lay out your goals, short-term and long-term.”

Sponsors

• ZipRecruiter.com – Find your next hire for free today!

Links and Resources from this Episode

• Roofstock.com (if you sign up and close a deal through that link before Oct. 31st, 2019, you’ll save $250 on Roofstock’s platform fee.)
• Alternative Investment Platforms

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