The numbers on my small laptop screen were difficult to see. The bright, equatorial sun streaming through my window caused a glare. So, I closed the blinds.
Yes. Finally, I could see my bank account come into focus.
Then I smiled. Another month, another set of automatic rent deposits from my tenants. Our Ecuadorian mini-retirement could continue.
Passive rental income is a beautiful thing. My wife, two daughters, and I recently spent 17 months in the beautiful, historic city of Cuenca Ecuador. And regular trips to bank ATMs allowed us to draw on rental income in the U.S. to buy exotic fruits, pay rent, enroll our kids in local private schools, and travel within the beautiful country of Ecuador.
But is it even possible to buy real estate for passive income anymore? Have markets become too competitive? Have you missed the boat at this point if you didn’t already buy properties?
In this article, I’ll show you how it IS still possible to buy profitable rental properties. I’ll give you five practical strategies that can you apply right now.
But to start, let’s take a look at one of the most important concepts in real estate – market cycles.
Roller Coaster Real Estate Cycles
Real estate is sort of like a roller coaster. Because of the relatively slow-moving forces of housing supply and demand, your local real estate market tends to go up and down, over and over again.
For example, if you bought properties with amazing rental cash flow in 2007 – 2012, you benefited from a historic recession and downturn in housing prices around the country. Rents did soften, but they did not crash like prices did. So, you could buy at low prices while still getting great rental rates.
But at some point during that period, the market turned and recovery began. The recession officially ended in December 2009. And the actual bottom of the national housing market was 2012 when prices finally started to turn upward. But this timing varied within different local markets.
Then from approximately 2012 forward, the economic and real estate recovery continued in the U.S. As demand from renters and buyers grew, prices of houses and rental rates rose as well.
At some point, the housing market transitioned from recovery to expansion mode. What was the difference? You could finally see cranes in the downtowns and you could hear nail guns in the residential areas.
New construction was back.
Always a Buyer, Sometimes a Seller
So, what does all of that mean right now in 2018 and heading into 2019?
We know at some point the cycle will start over again. Another recession WILL come. But when?
The exact timing is hard to say. Even the smartest economists get it wrong.
So, instead of trying to predict cycles, I like to be prepared at all times. I always have my deal radar on and my money ready to buy.
This means I’m always a buyer as long as the numbers make sense. In a highly competitive market, I just have to look at a lot more prospects to find a property that actually makes sense. But they ARE out there (as I’ll show soon).
I also like to take advantage of whatever cycle we’re obviously in at the moment. During an expansion when demand is high, I like to sell off any bad or suboptimal properties I might have accumulated during a previous cycle. The cash from the sale can be used to buy another property or just to pad my cash reserves for future opportunities (or challenges).
But the main point here is that you can’t just sit on the sidelines and say “I’ll get back in when the market crashes.” If you want to be a real estate investor who buys rentals with passive income, you need to be always looking. If you don’t, you’ll miss out on opportunities.
5 Strategies to Buy Rentals for Passive Income in Any Market
To help you in your hunt for passive income rentals in a competitive market, here are five suggested strategies. These have worked well for me and for investors I’ve coached.
1. Pick the Right Market
Not every regional market is equally good for rental property investing. Before you start farming rental properties, you need to make sure you’re planting in fertile soil!
The first thing to consider within a market is the ratio of price to rent. In other words, if a house costs $100,000 how much can you expect to receive in rent?
For example, San Francisco has incredibly high prices compared to the local rents. As of 2017 it had a price/rent ratio of 45.88, which means a house that costs $1,101,000 would rent for $2,000/month.
But many cities in the southern U.S., west, and midwest have price-to-rent ratios at healthier levels for investors. For example, Ft. Worth, Texas has a price/rent ratio of 14.77, which means a $177,000 house would rent for $1,000/month.
You can find the data I quoted above and a comprehensive list of price/rent ratios for cities around the US at this SmartAsset article.
This reality might mean some of you will invest outside of your backyard. That could mean driving one hour into the suburbs, or it could mean going across the country to a different market entirely.
But keep in mind that price/rent ratio isn’t the only or even the most important factor to consider. I recommend you evaluate all of the factors that make an ideal rental market. This will include big picture demographics like population and economic growth. And it will also include local market dynamics like school districts, parks, and other influences of housing desirability.
2. Find Good Dogs With Fleas
When I first started investing a mentor taught me an important lesson. And because I’m from the south, he taught it to me with a story.
This mentor’s name was Louis. One day he said “Chad, do you want to know how to find good real estate deals?”
Right away I said “Of course! Please tell me.”
Louis then explained that to find good deals I needed to look for good dogs with fleas.
No, that didn’t mean literally look for houses with fleas (although I’ve found them multiple times!). What he meant was find a good property that had problems.
The problems could be physical like the property needed repair work. The problem could also be personal like the owners just need to get rid of it because of life circumstances (i.e. death, divorce, job loss, etc). Or the problem could be legal, like if the title has a flaw (like when you buy tax lien properties) or a landlord is evicting a difficult tenant.
If you can learn how to remove these “fleas” then you can take the problem property off the seller’s hands and make a profit for your trouble. This is how I’ve bought most of my own positive cash flow properties.
3. Get Better at Communicating With People
It’s a major misconception that good real estate deals are just “found.” Yes, in 2008 to 2012 it was easy to find deals. But that period was an anomaly.
In my experience, very rarely are deals found like in a treasure hunt. Treasure hunt mentality seems to remove the most critical aspect – the people!
Instead, good real estate deals are often custom-crafted between 2 or more human beings. In other words, it’s negotiated.
Because this is true, I find many of my deals (especially in more competitive markets) not on the public listings like Zillow or the MLS (multiple listing service). Instead, I go directly to sellers to talk about buying their property and solving their problem.
But human problems aren’t usually solved like fixing a motor on a car. We’re not machines. We’re living, breathing, feeling beings who happen to also have a problem, in our case related to real estate.
So, you have to address the human behind the problem as much as the problem itself. Therefore, the same principles that govern any good human relationship also govern a negotiation with the person on the other side of the deal.
What are some of those basic principles?
- Willingness to listen
Yes, you must also be competent and knowledgeable about the technical aspects of real estate. But my experience teaching other investors leads me to believe that most investors are botching the human side of their negotiations much more than the technical parts.
So, if you want more real estate deals, make a commitment to get better at communication. And then go out and talk to people!
4. Put More Fishing Lines in the Water
If you had to survive by catching fish, you’d try everything possible to catch more, wouldn’t you?
You’d probably start by fishing more often. Then when you did fish, you’d probably put bait on several lines and put them all in the water at the same time.
Finding good real estate investment properties is no different than fishing. You need to look for them more often, and you need to put more lines in the water with attractive bait.
This is a very common mistake I see investors make. They don’t seem to realize how many leads they will actually need to generate before they actually get a good opportunity on the line.
You’re likely to get dozens and dozens of non-ideal leads before you get an ideal one. Yet many real estate investors get frustrated because they try to make those few non-ideal leads work.
My recommendation is to create a simple marketing plan. Work backward from the end and decide what actions you need to take in order to find your deals. For example, in order to get just one deal you may need to:
- Make 10 offers
- Look at 30 properties in order to make 10 offers
- Get 100 leads in order to go look at 30 properties
- Receive daily MLS listings, drive neighborhoods looking for properties, network, put ads on Craigslist, and more to get 100 leads
So, the final step of the break down above tells you the activities you need to do. Those are the fishing lines in the water.
In this way, you can quantify and plan on a day-to-day basis what you need to do to buy more deals. Importantly, whatever your plan you also have to execute it with an incredible amount of hustle.
5. Be Patient and Persistent
Nothing in the world can take the place of persistence …The slogan Press On! has solved and always will solve the problems of the human race.”
– Calvin Coolidge
Even if you do the first four suggestions I’ve made, you still might still not find more investment properties right away.
I’ve found that the path to your goals is rarely straight or smooth. Instead, the path is more like walking through a room blindfolded. You grope forward, bump into walls, adjust, and clumsily stumble along to your destination.
Without patience and persistence, these inevitable roadblocks, obstacles, and frustrations can permanently stop you.
But the failure isn’t “out there.” The failure is inside your head.
How high does the hurdle have to be before you quit?
If you regularly read Jillian’s posts and newsletter, you have one of my favorite examples of someone with grit who doesn’t easily quit. She’s an inspiration for me as well!
So, if you make 20 offers and get rejected 20 times, will you quit? Or will you persist and choose to learn from those temporary setbacks? If you do, the 21st offer will be even stronger than the previous 20 and you’ll be more likely to succeed.
That’s the power of patience and persistence.
Passive Income and You
I began this article by sharing my story of living off passive income for 17 months in Ecuador. I even made it sound easy.
But you and I both know that anything worthwhile doesn’t begin as easily as it ends. Buying profitable real estate begins with sweat and with effort. And I think this is good because it weeds out the investors who really want it from the ones who aren’t committed.
So, keep in mind that buying “passive” real estate investment isn’t really that passive in the beginning. It’s more like a business startup!
But as you stabilize your property, get it fixed correctly, build a solid team around you, find good tenants, and let time (and market cycles) do their thing, you’ll begin experiencing the magic of passive income.
Then you can begin taking mini-retirement or doing whatever matters in your life. And that’s the whole point.
But it all begins with those first steps! And I hope the tips I’ve shared with you will help you on your real estate investing journey.