How do you achieve a 29% return on investment on a rental property? Before I tell you how I went about it for my last real estate purchase, here’s a disclaimer, albeit probably not the one you’re anticipating: this is a no-fluff account, so don’t expect a story about how I installed gleaming cherry wood floors all over the house and bought everyone on the block a puppy. I’m not trying to win glamour points at cocktail parties, but neither am I some parasitic mobster; I went into this deal looking to make money, and I don’t think there’s anything wrong with that. If you disagree, go read Salon.com while sipping a soy latte brewed with fair-trade espresso beans.
Where To Find Best Deals
I buy houses in blue collar neighborhoods, for a very simple reason: they mostly sell wholesale, to investors, instead of retail to homeowners. That means a huge discount on the purchase price right off the bat. I have to put up with jokes from my friends that I’m a slumlord, because white collar people with advanced degrees don’t understand why anyone in their world would get their hands dirty by dealing with blue collar people in blue collar neighborhoods with blue collar problems.
But it’s a lot easier to find deals that will offer 29% returns in blue collar neighborhoods, rather than manicured picket-fenced suburbs or trendy yuppie districts.
What Type Of Neighborhood?
Here’s the thing: you don’t want awful neighborhoods, with high crime rates and more welfare recipients than workers. You want stable, old working class neighborhoods, the kind of place where Big Jim works the docks and grew up two blocks away, raised by a dad who worked the same docks. There should be a stable source of decent-paying, working-class jobs nearby.
Some properties in the neighborhood should be updated and renovated, but many should still be old-school properties occupied by the same couple who’s lived there for forty years.
Have several neighborhoods in mind, in your neck of the woods?
After looking through a handful of prospective neighborhoods in my home city of Baltimore, I picked one. I looked at all the properties sold in the neighborhood in the last six months, on both the local MLS and on Zillow. I looked at every property’s description, every property’s photos, every property’s square footage. I got a good sense of what an average-sized house in good condition goes for in the neighborhood… and what constituted a good deal on a property that needs repairs. Then, I did the exact same thing for all the properties rented or available for rent in the neighborhood. I walked around the neighborhood, looking at the properties that sold or were listed for rent, and refined my sense of prices and rents.
I saw that there were some good deals sold in the last six months, even if they were snatched up quickly. Not a lot, but a solid half dozen. If I had only seen one or two, that wouldn’t be enough to make me confident that good deals do come along in this neighborhood. I saw that I would need to move quite quickly to land a good deal here, though.
Moving quickly means buying with either cash or hard money. I used cash, and I strongly recommend cash for many reasons, but I’ve used hard money lenders in the past. They’re expensive, but the good ones will make it worth your while by moving at lightning speed.