Have you ever wondered why I only focus on rental property investment strategies — and not tactics for buying and selling houses?
See, owning rental property is like starting a business…
WITHOUT having to do any of the work once I have everything up and running.
First, I purchase the property, just like I would open a store.
Then, I collect rent from my tenants, just like I would collect profits from customers…
And I make sure the property can AFFORD to pay a property manager well…
So I don’t have to do any of the work of maintaining the property.
This way, I reap the rewards of passive income and generational wealth…
Just like I would from a successful business…
But with much LESS work.
So today, I will talk about:
- What a rental property REALLY is
- Why NOT all rental properties are created equal
- Pros & cons of different types of rental properties
- My favorite rental property investment strategies
- And how I navigate the potential risks as well
Let’s dive right in.
WHAT IS A RENTAL PROPERTY?
A rental property is an investment property.
Basically, an investor rents the property out to tenants.
In exchange, the investor typically receives monthly payments in the form of rent.
Generally, these properties can include:
- Single-family homes
- Condos
- Townhomes
- Apartments
- Other real estate investments
With rental properties, you could POTENTIALLY generate a steady stream of passive income…
And experience long-term growth in your wealth as your properties appreciate in value.
With the help of a licensed professional, you could also take advantage of tax benefits.*
*See full disclaimer below.
Plus, rental properties could possibly even protect your wealth against inflation.
NOT ALL RENTAL PROPERTIES ARE CREATED EQUAL
Let me tell you about my FIRST ever rental property.
It was a nightmare.
I had to deal with the classic 3 Ts that every landlord struggles with…
Tenants, toilets, and termites.
My problems quickly escalated when my tenants suddenly broke their lease…
And my cash flow dried up overnight.
I quickly realized I didn’t know much about being a landlord.
I didn’t know how to find renters…
And I didn’t know how to maintain or manage the property…
Or even how to place an ad in the newspapers.
I thought because I was only buying one unit, I had reduced my risk…
In truth, I had INCREASED my risk because I was dependent upon one tenant.
REMEMBER, IF IT HAS ONE DOOR — LIVE IN IT, DON’T INVEST IN IT.
So, what did I do?
I immediately did everything possible to sell the property.
Then I licked my wounds and did the math.
After fees to sell, I barely broke even…
Mostly because I refused to count any of the time I spent handling the property.
If it weren’t for the speed at which I sold the property…
And the little bit of positive cash flow I did receive…
I DEFINITELY would have lost money.
So my first deal wasn’t a complete disaster, but it could have been.
Fortunately, I paid attention to this experience…
And it changed my investing criteria forever.
I realized quickly how little I understood about rental properties…
And it reinforced all the warnings I had been given about the headaches of being a landlord.
Rather than writing off rental properties as unviable, I went back to the drawing board.
I studied those who had created mega wealth with rental properties – to see what they had done differently.
The answer quickly became apparent to me.
Yes, they had ALL created financial freedom with rental properties…
But none of the investors I studied were buying single-family homes.
None of them were dependent on having a single tenant.
Instead, they built businesses that were based on renting many doors to many tenants.
They used the income to cover the expenses of operations…
While they paid down debt with the property’s income… and waited for appreciation.
Here’s an example for you…
Most people don’t know how Fred Trump accumulated his wealth.
The father of former U.S. President Donald Trump actually built 27,000 affordable rentals for servicemen returning from the war.
Multiply 27,000 units by the monthly rent in New York back then…
And you can quickly see his estate was estimated to be worth $250 million to $300 million after his death.
Why am I telling you all this?
Because a property may look great on paper…
But when you’re trying to determine whether a rental property is a good investment…
You need to take into account:
- The number of units (the MOST important number in real estate)
- Repair and renovation costs
- Potential tenant issues
- Appreciation rates
- Property taxes
- Insurance costs, etc.
So, not all rental properties are equal.
Do your own research… and don’t make the same mistake I made.
6 DIFFERENT RENTAL PROPERTY INVESTMENT STRATEGIES
1. Single-Family Homes
Investing in single-family homes is how most people start investing in rental properties.
For example, you purchase a single-family home and rent it out to tenants.
Pros:
- Potentially lower upfront costs
- Potentially easier to find deals
- Flexibility in tenant selection
Cons:
- Lower monthly rental income
- Higher maintenance costs
- Longer vacancy periods
- You manage the property yourself
- Zero cash flow if the single tenant moves out.
2. Vacation Rentals
This means purchasing a property in a popular tourist destination…
And renting it out for short-term stays, on Airbnb or Booking.com for example.
Pros:
- Potentially higher rental income (in a good location)
- Potential for appreciation
- Flexibility in rental terms
Cons:
- Higher upfront costs
- High competition
- Seasonality of demand
- You manage the property yourself
3. Student Housing
You can purchase a property near a university and rent it out to students.
This rental property investment strategy could allow you to take advantage of a potentially steady demand for student housing.
Pros:
- Steady demand in the right location
- Potential for appreciation
- Potentially higher rental income
Cons:
- Higher upfront costs
- Higher maintenance costs
- Longer vacancy periods
- College education is getting too expensive
4. Commercial Real Estate Properties
This involves purchasing a commercial building and renting it out to tenants.
Examples include office, storage units, hotels, retail, and multifamily buildings of 5 units and above.
Remember, investing in commercial properties is a long-term strategy.
Some commercial properties, like office buildings, have very long-term leases.
This has its pros and cons.
Pros:
- Potentially higher rental income
- Long-term leases
- Potential for appreciation
Cons:
- Higher upfront and overhead costs
- More complex management
- Office, hotel, and retail can be highly volatile investments
5. House Flipping
I don’t really consider this an investment, because this involves a lot of time and work.
The income you could make when you fix and flip properties is earned income, not passive income.
To do this, you would have to purchase a property and make improvements.
Then, you market it and sell it for a profit.
Pros:
- Potential for appreciation
- Potential return on investment
- Quick turnaround
Cons:
- Higher upfront costs
- Higher risk
- Longer sale period
- Risk of running out of money to complete the flip
6. Multifamily Properties
It’s no secret that this is my favorite rental property investment strategy.
Multifamily investing means purchasing a building with multiple units and renting them out to tenants.
This strategy allows you to potentially take advantage of economies of scale…
Which could in turn increase your return on investment.
Pros:
- Potentially higher rental income
- Greater economies of scale
- Potential for appreciation
Cons:
- Higher upfront costs – can be offset by creative financing
- More complex management – can be offset by creative financing
- Higher overhead costs – can be offset by creative financing
***
Now, let’s dig into my favorite real estate investment strategies for MULTIFAMILY… and how I navigate risks as an investor.*
*Real estate investing can be risky. See full disclaimer below.
9 GREAT RENTAL PROPERTY INVESTMENT STRATEGIES FOR MULTIFAMILY
#1 – Use Leverage Wisely
By leverage, I’m talking about using good debt to purchase a multifamily property.
This could be an excellent way to potentially increase my return on investment.
For example, if I could invest $100,000 of my own money…
And find 9 other investors to also invest $100,000…
I could make a down payment for a loan needed to purchase a $4 million property (in a good debt market).
Then, the rental income from that property could be used to pay the loan back.
Additionally, I could use leverage to free up cash for other investments…
And potentially reduce my capital gains taxes.
#2 – Never Compromise on Location
When investing in multifamily properties, I always focus on a location that has a strong rental market.
This could include areas close to universities or high-demand job markets.
Additionally, I would also consider factors such as local crime rates and school districts.
This could increase my property’s chances of attracting potential tenants.
Investing in a growing job market could also provide me with a steady stream of potential tenants.
#3 – Carry Out Cost-Effective Renovations
I’m referring to making cost-effective renovations to a multifamily property.
This could mean power-washing the property…
Or repainting it for a fresh new look.
This could help increase its market value and potential rental income…
With very little cash up-front.
By improving the property’s appeal, I could potentially attract and sustain demand for my rental property.
#4 – Maximize Cash Flow Potential
You know me, I’m all about the cash flow…
AND IF IT DON’T CASH-FLOW, I SAY NO.
A rental property with strong cash flow could potentially help me receive a steady passive income.
Additionally, I would consider factors such as vacancy rates and maintenance costs…
So that I could maximize my potential ROI.
#5 – Network, network, NETWORK
As I always say, your network is your net WORTH.
Networking is KEY to identifying potential investment opportunities.
It could help increase your real estate knowledge…
And could also create potentially valuable connections.
For example, you never know who could help you find qualified property managers…
Or contractors for repairs and renovations in an unfamiliar market.
#6 – Always Plan Your Exit
Developing an exit strategy ahead of time is vital for your rental property investment.
For example, you could plan to hold the property for a certain number of years before selling…
Or look for opportunities to refinance the property to free up some cash.
And if it were up to me, I’d never sell my properties, because of the cash flow they provide.
#7 – Know Your Market
I cannot overstate how important it is to know the local market.
It could help you to identify potential investment opportunities…
And help you determine the best pricing strategy.
Researching rents could help you to determine what rents you need to charge…
And could in turn maximize your rental property’s profit potential.
#8 – Invest in Professional Property Management
I never invest without hiring a professional property management company.
This is especially crucial when approaching commercial lenders as a new investor.
Even if you’re financially solvent, you could get turned down for a loan if you lack experience.
Since I’m a real estate INVESTOR and not a landlord OR a property manager…
I always make sure to find properties that cash-flow enough to pay a good property manager.
This means someone who would take good care of:
- Tenant screening
- Rent collection
- Maintenance requests
- Running the property management team, etc.
This could in turn reduce my time commitment to the property…
And free up my time to pursue other investments.
#9 – Understand the Tax Benefits
Investing in a multifamily property could provide certain tax benefits.
These include tax deductions for mortgage interest and depreciation.
For example, I could deduct the interest on my mortgage for the property…
And take advantage of depreciation deductions to offset my taxable income.*
*That said, I would ALWAYS consult with a tax professional first before investing in real estate. See full disclaimer below.
THE 10 POTENTIAL RISKS OF RENTAL PROPERTIES
Obviously, real estate investing can still be very risky.
So, keep yourself informed of the following risks…
And consider your own personal risk tolerance when it comes to investing in rental properties.
In a moment, I’ll also share some strategies I use to navigate these potential risks.
Risk #1: Market risks
Investing in multifamily comes with the risk of real estate market shifts.
For example, if the local economy takes a downturn, it could decrease demand for rental units…
Which could make it difficult for you to maintain rent levels and rental income.
Risk #2: Interest rate risk
Interest rates could have a big impact on profitability.
They’re having a huge impact today, in fact.
When interest rates rise, your loan payments could very likely become more expensive…
And this could also make your investment less profitable.
Risk #3: Vacancy risk
In a bad economy, you need to be prepared for vacancies to skyrocket at your property.
Be aware that if you have too many vacancies…
It could become very difficult to cover your expenses and make a profit.
Risk #4: Tenant risk
Depending on where you invest, your tenants can cause a variety of headaches.
They can be a source of property damage, delinquent rent payments, and even legal trouble.
Again, this all depends on your due diligence and location.
Risk #5: Maintenance risk
You also need to be prepared for the risk of costly maintenance and repairs.
Some of these costs could be very unexpected…
And they could quickly add up and cut into your profits.
Risk #6: Legal risk:
There are a variety of regulations that multifamily investors must adhere to.
Failing to do so could result in costly fines and other legal headaches.
In a moment, I’ll share what I do to navigate these legal risks.*
*You should always consult a licensed professional before investing in real estate. See full disclaimer below.
Risk #7: Cash flow risk
Cash flow is one of the most important considerations when it comes to multifamily.
If you don’t have enough cash flow to cover your expenses…
You could have trouble making a profit…
And it could spell trouble for your investment.
Risk #8: Location risk
Risky locations include:
- Dying cities with shrinking populations
- Weak job markets and struggling economies
- Seasonal job market
- Places with high costs of living
If you don’t do enough research and invest in an area that doesn’t have strong rental demand…
You could find it difficult to generate a profit in the long run.
Risk #9: Leverage risk
I’m talking about over-leveraging your multifamily loan.
If your Debt Service Coverage Ratio (DSCR) is below 1.25, it could put you in a very risky situation…
Which means your rental property isn’t generating enough income to repay the loan.
Risk #10: Management risk
Multifamily real estate requires intensive management and oversight.
If you don’t have the time or expertise to do this properly…
Or if you don’t take the time to hire a reputable property management firm…
It could lead to costly mistakes that could hurt your investment.
HOW TO POTENTIALLY MITIGATE THESE RISKS
Research the market THOROUGHLY
Before investing, I would thoroughly research the market and surrounding area.
I would also evaluate the property’s potential for appreciation.
For example, I would look into:
- The local job market…
- Median income levels…
- Crime rates…
And other factors that may affect the future property value.
Plus, I would analyze rental rates for comparable apartment buildings in the area…
And assess the future demand for rental properties in the area.
Work with LEGITIMATE professionals
I would work with brokers and property management firms to help me find great deals.
Professionals could help me find the best deals…
And provide great insights into the local market.
They could also help me negotiate a favorable purchase price…
And provide second and third opinions on the financials of the property.
Analyze the numbers in DETAIL (also known as ‘underwriting’)
Before investing, I would analyze the financials of the property.
This helps me see if it could likely generate enough income to cover expenses…
And potentially provide a return on my investment.
I also underwrite the deal for as many worst-case scenarios as possible.
Do SERIOUS due diligence
I would hire someone to inspect the property to identify any potential issues.
An inspector can also help me identify repairs that need to be made…
And determine potential maintenance issues that may arise.
Hire GREAT lawyers
Hiring lawyers is essential for protecting my assets and being compliant with legal regulations.
A good team of lawyers could guide me on:
- Drafting contracts
- Reviewing leases
- Ensuring compliance with local laws
- Forming a business entity for my investment
- Negotiating deals
- Managing disputes with tenants or other parties
- Zoning and permits that may be required to own a rental property, etc.
Hire an EXCELLENT accountant
An accountant could also provide me with sound financial guidance…
And could help me make better decisions when it comes to my investments.
Also, an accountant could help me with:
- Understanding the tax implications of my investments
- Tax planning and preparation to potentially minimize my overall tax burden
- Analyzing my investments to see if they meet my financial goals, etc.
***
These are just a few rental property investment strategies I know of – based on my 35+ years of experience in real estate.*
*So always do your own research and seek a licensed professional’s help if you’re unsure. See full disclaimer below.
Look, I believe that everyone deserves a shot at this game.
So I hope you get to figure out the best way to achieve your financial goals.
I hope you get to close a GREAT deal that could bring you monthly cash flow…
And potentially create a legacy that could last for years to come.
I hope you’ll become your family’s hero.
I hope your children look up to you as an example of what it takes to be successful…
And your friends look at you in awe of your financial savvy.
I hope you get to feel proud and accomplished…
And that one day, you’ll have peace of mind…
Especially knowing that you have taken care of your family and future generations for years to come.
Be Great,
Grant Cardone
Disclaimer: This content is intended to be used for educational and informational purposes only. Before investing, you should always do your own analysis based on your own financial and personal circumstances before making any investment. Grant Cardone is an industry expert who has been investing for over 30 years and his opinion is based solely on his own personal experience and circumstances. Individual results may vary. You should perform your own due diligence and seek the advice from a professional to verify any information on our website or materials that you are relying upon if you choose to make an investment. Investment involves great risk and there is no guarantee of performance or results.
We are not attorneys, investment advisers, accountants, tax professionals or financial advisers and any of the content presented should not be taken as professional advice. We recommend seeking the advice of a financial professional before you invest, and we accept no liability whatsoever for any loss or damage you may incur.
