What stops someone from buying houses with a mortgage and having the tenant pay the mortgage in their rent? Why not do this with 50 houses?

The biggest thing holding people back is being uncertain if the rent will actually cover the mortgage. Fortunately with companies like Rented.com you can effectively rent the property even before you buy it. And not just rent it to a tenant who might not renew, leaving you on the hook while you search for a new renter, but rent it to a professional manager who will do all of the work for you, and pay you for the privilege.

Barring actually renting out the property prior to purchasing it, the next best thing is to assess what you can get in rent on the front end. Tools like this rental grader are great for that. Just put in your property details, and voila, it tells you what you can make renting it out.

One final note is the increase in rental potential we have been seeing in recent years thanks to the demand for short term rentals created by companies like Airbnb and VRBO. There really has never been a better time to invest in real estate. Not only can you capture outsized returns, but there are ways to do so with literally not having to do any work whatsoever.

                                            ANSWER

                     

Great question. The short answer is you CAN do this. Maybe not with 50 right off the bat, but the premise behind your question is exactly why I got into real estate investing and started The Holton-Wise Property Group.

You buy a property using someone else's money (the bank) then have somebody else pay off the bank (the tenant) What could be better than that? NOTHING!

But don’t get ahead of yourself, it’s not exactly as simple as getting a mortgage on 50 houses then having the tenants the ready and willing to pay off all of your mortgages.

The major barrier that keeps most mom and pop landlords from buying 50+ houses is capital. For non owner occupied purchases you would need at least 25% down to purchase the property. I am out in the Cleveland, Ohio market. We have tons of rental properties in the $100,000.00 range. The returns are solid as that price point will bring in $1,000.00-$1,500.00 in rent. So let’s say you wanted to purchase 50 of these $100,000.00 properties. That means you would need to bring in a cool $1,250,000.00 in cash.

If the $1,250,000.00 is not an issue for you, you will run into the next hurdle. Residential mortgage limits. You are capped 10 of those puppies. 1 primary residence and 9 rental properties is a nice start to a great portfolio but nothing you could live off of. Your 41 properties short of your original goal of 50 properties.

What does the investor do once they reach 10 residential mortgages?

Move onto multi-family investments.                                                                                                                            

After the 9 residential rental properties it’s usually time for the investor to move onto investing in multi-family properties. If you purchase a property that has 5 units or more it no longer falls under the residential financing restrictions. These properties use commercial financing and there is no cap to how much capital you can borrow so long as your credit and experience qualify and the loan amount hits the proper debt service coverage ratio.

This is what I did with my portfolio and it worked out very well for me. At this point in my life I rarely look into purchasing anything that has less than 4 units in it. If I do buy a residential property it is usually with cash or some type of owner financing.

Last thing you or any new investor should look at when deciding whether or not they want to take the plunge into rental properties is the true expenses associated with owning a rental property.

Let’s run the numbers on a typical property in a Cleveland, Ohio investment portfolio. The numbers below are based on properties in reasonable neighborhoods. Sometimes investors get greedy and attempt to buy properties in questionable neighborhoods because the rent to purchase price ratio is better. That may work sometimes but more often than that it can lead to disaster. I myself have ran into some issues with low quality properties. I discussed this here on Quora in another post. I recommend anyone thinking of investing in rental properties give that thread a read as well.      

123 Main street in Cleveland, Ohio.

• Price: $100,000.00
• Down Payment: $25,000.00
• Loan Amount: $75,000.00

Monthly Breakdown

• Monthly Rent: $1,500.00
• Monthly Mortgage Payment: $474.00 (Assuming 4% interest, 30 years)

$1,500.00 less your mortgage nets you a profit of $1,026.00 per month, but let’s not get too excited just yet. There are many more fixed and variable costs that we need to account for.      

Monthly Operating Costs

• Taxes: $168.00
• Insurance: $65.00
• Utilities: $150.00
• Vacancy: $75.00
• Repairs, Maintenance & Capital Expenditures: $150.00
• Non-Payment of rent: $75.00

After accounting for all the proper expenses that leaves the investor with a net profit of $343.00 per month. If the investor chose to hire a professional property management company that would bring the net profit down to roughly $193.00 per month.

The self managing investor would net roughly $4,116.00 per year. Since the initial cash investment was only $25,000.00 that is a return on investment of 16.5% and the investment would pay for itself in a little over 6 years.

If the investor hired a professional property management company the investor would net about $2,316.00 per year which is a return on investment of 9.3%. It would take almost 11 years to recoup the $25,000.00

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