Most Productive Rental Properties

Discover the most productive rental properties that you can own. Some of these ideas may surprise you and others you may have never thought of. If you want extraordinary returns you can't do ordinary deals.

My hope in sharing this wisdom with you is that you will be inspired to acquire trophy assets of your own because rental property is the greatest investment. I've already compared it to every other major investment vehicle and it out performs them all. But you could make mistakes. And you likely know people that have had nightmares with their rental property. So how do you avoid those? Well, in a previous post on The Five Rules of Rental Property, I shared with you how you avoid those. The first rule is about productivity.
 

12% Productivity Rule

My first rule of owning rental property is to own properties that have a productivity rate of 12% or more. What is the productivity rate? It's the net operating income (NOI) divided by how much you are “in it”. Your “in it” number is how much you paid for the property plus whatever else you invest in the property before it’s fully leased out; including holding costs between the time you purchase and the time you get your tenants in. The NOI divided by how much you have “in it” defines the productivity of a property, how well it throws off cash on a consistent basis. This is important because the goal is to own the asset long-term.

Importance of High Productivity: People have asked the question, "What if it's a property that has a strong appreciation rate, but it doesn't have as strong a cashflow rate?". Well, if it's always appreciating, that's great. But the only way you benefit from that appreciation besides seeing it on a piece of paper is to do a cash-out refinance. However, if your property is not productive, then you can't do a cash-out refinance because when you do, the debt service payments get so high that you eliminate your cash flow. So, you need this foundation of productivity regardless. That's why this is my first rule of owning rental property.
 

Productive Mindset

To be the kind of real estate investor who can reach this high productivity level you need a productive mindset.

Open-minded: A productive mindset starts with being open-minded. So often real estate investors get tunnel vision, and they don't see the amazing opportunities right under their nose. I feel like every day I see deals that I’ve never seen before, and some are right there in front of me.

Unrealistic: You need be unrealistic. Who has ever achieved greatness being realistic? You've heard the old Henry Ford phrase, "Whether you think you can or you think you can't, you are right".

Excellence: You also need to have a mindset of excellence as opposed to mediocrity. You only live once. Why not try to do as best you can in this broken world? Unfortunately most people argue their limitations when there's so much more you can achieve if you just focus on excellence.

Work: It's going to take some work to develop some trophy assets in your portfolio, but it will be worth every moment of it. As Thomas Edison said, and I'm paraphrasing here, "Like all great opportunities, it's dressed in overalls and looks a whole lot like work."

Collector: Owning highly productive rental properties means that you are a collector and have a collector's mindset. Have you ever met a collector who was proud of their common stuff? This is about collecting rare and beautiful assets; it's not about collecting thousands of common properties that everybody else can have. Be a collector and be proud of those trophy assets that you collect.

Creativity is King: Creativity is fostered in concert with the other five:

  • You're open-minded
  • You're unrealistic
  • You strive for excellence
  • You understand it's going to take some work
  • You're excited about the rare

When you have all five elements of a productive mindset, you can be creative. Your creativity allows you to look at a property differently than someone else. This enables you to find a way to create a higher level of productivity. These are not earth-shattering ideas. It just means being flexible enough to see how you can make more money with that deal. Creativity is king in being able to produce the highest levels of productivity.

 

Most Productive Rental Properties

 
These four types of properties can produce 12% or more productivity, but they aren’t perfect and pretty. They are properties you will have to work for, but they have the raw ingredients to produce remarkable results. Approach these deals with the attitude that it's not where you start, it's where you finish.
 

1. Alternative Use

Alternative use means using that property in a unique way, which may not be the standard or traditional use for that property.

Short-term Rentals: My favorite alternative use property is short-term rentals. I have a series on how to own vacation rentals wisely. I've made so much money with these and they’re still an amazing angle. Instead of renting my properties for $2,000 a month as a single family, I’m able to rent for $8,000 a month as a short-term vacation rental and produce absolutely extraordinary returns. The biggest challenge right now is finding deals at the right price because property values in certain markets have by doubled or tripled. That said, our people are still doing deals. You just need to get them off-market.

Student Housing: In another video called How to Turn a House into a Cash-flowing Machine, one of the alternative uses I mention is student housing. This involves renting out the house by rooms to college students and I have found this productive in the past. Another name for this can be a boarding house. Either way the idea is that instead of renting the house to one tenant, you rent by room to many tenants and they share the communal areas.

Halfway House: Another example is a halfway house. I don’t know much about this, but we have a huge problem with drug addiction and mental health in America and this may be a way to turn one property into several tenants paying more than if it was just one tenant.

The major challenge with alternative use is with zoning or land use laws. You must be incredibly careful here. Understanding the zoning laws is critical because there are governments that don't like alternative use properties. And there’s bound to be some neighbors that may not like your halfway house or student housing next door. So, be sure to know the zoning laws as good or better than the government and follow them.

To be clear, the government doesn't always know their own laws. And don't assume they’ll give you reliable information about their own laws. I have proven them wrong repeatedly. So, you need to know the law well enough that you can defend yourself. And if you defend yourself wisely, they will back down.

 

2. Single Family Outliers

There are areas where single-family home rentals can produce these kinds of results, but they are outliers. Even in today’s market, you can buy a three-bedroom, two-bath house, for $20,000 and then rent it for $600 - $800 a month. I've never lived in these areas, so I don't personally have any properties like this, but I know they're real because some of my apprentices do.

Section 8: Often investors who do own properties in these areas turn a handful or the entire portfolio into Section 8, which is government subsidized. This is a controversial subject, but if you have the right system in place, I know investors that do Section 8 successfully.

 

3. Multi-Family

A treasure trove of opportunity is waiting for you in multifamily. These are income producing properties that have two to four units. Anything five units and above is commercial real estate. In today’s market, multifamily properties are selling high, so you need to either get a property off-market or create additional units. And there’s good news for investors who want to transition a single-family home to a multifamily property. To combat the affordable housing crisis, there are parts of the country that have changed their zoning laws to allow homeowners to turn their single-family home into a duplex up to a fourplex. Four units are marvelous because you can still get residential 30-year fixed-rate financing, while having four units to spread across your risk.

Value-Add Opportunities: Multifamily is not just about creating additional units. It's also about creating more income from each unit through value-add opportunities. For example, adding laundry facilities in each one of the units or adding new appliances. These small adjustments allow you to increase the rents. Another way to create income is by raising rents to the current rental rates. Rental rates have exploded in the last year, in certain markets increasing by 30 or 40%. So, by simply bringing rates up to market value you can increase your cash flow.

It's Not Where You Start, It's Where You Finish: The idea is that you create a 12%-plus productivity deal. It may not start out that way, but you see opportunity where others don't. If zoning laws permit, you could turn a mediocre income-producing property into an extraordinary income-producing property.

Off Market Deals: The key is search for off market deals and market directly to motivated sellers. These properties can either just come along because of your heavy-duty off-marketing of motivated sellers, or it can be purposeful because that's what you're looking for. Either way you will do well because there is high demand for affordable housing. If you watch the trends of the bigger hedge funds, you'll notice they are buying huge quantities of single-family homes. They can see that the future will be a renting population.
 

4. Commercial Real Estate

Another honey hole is commercial real estate, specifically apartments and mobile home parks. You should be looking for apartments and mobile home parks with less than fifty units. Commercial real estate is not something that I focus on. So, I recommend you go to my good friend Peter Harris at Commercial Property Advisors. He and his team are great and they will teach you how to get off-market commercial deals, improve performance through value-add opportunities and achieve 12% productivity.

Now, you do need more money to invest in commercial real estate because it typically requires at least a 25% down payment depending on the type of asset. For a 10-unit apartment building selling for $700,000, 25% is a significant amount of money. Also, in certain cases you need to be able to prove other assets to get that loan. I've had many apprentices make a lot of money with me in residential real estate and then upgrade into commercial deals afterwards. It is common to start in residential, compile a portfolio with several trophy assets, own them for quite a while and then sell them and do a 1031 exchange and go into a commercial property.
 

Comments

  1. Mark Powley says

    Excellent!

  2. Sylvia Lenoch says

    Looking fot a free copy of your real estate book….
    Thank you for the great video.

  3. Jaime ocegueda says

    Hi Phil, thank you for the Video .

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