Investors have a number of ways to build their rental portfolio. One route is to purchase a turnkey property — one that’s filled with existing tenants, has documentation regarding income and expenses, and is ready to go. This can be a great scenario if the property is profitable (verification is of the utmost importance), but also understand that you pay top dollar. An owner will understandably expect to receive a premium price for a property that simply needs to be handed over.
With a little more work and creativity, you could instead look for the diamond in the rough and potentially land an amazing deal that results in monthly income as well as long-term profit. Consider a buy, rehab, and rent. As the name suggests, this is a property that will need work before it’s tenant-ready. The extent of the rehab is up to you; as when exploring rentals, be honest about your experience in rehabs when going this route. Rehabs can spiral fast if you don’t know what you’re doing.
Benefits of a buy rehab and rent strategy for building a rental portfolio:
- Lower purchase price. Any deficiencies should be reflected in the purchase price — and the more work, the bigger the discount. You will often find a lower cost of entry when you allow for a fixer-upper in your investment plans.
- Less Competition. Sometimes all it takes is stinky carpets to weed out the majority of the buying competition. Investors shouldn’t be put off by superficial issues, but with single families in particular, most buyers don’t know how — or simply don’t want to — look past issues that might look or smell gross but are easy to fix. In multi-families, a lot of investors seek the turnkey properties that come with a rent roll and solid bookkeeping. There’s less competition for the ones that need work and marketing before they’re ready.
- Refinance Options. If you buy at a discount and rehab properly, you should build equity in the property fairly quickly. This is a great benefit, as the option to refinance allows you to shop for your next rental a lot sooner than you might otherwise have. (You might have heard this referred to as the “BRRR” method — buy, rehab, rent, and refinance. Same principles!) In fact, hard money lenders in Maryland can help transition you from a hard money loan to a long-term loan. No need to juggle lenders.