Criteria and philosophies: rental properties

Two and a half years ago, we’d saved our 6 month emergency fund and were debt free other than our mortgage. We had toyed with investing in real estate, but thought we’d have to wait a few more years to save up in addition to our emergency fund.

Then we had a mindset shift and decided to invest NOW instead of waiting until the perfect time. We used up just about all of our emergency fund in order to put 20% down on our first investment property (with a fixed rate, 30-year mortgage). It was risky, but we learned a lot without loss.

Learning:

Quality neighborhoods, quality houses: happy tenants, happy landlords

We researched legal things as we put up pictures and listed our turnkey rental. The legal side of things is a story for another day, but reading landlord books was eye opening in terms of what criteria to insist on when approving tenants–and the importance of maintaining those criteria without any deviance that would open room for lawsuits regarding discrimination.

Tenant criteria:

Before I get into our house purchasing criteria, here’s a brief summary of some criteria for our tenants:

  • they must make 3x the amount of rent
  • they must have good credit
  • they must have excellent references from past landlords

That last item is the most important. I research and independently verify any landlord names and phone numbers (thanks, internet!) and always call landlords where they are not currently living but several years back to get unbiased answers.

House criteria

Our first property was a turnkey rental right before house prices sky rocketed in our city (for a story of a renovation–you’ll have to follow our journey with our second investment property). It was also very close to our own home (this saved me a little since I ran over to show it to everyone and anyone who asked at a moment’s notice–I hadn’t learned about pre-screening before showings!). It’s in a nice neighborhood, has a yard, a garage… we’ve attracted great tenants ever since.

Our criteria for our next investment was:

  • a quality neighborhood we wouldn’t mind living in
  • garage and driveway
  • 2-3 bedrooms
  • fenced in backyard (we allow dogs and this has proven to be a “selling” point)
  • 12% or higher cash-on-cash return (how we run those numbers: coming soon)

Our second and third investment properties meet those qualifications, and once again, we’ve kept our property standards high, our tenant standards high, and our own standards of how we treat our tenants high as well. We insist on quality tenants, and we provide quality landlord care: keep everyone happy all around.

We’ve updated our criteria since our third property for two reasons: it was more difficult to find tenants and there’s a strong possibility we’ll have water issues in our basement:

  • no basements (only slabs or crawlspaces from now on)
  • stick to 2 beds

We’ll see where the real estate market goes next, but we hope to be in a position to buy as houses become available in this economic crash, and our criteria will stay the same!

That’s it. We turn down some deals when they’re in neighborhoods we just don’t think we would want to live in and that would drive away some tenants. We’ll see where the real estate market goes next, but we hope to be in a position to buy as houses become available in this economic crash, and our criteria will stay the same!

Already, our third house was filled with a tenant who wanted it because of the recommendation of another of our tenants who couldn’t recommend us highly enough. Another house, we moved some tenants in the day after the previous tenants moved out–it was in perfect condition.

Many people buy in the cheaper neighborhoods, but it holds no appeal for us. We’ll stick with providing houses we’d happily live in ourselves.

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