How to Score a Potential Rental Property

I get this question ALL the time, from friends, family, people online. They all want to know, the answer to the following questions

“Should I just rent my house out if I move out of it?”

Or,

“Hey I found this great house, should I make it a rental and get crazy rich?”

Let’s dive into this question, as its much more nuanced then you might think. We have a very rigorous set of decision points we put each of our deals through to determine if it will make an excellent long term rental.

Stealthy Rich Approach to Score a Rental Property

“Rent to Price” Ratio

We always first use our trusty Rent to Price ratio percentage. This ratio is the first one we look at before we even think about making a property into a long term rental.  The Rent to Price Ratio is merely the monthly rent a property could fetch divided by the total purchase price (or rehabbed cost) of the property.

Monthly Rent / Purchase price = Rent to Price Ratio.

Most people will tell you that to make it a good rental, you should have a Rent to Price Ratio of at least 1%. That would mean a property costing $100,000 should rent for $1,000 per month. 1000/100,000 = .01 or 1%.

We at the Stealthy Rich aim to do better than average. We consistently shoot for between 1.25-1.5 Rent to Price Ratios. So typically, we like to see something like this: Rent of $1250 on a house that cost $90,000 equals a Rent to Price of 1.38%. This is how winning is done.  To find these deals, we scour all kinds of deal sources such as Yellow Letters, and desperate wholesalers who need to sell a property quickly.

Let’s apply this ratio to a real-life example. My buddy owns a 3400 sqft property and is going away on business for several years. Should he rent his house out while he’s gone or sell it? Now there are many other factors to consider to answer this question, but let’s look at it strictly from a Rent to Price question. His house cost him $365,000. The most he could rent his house is for $3,000 if we look at the current rental market in the area. That would give him a rent to price ratio of 3000/365,000 = .82%

Not a great Rent to Price ratio. He might still make money, but it will be an uphill battle for sure. Remember, the price you pay is not necessarily what the property is worth. Try to buy properties at a discount as that’s where all the money is made.

Other Factors to Consider When Scoring a Potential Rental Property

• Does it have a pool?  The Stealthy Rich love a good swimming pool, but not in rentals. They are a liability nightmare as well as a money pit for expenses and maintenance. A house with a pool is an instant flip for us.
• How Nice are the finishes? We always joke that when we rehab a property, we have two “SKUs” to choose from for the type of rehab materials we put in it. SKU #1 is a cheaper, almost bulletproof Rental product, whereas SKU #2 is a nicer, more elegant product geared to get maximum dollar when we sell the place. If your property has polished finishes, know that when you rent it, they won’t be nice for very long. Not a deal-breaker when scoring a rental, but don’t expect your marble vanities to be beautiful when you get the house back at the end of the lease.
• What kind of floors? This point is an extension of the bullet above, but always consider the floor type and its resiliency. Wood and carpet in common areas are a recipe for a money pit every-time you have to turn a property. We try to do LVP (Luxury Vinyl Plank) or Tile in any common area, Kitchen, or bathroom. These surfaces seem to be able to withstand the test of time and take a beating for each renter without losing their luster.
• How awful is the HOA? Is your potential rental in an HOA? Is your HOA militant towards renters? We’ve experienced this before, and it’s brutal. Once your HOA sniffs out that your tenant is not the owner, if they mess up even once, they will be on a list forever, and it will cause you the biggest headache ever. Consider HOA hostility before you plop down a rental house in enemy territory.
• Could you flip the property for now for a huge payday? We always say that if we can get five years of cash flow right away, we will sell the house now. Consider the deal you got on the property and if you can flip it now.

Why Would You Want to Become a Landlord?

This is probably the most critical question. Why do you want to be a landlord? Is it just to make insane cash flow? Or do you enjoy the hunt for assets and the management of property to try and maximize profit? While it’s true, you can always outsource management, as a landlord, the problems you run into are not for those with a weak stomach. It’s a people business, and if you’d rather have a more passive investment, I would recommend index fund investing. However, if you are up for the challenge and want to leverage your investment for something potentially extraordinary, I invite you to enter the world of rental real estate! The Stealthy Rich genuinely believe real estate is the best way to obtain wealth.