What Makes a Good Long-term Rental

And How to Acquire One

What exactly makes a property ideal for long-term rental? Boiling it down to just three simple metrics:

1. Your all-in costs are 75% of ARV* or less
2. The property cash flows in an area where 1%* rule properties are common
3. It's in a neighborhood that won't cause headaches

• ARV stands for After Repair Value, which is the amount you estimate the property will appraise for after you're done with any improvements. Basically, it's the market value Monthly income - expenses > $0 * (1 month of rent / purchase price) > 1%

Okay, that's what makes it good, but why those rules? And is there really nothing else to it?

Why Buy at < 75% ARV

The only way to do this is to buy a property which is distressed in some way. That's a fancy way of saying "buy a fixer upper". The reason you want to buy a fixer upper is threefold: a) You can force appreciation (pump up the ARV) by more than the cost of repairs b) There's less competition for those deals because it's more work c) You can pay less upfront, which means you can pay cash and avoid financing

Coming in at 75% of the ARV is a bit of a magic number, because banks will typically allow you to refinance (get a new loan on a property you own) and pull out up to 75% of the value of the property.

Say now, if you put $75,000 into the property and it's worth $100,000 ... that means you can refinance and get $75,000 right back.

Gee, you sure could. This here is called a "Good Money Move" (BRRRR author David Greene). It means you own an entire house without sinking a single dollar of your money into it. Sure, you have a loan on the property now, but that's why we have Rule #2...

Why Cash Flow is King and Where You Buy Matters

If your property generates positive income every month (factoring in less common repairs like new roofs, water heaters, etc.) AND you have no money in the deal, it's an awful like you just asked for a house and received it for free. Of course, you put a lot of work into finding, acquiring, repairing, and renting the property -- but once it's yours, you're in the clear!

You can easily take your original $75,000 and start again on the next property while your last property sits quietly, printing money for you.

This is significantly easier if you are buying properties in an investor friendly area. That means properties are regularly selling at the 1% rule or better. It's simply not possible to buy properties like this, even if they are distressed, if you are competing with homeowners who don't care how much they have to pay to get in the door.

Even if you get #1 and #2 right, you could still be ruined if you buy in the wrong area. What good is getting your initial investment back and positive cashflow if you're pulling your hair out with terrible tenants, frequent police calls or gang activity in your neighborhood, or grim long-term prospects for rental demand?

Thats' why...

Buy in a Place That You Would Actually Want to Live

To put it on a bumper sticker:

• Job prospects should be good in the area
• Home values should be stable or increasing
• The neighborhood feels safe and people take care of their homes (no broken windows)

Buying in a place like this will give you access to a pool of high quality tenants who want to take care of your property, generally complain less, and generally do less damage to the property. If you feel safe and at ease walking the neighborhood during the day, that's a great sign. If you feel safe at night, that's even better.

Sure, buying in a great school district, with access to parks, the freeway, and local attractions in a trendy area is all great stuff, but your bread and butter aren't going to be those kinds of expensive properties.

Buy where good tenants live and you'll get good tenants

There you have it! Go make some money!