How To Start Investing In Rental Property For Beginners

Are you interested in learning how to start investing in rental property for beginners? Today’s interview is with Paula Pant, who in her 30s already owns seven rental homes.

You may remember Paula from when I first interviewed her a couple of years ago in How This 34 Year Old Owns 7 Rental Homes.

Today, I’ve asked her to come back and answer some more of your questions, as well as give us an update on property investing in the current environment.

Paula and her work have been featured on Oprah, MONEY, CNBC, Forbes, The Washington Post, MarketWatch, USA Today, Bloomberg Business, U.S. News, Fortune, Business Insider, Nerdwallet, The New York Times, and countless others.

Paula has been investing in real estate for over a decade. She’s been an out-of-state investor for five years. She currently has a portfolio of seven buy and hold rental properties, and recently bought a duplex in March of 2021.

In this interview, you’ll learn:

• Is owning rental property profitable?
• How do you know if a rental property is a good investment?
• How much profit should you make on a rental property?
• How do you manage rentals from another part of the country? What happens if there’s a repair needed or if a tenant moves out?
• How do you deal with a bad renter? Have you had one before?
• What do you think of the current real estate market? Is it too hot to get into?
• What’s the best way for a person to get started with real estate investing as a beginner?

And more! This real estate investing for beginners interview is packed full of valuable information.

Here’s how to start investing in rental property for beginners.

1. Hey Paula! Some of my readers may not know your story. Can you tell us who you are and what you do?

Hi Michelle – and huge hello to the 1 Dollar Financecommunity! 

I’m the host of the Afford Anything podcast and the founder of Afford Anything, a platform that’s built around the philosophy that you can afford anything, but not everything. Every choice you make is a tradeoff, and this opens up two questions: (1) what matters most?, and (2) how do you act accordingly? 

You’ll never finish answering these two questions; exploring these answers is a daily lifetime practice. This is the core philosophy behind Afford Anything.

As I mentioned, Afford Anything is best known for its podcast, which has 18 million downloads. We also have a website with 10 years of articles, a thriving newsletter with 70,000 subscribers, and a YouTube channel that’s currently mostly podcast audio. 

Our flagship course, Your First Rental Property, is based around the letter “R” from that F.I.R.E. cornerstone – it’s a deep-dive into how to intelligently invest in rental real estate. 

2. What do you like about investing in rental real estate?

I love that real estate is a hybrid between running a business and owning an investment. 

You can influence the profitability of your real estate investments. You have control over the outcome. 

If your rental property isn’t delivering the returns that you want, you can make the operation more efficient – just as you would with any business.

By contrast, if your stock and bond index fund portfolio isn’t delivering the returns you want, you’re stuck. You’re at the mercy of the market, and there’s no way to take the steering wheel. 

I love stocks and index funds, but I don’t like the idea of 100 percent of my portfolio at the mercy of broad macroeconomic forces outside of my control. 

That’s why I like diversifying into rental properties and also running an online business. I see those as highly compatible activities; both allow you to take the reins.

The difference, however, is that running an online business is an active enterprise that requires me to show up and work for many hours, nearly every day.

By contrast, rental properties create a hands-off ongoing stream of residual income, also known as passive income. 

The phrase “passive income” is occasionally controversial or misunderstood, so let me be clear: “passive income” is not a euphemism for “free money.” It’s a reference to front-loading the workload, so that you can enjoy residual income for years to come.

Dividends are passive income. Royalties are passive income. And rental income is passive income; in fact, the IRS officially designates rental income as “passive.”

When you invest in rental properties, you spend a few months working hard upfront, and then you enjoy decades of receiving a payout in perpetuity. It’s the ultimate dividend investing.

3. How did you get into rental real estate? How did you, at first, afford rental real estate?

When most people become homebuyers, they pay their entire mortgage from their paycheck.

I didn’t want to pay out-of-pocket for my housing costs. So I got a rental property instead. My first property was a triplex, which I bought with my former spouse. (If you’re unfamiliar with the term “triplex,” it’s like a duplex, but with three units instead of two.) He and I lived in one unit, which we also shared with roommates. We rented out the other two units. 

Between the rental income from the tenants in those two units, plus our roommates, we had zero out-of-pocket housing costs. This allowed us to accelerate our savings, which paved the way for the second property.

By the way, I should note: I owned 7 rental units before I ever purchased a home for myself. I went directly from being a tenant to being a landlord. 

The first time I bought a personal property, a home purchased for the sake of personal living, I was like, “how do people afford this?!?” I bought a reasonably-priced condo, but it felt extravagant because it was purely a consumer purchase. 

It was the first time in my life that I had to pay the mortgage from my own paycheck, rather than from rental income.

A personal residence takes money out of your pocket every month. An investment property puts money into your pocket every month. That’s why my personal residence was my 8th property, not my first or second.    

4. Is owning rental property profitable?

Is owning stocks profitable? Only if you do it correctly. 

Same holds true for real estate.

Some people don’t understand how to invest in the stock market. They speculate, they act impulsively, they don’t bother to learn what they’re doing. They throw money into the market blindly, cross their fingers, and hope everything works out. Occasionally they get lucky, but it doesn’t last. And when they lose their shirt, they swear off stock market investing. 

For these people, stock investing is unprofitable. But the problem isn’t the stock market itself. The problem is their lack of knowledge, preparation, and contingency planning.

The same happens in rental property investing.

There are amateurs and accidental landlords who have no idea what they’re doing. They make assumptions and hope for the best. Sometimes they get lucky. But more often than not, they’re blindsided by something that they didn’t anticipate – and they don’t have any planning, systems or structure to deal with this.

By contrast, the profitable rental property investors are the ones who treat it like a business from Day One. They have checklists, systems, procedures and processes. They have a team that handles the day-to-day tasks. They financially plan for vacancies, repairs and renovations. 

Their knowledge, preparation and multiple contingency plans are the key to their profitability. 

5. How do you determine a good rental property? How do you know if a rental property is a good investment?

That’s like asking “how do you determine a good first date?” – it’s all about compatibility. 

In the same way that humans have different characteristics and attributes, so do rental properties. Some rentals are, by their nature, lower-effort and more hands-off. Other rentals have higher profit potential. Some are better for cash flow. Others are better for equity growth. 

Your rental property needs to be compatible with your goals as an investor.

The first homework assignment that I give my students is a self-assessment. They fill out a detailed worksheet in which they determine their overall life goals and financial goals, and then they determine which rental properties are a good fit.

6. How much profit should you make on a rental property?

To understand this, let’s again look to the world of stocks and bonds. 

When you invest in any asset – like a stock, bond or index fund – the returns should reflect the risk. 

If you invest in an emerging markets index fund, for example, you’d look for higher returns than you would if you bought a conservative bond fund. 

The higher the risk, the higher the return.

The same holds true in the world of rental property investing. If you buy a newer-construction property in an upscale neighborhood, the type of property where your tenants are likely to have graduate diplomas and tend to stay in one location for a few years, then you’re going to have lower returns. 

This is because your risk level is lower on multiple dimensions: the age and condition of the property, the average vacancy rate of the neighborhood, the credit and income qualification of the tenants. Lower risk, lower return. 

By contrast, if you buy an older property that needs significant repair work, and it’s in a neighborhood with high vacancy rates, you need to demand higher returns to make that investment worthwhile.

The specific numbers will vary from city to city. Personally, I want my lower-risk rentals to perform better than bonds, and my higher-risk rentals to perform better than a stock index fund.

7. How do you manage rentals from another part of the country? What happens if there’s a repair needed or if a tenant moves out?

Imagine that you own and operate a taco restaurant in Austin, Texas. Your taco restaurant is a massive success, so you decide to open another location in Nashville. 

You hire a general manager who lives in Nashville and handles the day-to-day operations of your taco restaurant, such as hiring staff, procuring equipment, and tracking inventory. As the out-of-state owner of the restaurant, you interact at the 30,000-foot-view level: reviewing the company’s financials, creating strategic plans for expansion, evaluating the performance of the management. 

Obviously, you’re not going to fly to Nashville every time your taco restaurant needs more cheddar cheese. You hire a staff. You create systems. 

When we talk about traditional businesses, it’s easier to wrap our heads around this model. We know that there’s a distinction between being the owner vs. being the operator or manager.

But when it comes to real estate (which is also a business!), we tend to forget.

We conflate our direct, personal experience of living in a house with our imagined business experience of operating a house. 

I’ve owned real estate locally, and I’ve owned real estate from 2,000 miles away. I prefer out-of-state investing, because it forces me to treat it like a business, not a hobby. It forces me to hire a team, to create detailed checklists, systems and processes (which I share with the students in my course), and to be the owner, not the manager.

When there’s a repair needed, my manager contacts my preferred handyperson. 

If a tenant moves out, my manager conducts the move-out inspection, lists the unit for rent, handles showings, screening and lease signing, and facilitates move-in. 

Like the out-of-state taco restaurant owner, I’m the owner, not the operator. I interface at the 30,000-foot-view level.

8. How do you deal with a bad renter? Have you had one before?

The best cure is prevention, which is why I have strong screening criteria for any tenant applicant. Tenants need to agree to a background check, credit check, income verification, and provide references from multiple previous landlords and their employer.

I spent a lot of time upfront creating and refining my processes and systems for tenant screening (which I share in the course), so fortunately, I haven’t had a terrible tenant whom I approved. 

The two examples of trouble that come to mind happened (1) when I inherited a tenant from a previous landlord (someone already living in the home at the time of purchase), and (2) when an unapproved subletter started living in the property. 

In the first example, I bought a duplex in March 2021. Each side was occupied at the time of purchase. One of those tenants is fantastic, and I’m proud to continue to be his landlord today. The other tenant, unfortunately, left the place as a complete mess when he moved out. He didn’t get his deposit back, and I had to hire professionals to deal with the junk he left behind, but that’s a manageable and low-level challenge.

In the second example, I rented a property to a highly-qualified tenant with a master’s degree in accounting and an impressive job. Unfortunately, he subletted without permission, and the new person who moved in trashed the place. Since he wasn’t allowed to sublet, he had to bear the full cost of the damages.  

When those types of issues arise, the response is to handle it professionally through systems, order, procedure and documentation. 

A good lease will outline the procedure for how to handle lease violations (such as an unapproved subletter). The laws of your state will also provide parameters and boundaries. 

This is why it’s so important to treat your rental property like a business, not a hobby, from Day One – because when disputes arise, it’s critical to have followed the proper procedures and to have adequate documentation.  

9. What do you think of the current real estate market? Is it too hot to get into?

It’s a fantastic time; I myself recently bought a duplex in March 2021.

There are two responses I’d give to this concern:

 1. Market timing: You wouldn’t say, “the Dow Jones is high, so I’m going to stop buying index funds in my 401k.” That type of statement would be an example of market timing, and we know that time in the market is more important than timing the market.

The same holds true for rental properties. This is a long-term investment, and trying to time the market in real estate makes about as much sense as trying to time the market in stocks. The market may rise or fall; the key is to ignore short-term volatility, zoom out and play the long game.

The earlier we start the investing clock, the more time our investments have to grow and compound. Buying a rental property this year means that the property immediately starts creating wealth in a multitude of ways: equity growth through principal payoff, equity growth through both forced and market appreciation, cash flow, and tax depreciation.

And the longer you hold the property, the more wealth it’s likely to create. Over time, your fixed-rate principal and interest mortgage payments stay the same, but your rental income grows, which means real estate often creates more wealth the longer you hold it. It’s also a fantastic hedge against inflation for that same reason.

 2. Scarcity vs. oversupply: Many people have a fear of heights. They saw the housing market rise rapidly in 2006, and then crash in 2007-08, so they assume that today’s housing growth will be the same as last time. 

But the underlying factors are different.

In 2006, there was a surplus of houses. Builders were speculating, rapidly throwing together new housing developments as fast as they could. Meanwhile, underqualified borrowers were getting loans that their income couldn’t support. 

Let’s restate this, for emphasis: in 2006, unqualified borrowers were taking out oversized loans to buy houses, and home builders responded by flooding the market with a glut of new construction.

Okay, now let’s compare those fundamentals to today.

In 2021, stricter lending criteria is screening away underqualified borrowers. Nationwide, the percentage of homeowners who have mortgages is significantly lower than it was in 2006 (meaning more people own their homes free-and-clear), and among those who hold loans, their debt-to-income ratio is lower. 

In other words: today, there are fewer borrowers, and those borrowers have higher qualifications and are taking out smaller loans. The risk of mass default, which is what triggered the Great Recession, is not present in the fundamentals on the borrowing side.

Next let’s look at the supply side. The pandemic forced construction (both new construction and renovations) to come screeching to a halt. The economy is slowly re-absorbing those jobs and projects now that we’re coming out of Covid-19 shutdowns, but there’s still a drastic undersupply of homes.

When supply declines and demand stays the same or increases, prices rise. That’s what we’re seeing in the rapid rise of today’s home prices.

That’s a long way of saying that the fear of “it dropped before, it might do it again” is too simplistic. The better question is, “are the factors that caused the previous decline present in today’s environment?” – and the answer is a resounding no.

Home prices are rising based on supply/demand fundamentals, not credit-fueled speculative bubbles. That’s the difference between 2021 and 2006.

10. What sacrifices did you have to make to acquire so many rental real estate properties?

Honestly, I sacrificed more than I needed to. If I’d had the information then that I have today, I could have done this much more efficiently from the start. 

That’s why I built the course: to teach everything I would’ve wanted to learn when I was starting out, so that I wouldn’t waste so much time or make so many dumb mistakes.

There are two types of sacrifices in this context: money and time.

The biggest sacrifice that I made – which in hindsight wasn’t necessary – was all the wasted time. 

I spent time scouring Zillow without knowing any strategies for how to find targeted deals, using the deal-finding methods that real estate pro’s and investors use. (Some of these methods include “driving for dollars,” sending direct mail campaigns, priming for pocket listings, and developing relationships with wholesalers.) 

I spent time trying to handle some repair and maintenance work myself, because I bought into the myth that my “profits would be higher” if I took a DIY approach. In reality, I wasn’t factoring the value of my time.

I spent time Googling for answers, and getting bad advice, about everything from how to manage the finances, to what types of loans I should look at, to how to interview and hire property managers. 

That wasted time came at the cost of health and relationships: I didn’t get to the gym as often as I wanted, for example, and I dedicated my weekends to real estate rather than hanging out with friends and family. But so much of that was unnecessary. I was inefficient because I didn’t know what I was doing. 

In hindsight, with a little more knowledge and preparation, I didn’t have to sacrifice nearly as much time as I did. 

When I compare the time I spent investing in my most recent property (purchased March 2021) to the time I wasted investing in my first rental property, I can see how much more efficiently I’m able to operate today. And that’s the knowledge I’d like to pass on.

11. What’s the best way for a person to get started with real estate investing as a beginner?

First, choose one niche and one strategy. 

Your niche is the type of real estate that you’d like to focus on, such as residential homes, commercial establishments, apartment buildings, office spaces, warehouses, mobile home parks.

Personally, I chose residential real estate – which is defined as any property with 4 or fewer units (a single-family home, duplex, triplex, or 4-plex) – because it felt accessible as a beginner. There’s plenty of deal volume and deal flow, and financing is more accessible when you’re starting out.

Next, choose a strategy for how you want to make money within this niche. Some investors will flip homes, some invest in tax liens, some turn into private lenders or hard money lenders. 

Personally, I decided on a buy-and-hold approach in order to maximize passive income, also known as residual income. 

The other strategies turn into jobs. For example, if your strategy is flipping houses, you get a one-time payout when you sell the home, but no more residual income. The only way to continue to get paid is by flipping again. It turns into a second job.

If you opt for a buy-and-hold strategy, by contrast, you frontload the initial workload of finding, analyzing, financing and closing the deal. Then you hire a team of managers and contractors to handle the operations. Once that upfront work is complete, you enjoy a lifetime of residual income.

A lifetime of income for a few months of work – that’s the reason I chose the buy-and-hold strategy. 

After you’ve chosen your niche and strategy, then the next step is research! Find trusted, reliable sources of information on the topic, so that you’re armed with knowledge before you start foraying into the scene.

12. Can you tell me more about the training that you offer?

Your First Rental Property (YFRP) is our flagship course.

It is the result of over a decade of real estate investing lessons learned the hard way — my real estate magnum opus.

It’s the course I wish I had when I was getting started.

This course is dedicated to one thing: giving you a reliable step-by-step framework you can follow to get out of “analysis paralysis” and into your first (highly profitable!) rental.

You’ll no longer wonder if a property is a good deal — you’ll have the confidence, training, and – most importantly, a proven and tested system – to know.

There are lots of other real estate courses out there, but they typically offer the same thing:

• Several training videos
• Maybe a handful of worksheets
• Probably a guru who answers questions once or twice a month
• Free Facebook group that no one likes or uses

With Your First Rental Property, however, you get everything you could possibly need!

Here is what we have for you:

• Full-time salaried course administrator — their whole job is running the course, overseeing the TAs, evaluating and updating the course content
• Teachers assistants (TAs) — 6 paid teachers assistants working on rotating shifts, constantly prowling the forums to ensure students get their questions answered within a day
• Community platform — Standalone forums custom-developed on the best forum software in the world
• Coaching — Ongoing lifetime access to live “office hours” coaching with me, including a searchable archive of all past office hours recordings
• Study halls — Live TA-led sessions to do a deep dive into course content and walk students through our resources
• Active investor calls — Live TA-led sessions that address challenges & questions students are running into as they attempt to purchase and manage real estate
• Group learning — We launch the course as a group so that students are learning alongside each other and able to discuss the content with peers in the forums
• So many resources! — The course is bursting with worksheets, quizzes, checklists, flowcharts, and spreadsheets to support students at every stage of the process. Multiple students have said that our “mega analyzing spreadsheet” alone is worth the price of the course.

Your First Rental Property is a comprehensive, systematic framework for building a portfolio of profitable rental properties.

We cover it all, from finding a property, to analyzing, to financing, to renovating, negotiating, building a team, and managing tenants.

We are constantly updating and adding new content to give you the best experience possible.

This is everything you need to confidently walk into the world of real estate investing.

You can learn more about Your First Rental Property here.

I hope to see you in the course!

-Paula

Here are several free webinars taking place in October of 2021:

• How to figure out if rental real estate is right for you?
• Can you succeed in this super-hot 2021 market?
• What to do if you live in a high cost area – “Is it right for me if there’s nothing good in my city?”
• How to shave years off your FIRE retirement timeline – “Is this right for my FIRE plan?”

You can sign up for free here.

Are you interested in learn how to start investing in rental property for beginners?