My father did a similar thing back in the 90's when he sold a triplex that we had initially lived in, and owned in a college town for many years in California for $1.2M (purchased for $50K!). He took about $800K from the sale and bought four single-family homes in Raleigh North Carolina. (FWIW - for the college-town renters, rent to professors and grad students. They make much better, long-term tenants.)
My Dad initially did it the wrong way for the right reasons. He had been his own landlord for awhile and wanted to find a market where property values and the economy was stable, hence Raleigh. The problem was he didn't have property management, and so he talked his realtor into handling his rentals for him - very bad idea. After about six months, that relationship fell apart and he ended up finding and hiring a small, family-owned property management/relocation company that knew their stuff. This firm handled all management duties for him and did a terrific job for a reasonable price. He and Mom lived on that income in retirement and even through the most difficult economic periods, they never had a downturn in rent and their property values were incredibly stable. From a return standpoint, I would estimate they earned about 6% per year on their investment, not a great return for the time, but it was reliable and the equity was preserved to pass along, which is what they wanted.
Fast forward to 2010, when the market, and property values, took a dive my wife and I decided it would be a good idea to raid our stocks and buy more property in NC. Since I was already 'managing' and would be receiving my parents' properties it seemed like a good idea to add to the existing portfolio. Our timing couldn't have been more lucky. Unlike my father's initial foray, we had experienced management in place, the inventory was plentiful and cheap, and the homes we bought were even better financial investments overall than the ones my dad had purchased years earlier. We were even able to negotiate our fees down since the management company had seven properties in our account. For us, since we financed our properties, our return has been much higher on invested capital - we invested about $180K and the homes have appreciated $250K+ in 5 years plus they spun off $1,000 excess cash per month and we have missed a total of 3 months rent in 5 years due to turnover. I couldn't be happier with the whole package. We recently refinanced and lowered our interest rates on all the properties and took some cash out for a kitchen remodel (ours).
For comparison to earlier posters, we were able to purchase our homes for about ten times annual rent - a little less on one, a little more on two - and that seems to be a good factor for us that I have used to evaluate opportunities quickly. (I've read that 10-12X is good) I will be doing a 1031 this year, and I don't think the new property will even come close to those numbers, but since I'm selling too... FWIW - I like owning rental properties that are nice, and attractive to working couples and families. Students, Section 8, low-income rentals are not my thing. My one weird hangup is that I have to have a two-car garage. (It makes life so much easier!)
Having said all that, if we didn't have the benefit of market timing, our returns would be much different. Every owner's situation is unique and there are a lot of moving pieces to help make it successful - timing, market selection, property management, level of investment, type of investment etc. It seems to be much easier to use rentals as a place to store large sums of cash vs. trying to do it on the slow and cheap, but it can be done; the earlier you start, the better. It is interesting how property values tend to rise much faster than rents, and that makes markets like SoCal very difficult for SFRs. Sadly, I could never make it work where I live.
If I were starting over from zero, my first task would be to find the best market from a risk/return perspective, and the best management in that market to help me find and fill my properties. I've heard Milwaukee is good for rentals right now and down South there are other good markets. Keep an open (and analytical) mind.
I figure I have between $120K and $160K initial investment dollars. (It's not like I can log into fidelity and process my numbers)
