Over the past two decades, my family and I have built a residential rental portfolio that supports our long-term goal of financial independence. Along the way, we’ve learned a ton—from other investors, mentors, books, trial-and-error, and plenty of hands-on experience. We followed a set of guiding principles and investment criteria that have stood the test of time—and changing markets.
Before diving into the nuts and bolts, let’s start with some perspective. According to data from the U.S. Census Bureau and the Rental Housing Finance Survey, there are over 20 million rental properties in the United States. 70% of these are owned by individual investors, not institutions or corporations. Of those, roughly 17 million consist of small, 1-4 unit properties. That’s the segment we’ve focused on for much of our investing journey, although we have owned (and continue to own) small apartments along the way.
Finding the Right Geography: Where and Why We Invest
One of the most important decisions in real estate is location—not just in the micro sense (a good street, a stable neighborhood), but at the macro level, too. Over the years, we’ve developed a clear geographic strategy. While we’re comfortable owning and managing from a distance, we’re very conscious of how critical it is to build strong local teams. That takes time, trust, and boots on the ground. As a result, we limit our active investing to just four geographies: our home city of San Diego, plus three other markets—Phoenix, Arizona; San Antonio, Texas; and Kansas City, Missouri.
Let’s start with San Diego. We bought this rental back in 2013. It was a solid investment at the time, but in the years since, the landscape has changed dramatically. Home prices have increased substantially, while rental growth has not really kept up. The combination of high property values and rent control laws has made it difficult to find deals that meet our return criteria. On top of that, California’s regulatory environment is generally unfriendly to landlords. Eviction processes are drawn-out, legal compliance is costly, and local ordinances often favor tenants—even in cases of non-payment or lease violations. That creates uncertainty and added operating expense. For these reasons, we’ve focused our efforts in other states for the past decade plus.
Outside of California, we’ve chosen to invest in Arizona, Texas, and Missouri. These states share several key traits: they’re generally business-friendly, they include large metro areas (Phoenix, San Antonio and Kansas City) with both historical and projected population growth, and they boast diverse economies. We avoid markets that rely on a single employer or industry—think mining towns or cities dominated by a single hospital or university. That kind of economic concentration increases risk, especially during downturns.
Another critical factor is the relationship between property prices and rental income. In some cities, like San Diego or Phoenix, prices have spiked to the point where cap rates are compressed and cash flow is hard to come by. So, even within these “target states,” we drill down to find submarkets where the math still works.
What We've Learned About Operating in Different States
As you might imagine, investing in multiple states introduces layers of complexity—but also valuable perspective. One of the biggest variables we’ve had to contend with is property taxes. Texas, for instance, assesses property values annually, and appraisal districts are incredibly aggressive. We’ve had years where our property taxes doubled—sometimes even tripled—compared to our purchase year. By contrast, Arizona and California have caps on how much assessed values can increase annually, which provides a level of predictability that’s invaluable when budgeting for long-term cash flow.
Insurance costs are another big factor that vary significantly by geography. Phoenix tends to be relatively benign from a weather perspective (extreme heat, at least to date, hasn’t been so much a driver of insurance costs). That means lower insurance premiums and fewer weather-related losses (specifically hail, wind, wildfires and flooding). Texas, however, is a different story. Hail, windstorms, and flooding are frequent and sometimes severe. Insurance premiums there have increased significantly in the past few years—sometimes by 30% or more. And that doesn’t even account for the hidden costs of certain natural conditions. In San Antonio, for example, the expansive clay soil can wreak havoc on foundations, causing cracks and shifts that lead to thousands of dollars in repairs—repairs that are generally not covered by insurance.
Another consideration is the cost of materials and labor. This doesn’t get talked about enough in investing circles. Installing a new roof in Phoenix might cost 20-30% less than the same job in San Diego. Skilled labor is more accessible and affordable in some parts of Missouri compared to larger metro areas in Texas. These discrepancies affect both day-to-day maintenance and larger capital expenditures. That’s why we always allocate a healthy capital reserve and tailor it to the local market.
How We Evaluate Performance
When analyzing potential investments—or reviewing the performance of our existing properties—we focus of course on net operating income (NOI). This is the income your property generates after all operating expenses are paid, but before mortgage payments and capital expenditures. In our experience and the experience we have seen with other investors, you can expect NOI margins between 50% and 65% with effective management and operation (and importantly, not including property management fees, which can take another 8-12%), depending on the market. Texas tends to fall on the lower end of that spectrum, due to high taxes and insurance costs, while Arizona properties often reach the higher end.
NOI is the foundation of real estate investing. It determines not just your cash flow, but also how multifamily properties are valued (via cap rates). It’s the metric that tells you whether your investment is truly performing, or just treading water.
What We Buy—and Why
Our portfolio includes a mix of single-family homes, duplexes, fourplexes, and a small apartment complex. Each asset class has its strengths and trade-offs, and we’ve come to appreciate the role each plays in our broader strategy.
Single-family homes (SFHs) are good for appreciation. Since they’re often purchased by owner-occupants, their values can rise quickly during hot housing markets, and are not as correlated with financial metrics like net operating income. They also tend to attract longer-term tenants, which reduces turnover costs. And financing is straightforward and very advantageous: 30-year, federally backed fixed rate loans with attractive interest rates are readily available. The biggest downside is cash flow—SFHs typically produce less income per dollar invested compared to multifamily units, in part because they lack economies of scale and have a higher capital expenditure requirement (roof replacement, driveway, sewer system, etc).
Two-to-four unit properties can be an attractive option for a cash flow focused investor. They often generate better cash flow than SFHs and still qualify for attractive 30-year fixed rate conventional financing. There are also small efficiencies—like sharing a roof, driveway, or plumbing lines—that reduce operating costs. That said, these properties are still valued like single-family homes, based on comparable sales rather than income. That means you can’t easily increase value by improving operations or raising rents.
With apartments (five units and up), the dynamics change. These properties are valued based on income, which means we can force appreciation by boosting NOI. The economies of scale are also better. One maintenance person can handle multiple units, and management is centralized. On the flip side, financing is more complex, with shorter loan terms and balloon payments every five to ten years. There’s also more administrative burden—more tenants means more lease violations, complaints, and potential conflict.
Our Philosophy and What Keeps Us Focused
At the end of the day, our strategy is grounded in a simple philosophy: long-term cash flow that supports our family’s financial independence. We’re not chasing quick wins. We’re not flipping properties or speculating on appreciation. We’re focused on stability, steady growth, and building a portfolio that replaces our active income.
Staying focused on that goal has helped us tune out the noise—especially during market booms, when everyone seems to be making a killing on short-term flips or Airbnb arbitrage. We know what we’re trying to achieve, and we structure our decisions accordingly.
That clarity has been one of our greatest assets. And it has allowed us to build a rental business that not only performs, but aligns with the life we want to lead.