Owning Rental Property: Worth the Investment?
Are you considering investing in owning rental property? If you are, then check out this guide to determine whether or not it’s the right move for you!
The real estate business has seen its share of ups and downs over the past decade. Things have definitely shifted more towards a renters market, thanks to a combination of unstable job markets and the rise of AirBnB. You might be thinking about owning rental property to try and get in on this action, too.
Well, it is certainly a good idea, it’s just a matter of knowing what risks come with owning rental properties. Rental markets have seen an increase of over 9 million properties from 2005 to 2015. That means you have to know your stuff if you want to compete.
Before pulling the trigger on that low-cost apartment complex, you should be realistic with your purchase. Here’s the sweet and sour mix of facts of an income property investment.
Flipping or Fixing?
The cost of buying a rental property can be deceptively low. In some instances, your initial investment may seem equal to a year’s worth of rent. What isn’t accounted for is how much it will realistically cost to inspect, fix, and clean for occupants.
You definitely don’t want to DIY this process without lots of experience. Big problems can get overlooked and if your tenants are in any way affected by faulty structures, you could be in trouble. If your budget can’t handle a period of months that leave the space vacant for repairs, then don’t invest in your first rental property yet.
Or, if you really want to get into real estate, with minimum fuss, contract a turnkey real estate company, like this website.
The One Percent Rule
This is just a general rule of thumb among real estate investors. The idea is to get your initial investment back on the mortgage or lease. This is much easier to accomplish with most condos and apartments, but make sure you factor in all the repairs and estimates.
House-flippers will likely find the process a little trickier and it will require studying the local market. Sometimes the investment may appear to not be worth it, but if the neighborhood is growing rapidly, it’s a steal. Making money is all about noticing trends and taking advantage of them.
Factor in Property Taxes
Taxes are one of the most commonly overlooked aspects of owning a rental property. High state taxes will eat into your margins, while living in a state with low taxes will enable you to keep a bigger cut of your rental pay every month. When in doubt, know that the highest property charges are in the city and the “sweet spot” is between rural and suburban areas.
A few areas charge speculators at a higher rate than tenants, so it merits calling your nearby accountant to decide if this is the situation you will be in. Make sure to recall that regardless of whether you locate the ideal house in the ideal neighborhood, high property assessments could make it a poor property investment.
This is something you can’t afford to skimp on, yet can really drain your profits, depending on the coverage. You have to weigh your options on what is more advantageous for you. Depending on the age and state of the apartment, you may benefit from paying a higher premium, but lower deductible.
If you think at any point in the future, your property could be affected by extreme weather events, go for the higher premium. If the property is new, in a great neighborhood, and temperate climate: get the lowest premiums.
You can further customize your coverage to save even more money online.
Location, Location, Location
Owning rental properties is all about location. You can have the most beautiful apartment units, state-of-the-art appliances, and still fail to fill them. Who wants to live in an amazing apartment, but have no access to major retail stores or nightlife?
The same goes for internet access. If your places have limited or slow internet providers, you won’t keep tenants in there very long. In some cases, bad utilities are more of a turn off than so-called “crime rates”.
Now, this isn’t to say crime is never considered when selecting apartments. Honestly, unless you’re targeting high-income tenants, I wouldn’t place as much value on “bad neighborhood” proximity.
Keep the apartments looking clean, well-kept, and well lit. That’s what tenants are looking for the most.
Continuing off that last point, there is no room for being cheap on apartment management services. When it comes to owning rental property, the worst thing you can do is allow your landscaping, trash collection, or pest control lag behind. You open the door for pests, rodents, or property erosion and you might start scaring away tenants.
The best way to handle property management is to be proactive. Hire a company that is always on-call and will take care of any repair or maintenance for a flat rate. Usually, this costs you around 8-12% of your monthly rent. Trust me when I say it’s worth it.
This goes for anyone who feels more than qualified to fix small repairs and things. It’s way cheaper to just hire the maintenance services needed for whatever needs repairing.
Keeping a Repair “Nest Egg”
The alternative to hiring a full-time maintenance company is throwing aside a portion of your profits to afford costly repairs. This is typically around $10k for low-income apartments. Which sounds sufficient, but if you own multiple units, that can quickly run out.
A few air conditioners and a plumber call later, your nest egg could be gone in the first year. You never know what might happen. The initial inspection may give you the green light, but HVACs and pipes that are older than 10 years can go at any time. Other unexpected expenses may include: refreshing the paint, mold removal, pest removal, tree removal, and other natural inconveniences.
Good Tenants Deserve Your Time
Although owning rental properties is primarily all about growing your investment, you should not be inaccessible. You have to keep your good tenants happy, especially those that are a positive reflection of your apartments. Those tenants that keep to themselves, have clean places, are friendly with their neighbors, and etc.
If you aren’t flexible on rental payments, you could risk losing valuable tenants. Only bring down the hammer if you suspect a pattern of abuse. You wouldn’t be doing anyone any favors by enabling them to stay in a unit that they cannot afford.
When it comes to your best, most loyal tenants, try not to raise their rent to offset your costs. Incremental rent increases should not be valued over alienating a great tenant, especially if they’re on a tight budget.
I know, a lot of this advice runs contrary to how rents have been skyrocketing lately, but if it’s your first rental property: play it smart.
Weeding Out the Bad Apples
Getting those model tenants involves a strong screening process. This goes for just about anyone owning a business. Protecting your investment requires proactive steps to be taken.
Outside of a standard rental application, you should require a credit check and background check. The credit check is important, but shouldn’t be the ultimate decision-maker when screening tenants. After talking to the applicant’s employer and references, have a genuine interview with them and see if they are a serious candidate.
If your interview is mostly nervous energy or if any of their answers seem disingenuous, you might be able to use that information. People who have something to hide may turn out to be neglectful tenants. No matter how good someone’s credit score is, make sure they have a steady income.
Owning Rental Property Demands
Some landlords get rebranded as “slumlords” due to their attention, or lack thereof, to their properties. Either they are too busy to make repairs in a timely manner or they are too cheap to do them. What you absolutely should not do with your first rental property is be cold and distant.
Thanks to the ubiquity of smartphones and video evidence, taking care of your units should be fairly straight-forward. Operate using official channels, empirical evidence, and focus on long-term investment. Again, property-flipping can be lucrative if you stay on top of your responsibilities and budget.
You will make mistakes, but as long as you do your homework, prepare for any worst-case scenarios, your risks will stay low. If you have any advice or questions about this guide, feel free to contact us.
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