One of the fastest ways to accumulate wealth in real estate is by owning rental properties. While this is certainly no secret, there are many different strategies employed for each individual investor. You can opt for properties with a higher return that might need more attention, you can look to purchase many smaller properties throughout the course of the year or you can look for larger commercial properties with many more units. Before you purchase any rental property, you need to assess your goals and come up with a strategy that is best for you and your business.
Owning rental property is full of many different challenges. If you think that you can buy any property, slap a coat of paint on in the living room and wait for the checks to come, you will be in for quite a surprise. Owning rental property and developing a portfolio require time, money and plenty of patience. This is the case, whether you own one small single-family or multiple commercial units. You need to accept that there will be calls at all hours of the night from tenants that have never lived on their own before or from neighbors complaining about a car parked near their yard. Whatever your goals are, you should first accept that it won’t be easy being a landlord and there will be many times that it will be very frustrating. Once you acknowledge this, you can start to think about which type of properties you want to look for.
With most every rental property, you will be faced with the choice of generating monthly cash flow versus trying to accumulate long term appreciation. The perfect scenario will do both for you, but this may not always be the case. Some properties can give you the cash flow you are looking for, but may take several years to take off in value. If you buy in a good area where demand is high, you can get maximum rental price. Because of this, you will most likely have to pay at the top end of the market price when you purchase. This means that pulling money out may be difficult or take several years until home values rise. Under this scenario, you will make money monthly, but the bulk of your investment will be tied up for several years preventing you from using that money elsewhere. The property will appreciate over time, but not for several years down the road.
An alternative to this is to buy a property below market value with less yield every month but a better short term sales option. The monthly cash flow is only seen as a bridge until you decide to sell. This could happen in only a few months or even a few years but your mindset from the time you purchase is to get in and out in a short time frame. Knowing this will impact the type of work you put into the house and the lease structure you provide. If you think you are going to sell within six months you may opt for a month to month lease and only put work in that can cover the short term. The rent received is not your main goal rather just something that will cover your expenses and leave you positive until you sell. What many investors that opt for this strategy find is that while the intent may be to sell nothing is guaranteed. They could find that the rental market may be stronger than the buying market and want to hold onto the property for one more lease. One lease turns into two and soon enough you are five years after you bought. You can look to fix problems inexpensively but never just put a band-aid on a property that may come back to haunt you.
What is fairly universal among landlords is that a quality tenant is better than trying to squeeze every dime out of the property. Your goal may call for you to try to get $1,100/mo. in rent but if an existing tenant is paying $1,000 it is probably worth the $100 a month to keep them for another lease. A bad tenant can make even the most conservative goals difficult. Your time is one of the most important assets you have in business. If you have to spend it dealing with tenant complaints or issues with your property, that is time you can’t spend elsewhere. Bad tenants can not only sap you of your time, they can lead to you hiring a property manager that will cut into your monthly cash flow. Make sure your goals account for the various issues that will come up with existing tenants, your property and finding new tenants from lease to lease. The path of least resistance is often the best plan of attack when it comes to dealing with rental properties.
There is a lot that goes into deciding to buy a rental property. With all of the options and the amount of work that goes into being a landlord, it may not be for every type of investor. Before you find a rental niche that works for you, write down your goals and strategies for owning rental properties. If your goals are in line with the properties you buy this can start you on your path to real long term real estate wealth.
