So You Want To Be A Landlord? Five Considerations Before You Buy
The first of the month is easy for me to love: Rent is due! I sit back in my office as the payments roll in, knowing that my investments are working for me. Real estate is an attractive investment for many reasons, but the passive income from rent is at the top of the list. Some of the other benefits include tax advantages, property appreciation and having tenants paying off your mortgage. With all these benefits, it is hard to find another investment that can match the perks of real estate.
But there are challenges to go along with the upsides. If you are looking at rental real estate as an investment option, be sure to consider these five things before you buy.
1. There are ups and downs: According to most of the real estate books or articles you read, real estate investing is full of rainbows and kittens. Although I and countless others have found great financial success in it, it has to be acknowledged that real estate can be a tough business. It takes work to locate and analyze deals; it takes work to manage tenants or to manage property managers. It also can be challenging when you need to make decisions on how to handle tricky situations. Tenants can be hard on the property, hard on your bank account hard and on you. If you are willing to deal with the downs and stick with it, real estate is consistently an effective way to build wealth. It is also important to note that managing your rental portfolio becomes easier as you build your team and your systems.
2. Cash is king: Businesses, including real estate, can be profitable and still go out of business. I remember finding myself a not-yet-30 self-made millionaire — on paper, of course. When the market turned and I did not have proper cash management, I almost lost everything. Without proper cash flow on your rentals and proper cash reserves, you can go bankrupt. It is the reserves and cash flow that preserve you if the tenant stops paying rent or you need a major repair. The advice I would give for longevity in this business, which is necessary to get rich, is to focus on buying rentals that will generate a positive cash flow and always maintain adequate reserves.
3. To self-manage or to outsource: This is always a fun discussion in my office. Some of us manage our own rentals and others hire a property manager. There are benefits to both, for sure. If you do not stay on top of your rentals, a management company can improve your bottom line and remove much of the headaches. If you can create systems to manage your own property, you will make more money because there is no management fee. I would typically recommend a newer investor manage their own rentals for a while when getting started. This will give you valuable experience that will serve you well. There is no right or wrong answer here, but it is something you should consider before you buy.
4. Patience is essential: This is a long-term business. There is no getting rich quick in rental real estate. In fact, you would probably be surprised how many properties it will take, especially subtracting the real costs to manage them and to replace your income. I have seen people try to replace income with rentals and fail badly. To be clear, it can be done — but it is challenging. Rental property is fail-safe if you have a long-term horizon and you don’t need the income it produces to live on today. Buy rental to be a fortune wealth generator over time.
5. Financing your investments: This can be a complicated subject, but it may be the most important variable before you start to make offers. In general, you will want to avoid paying cash and want to leverage your money to speed up your financial growth. That, of course, is a double-edged sword, because whenever you use leverage, you take on additional risk. I believe you can mitigate leverage risk by buying properties that generate cash flow and keeping your reserves, as discussed earlier.
It is common to use conventional financing as much as possible because those options come with long, fixed terms with low interest rates. Talk to a mortgage broker or banker to get more information on the conventional financing options available in your situation. Only after you have a financing plan in place should you consider making an offer to buy something.
Source: forbes.com
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