Investing in rental property is one of the best ways to generate long-term wealth. In addition to long-term wealth, you can also realize short term cash flow and build a portfolio that will give you options in the future. While rental properties can be highly profitable, not everyone will be a home-run. In addition to buying the right property, there are a few fundamental tips that every landlord needs to follow. There is often a very fine line between rental property success and failure. Here are four tips that will give you the best chance at rental property success:
1. Know the Local Market: It is critical for any potential landlord to know the market they are buying in. Market conditions and demographics can quickly change in a matter of just a few days. Before you make an offer, you need to know everything about not only the property, but the area you are buying in. The area you buy in will directly impact current market rents and demand for the property moving forward. It is far better to buy a lesser quality rental property in a better location. These will hold their value much better over time and make your job as a landlord much easier. Rental markets can quickly change, seemingly overnight. You need to know if there is a problem with the town’s budget that could cause taxes to rise. You need to know which areas have a high concentration of foreclosed properties. Before you make an offer, you should leave no stone un-turned. The more you know about your market, the better properties you will get involved in.
2. Buy With a Plan: There are differing opinions as to what the best strategy is for owning rental properties. One camp insists that you buy rentals with the thought of long-term appreciation in mind. The other side will tell you that the property needs to have cash flow. Both sides are correct, in that the property needs to be in an area with a good long range forecast, but it also needs to produce cash flow. Before you buy, you need to have a defined plan with the property. You need to know exactly what work you will do, how much you have to spend, how you attract tenants and who will take care of the property. These items shouldn’t be done on a wait and see basis. Time is money, starting from the first month you own the property. It is important to have a plan so you can hit the ground running.
3. Always Have a Reserve Fund: This is probably the single most important rule that successful landlords follow. Everything may run smoothly in your rental property for months, but there is always the chance that something will come up. Without the funds to take care of items, big or small, you will run into trouble. If you neglect seemingly small items like clogged toilets or a broken washing machine, you will lose the confidence and trust of your tenants. Instead of treating the property like it is their own, they will neglect it and may not disclose problems with the property. If the items are larger in scale, such as a roof or furnace, you have much bigger issues to worry about. These big ticket items require immediate funds to solve the problem. Without this money available, you will scramble to pull money from other sources. This could mean borrowing money at high interest rates or relying on credit cards. If you can’t find the money, your tenants will move out and you will have a depreciating assent on your hands. This can happen pretty quickly if you do not have a reserve fund in place.
4. Spend Time Finding the Right Tenants: Your property is only as good as the tenants that are in it. Not enough time is spent on doing everything possible to find the best tenants. Without good tenants that pay on time and take care of your property, the process will be a nightmare. You will have to constantly chase the rent or even worse they will stop paying rent altogether. This will cause you to devote a good amount of your time and energy to one property. Conversely, a good tenant will make being a landlord almost seem easy. While you can never really know what type of tenant you are getting, you need to do everything possible to increase your chances for success. This means going through the application process and following up with any references. Don’t automatically rent to the first person that shows interest. Even if you are having trouble finding tenants, it is better to rent to a more qualified tenant than run the risk of taking on a bad one.
There is a lot that goes into a successful rental property. It is important to stay disciplined and put the time into every new property you think about buying. All it takes is one bad property, bad tenant or unexpected repair to set your business back. Conversely, if you can keep the process moving from one tenant to the next, you will reap the benefits of cash flow, equity and future appreciation.