It has been said that there are multiple ways to make money in real estate. What works for one investor may not work for another. The most important aspect in deciding which area of the business is best for you is to evaluate your own goals. Your goals play a hand in deciding whether rehab loans are for you or rental properties are more your speed. Rental properties have a reputation of being difficult to manage, but there is no better way to obtain long-term wealth faster than by owning rental properties. Before you explore whether or not rental properties are for you, you need to determine just what you want out of your portfolio.
The best portfolios offer a mix of short term rehab projects and long-term rental properties. Not every rental property is the same. Some offer a greater amount of monthly cash flow while others have a higher equity upside. It is important to know which is important to you. The greater the amount of cash flow, the more disposable income you will have to utilize in other areas of your business. While this is important, long-term appreciate can offer much greater returns. It is not enough to know you want to invest in rental properties, you need to know what your goals are with them.
The biggest mistake that new investors make is in calculating cash flow. Cash flow is the amount of rent you bring in minus the mortgage payment, taxes, insurance and expenses. While this is true, the expense number is often underestimated. Expenses include all utilities and bills, but also include a vacancy factor, reserves, snow removal, lawn maintenance and everything else associated with the property. Anyone can make the cash flow look higher than it is without adding all the correct expenses. The amount of rent a property brings in is not nearly as important as the correct cash flow amount. This money is essentially the monthly wealth created by the property. To get this, all you need to do is keep rent checks coming in and take care of your property. This can be easier said than done. If you hire a property manager, the amount of cash flow will be reduced. If you decide to take on all housing tasks yourself, you are taking time away from other areas of your business. However you decide to run your rental; how you calculate your monthly cash flow is critical.
Another reason why investors would look at rental properties is for the appreciation. There are many investors who will buy a property, put work in it and rent it until the market changes in their favor. This is a viable strategy but needs the help of the market. As we have seen in the past there is no way of truly predicting which way the market will go. Making improvements will certainly increase the value but there is no way of knowing where the market will be ten or even twenty years down the road. Banking on appreciation over time may leave you disappointed. There are two ways in which property value will appreciate. The first is to make improvements. To make improvements you need to have the capital to do so. The second way is to buy in the right market. This takes a combination of due diligence and foresight. If you can pick out the right property, do the right work in the right market you will hit a home run. You will get the combination of the monthly cash flow benefits and appreciation whenever you decide to sell. These properties are more the exception rather than the norm with rental properties. There are certainly profits to be made but before you look at any properties you need to decide whether you are looking for short term cash flow or long term appreciation.
When a rental property is running well it can be the best part of the real estate business. When they are running bad they can take all of your time and money if you are not careful. Even if you use a property manager there is no way of guaranteeing that a tenant will pay. Dealing with an eviction can be a grueling process that will engulf your business. Just like any other part of real estate there is risk and reward with rental properties. Rehabs offer a similar type of scenario but in the short term. Access to capital is a must with any landlord. You never know when you are going to need funds to replace a dishwasher or deal with a broken furnace. Cash flow and appreciation may be great but they will quickly vanish if you don’t have money to deal with issues in the property. If you are considering buying a rental property this is a must. Having money to buy the property and do the work is not enough to be successful.
The idea of having someone pay down your mortgage is an appealing thought. The right rental property can help build your retirement and give you increases options in the future. It won’t come without at least a few times when you wonder what you are doing as a landlord. This is all part of owning rental properties. If you can get past these times, it will be worth it in the end. Have your goals in mind and know what you want out of the business before you look at your first rental property.