Real estate has consistently been one of the highest rated investments available to individuals. TV shows certainly make rentals look easy and you may even know someone who has made a lot of money with them. Possibly, the thought has crossed your mind that if they can do it, you can too.
Before you contract for your first investment, ask yourself some questions that could save you time and energy. Not all people have the time, the inclination or even the skill to manage property. Landlords need to be good business people who can maximize revenue and minimize expenses. If investors don’t have the skills and talent to handle some of the repairs, they at least need to know reputable and reasonable service professionals.
Another important element is to be familiar with the state and local landlord tenant laws. You’ll need to know what are allowable security deposits and where the money can be held. Knowing how long you have to return it to a tenant is important and what to do if you plan to keep all or part of it for damages done. It is important to know about the eviction process and how fair housing applies.
If you decide that you may not be cut out for being a landlord, it won’t eliminate investing in rentals. It does mean that you will need to engage a property management company who is capable of dealing with all aspects of the process. The peace of mind and convenience will cost you a fee, usually a percentage of the rent collected. They can handle finding a tenant, doing the background check and writing the lease but there will be an additional fee for that service.
Even though your expenses will be higher with a property manager, with their experience, they should be able to help you lease the property for more money than you can get and will probably have service providers to do the work needed for less.
Occasionally, rental property requires out of pocket expenses for repairs and improvements which is like making another capital contribution. As equity builds in a rental property due to appreciation and principal reduction, the owner does have the option to take cash out of the investment either to pay additional expenses or to use any way the owner wants. Pulling equity out of a rental doesn’t even trigger a taxable event.
Single-family homes and up to four-unit buildings offer an investor the opportunity to get a high loan-to-value mortgage at a fixed interest rate for 30 years on appreciating assets with tax advantages and reasonable control compared to other alternative investments.
Many investors like the fact that you can borrow to purchase a rental investment where many other investments require cash. The use of borrowed funds can create an advantage called leverage. Assume you paid cash for a $100,000 home that generated $7,000 income after the rent was collected and expenses were paid. Divide the value of the home into the income and it would earn 7%.
If you decided to put an $80,000 mortgage on it at 5% interest, the interest expense would be $4,000 leaving only $3,000 income. However, at that point, you’d only have $20,000 invested in the property. Divide the cash invested into the income and the rate of return would increase to 15%.
This is a simple example of leverage showing that borrowed funds can increase an investor’s yield on a property.
Rental property can be an excellent investment when it is treated like the business that it is. Knowledge of the investment will reduce the risk and enhance the opportunity to make a profit. Some investors consider their rental income as “mailbox money” because each month, they go to their mailbox and they have money being sent to them by their tenants. The benefits of rental property can easily outweigh risk involved.
Contact me for more information on rental properties and the option to be the landlord or to delegate it to a property manager.
