Should I Invest in the Rental Business?
You've heard it before: Property is wealth. But is it? You're thinking of becoming an investor in rental properties but wondering if it's right for you. Why not check out the research that savvy investors have already done and find out once and for all if it makes fiscal sense to get into rentals?
You can tap traditional sources for information. Books such as Dolf de Roos' New York Times bestseller, “Real Estate Riches: How to Become Rich Using Your Banker's Money,” are a great place to start. But don't discount online sources like real estate advisers and property management bloggers who share their success and failures through entertaining columns.
Sure, you might have to join their mailing list to get access to advice columns and web seminars. Maybe you'll even have to pay a fee to download guides that will help you decide how profitable a particular rental scheme might be. Consider it a deposit on your finance education – tuition, if you will, for lessons that could save you from making expensive mistakes as a first-time investor.
And don't limit yourself to only positive, encouraging articles. Also read those, like the one that Janet Berry-Johnson wrote for Forbes, that lay out the downsides.
You want to be sure that your decision to take a leap into rental investment – or to bypass that particular form of investing – is based on sound financial, structural and market information.
Who's in this market and who's succeeding?
Do you have to be young and physically strong to be a landlord? Middle-aged and already wealthy? It would be great if you could take a quick test, like those quizzes that are always popping up on social media, to tell you if real estate investment is right for you. You'd tick off boxes in multiple choice questions and, if you chose more B'c than As, Cs or Ds, some algorithm would declare that you're a 'Natural Born Investor.”
Well, it isn't quite that easy, yet a good number of sources do list certain hallmark characteristics of prosperous rental investors. Investor and author James Vermillion, for instance, identified personality and habit traits that seem to be shared by successful investors.
According to a personal finance article in Forbes magazine, winning at rentals appears to come down to having a specific set of abilities and aspirations, and realistic expectations. Notably, it said, “…making a living [solely as a property investor] isn’t always as easy as others would lead you to believe. If you want to earn a living, for example the equivalent of a $50,000 salary, you’ll need to profit more than $4,000 per month. That’s a lot of pressure.”
The common theme then isn't age and background as much as it is pragmatism and practicality as well as the ability to persist in the face of unexpected repairs, vacancies, and bad tenants. And don't think of investments as a way to resolve an existing financial crisis. You'll need to start your venture with good credit, accommodating lenders, and money to spare after the purchase for repairs and other contingencies.
You'd better be a planner, or find a partner who is, so that your real estate investment doesn't drift aimlessly between profits and loss, year after year. InvestFourMore's Mark Ferguson sets annual goals for his rental property business. The wisdom here is that he won't easily be enticed into buying property that doesn't meet his goals. And if a property fails to live up to its income promise, it's time to cut it loose. Ferguson said, during an EZLandlordForms Tweet chat, #REInvestingChat, that hanging on to a home that isn't making money every month is a mistake. Emotional attachment to rental property is a no-no. Landlords who fall into that trap typically are leasing out a home they once lived in.
Finally, landlords tend to help one another out so, while it can feel lonely when a tenant calls at 9 p.m. with a plumbing emergency, as a landlord you'll have friends out there. As an example, the comments that follow J.D. Roth's personal account of buying an investment property at auction are as interesting, and perhaps more so, than Roth's tale itself. Readers share stories of their own experiences with being landlords, trade tips on insurance, discuss how to screen and develop a good relationship with tenants, and talk about how they survived court actions. The comments illustrate the support many find within the landlord community. Indeed, this willingness among landlords to share their stories is a bonus for anyone researching the job.
How to Get Started
In “Real Estate Investing for Dummies,” authors Eric Tyson and Robert S. Griswold advise first-time investors to jettison any thoughts of buying and leasing property as a get-rich-quick scheme. That's not the way it works. Careful study is called for. Research your financial options. The larger the down payment, the lower mortgage payments will be and the more you'll keep as profit when rent is paid each month Then, scrutinize the local market and find out what homes are going for in your area before making any offers.
Among the considerations that they and other investors advise you to take into account if you're going to enter the market:
- Have a trusted team of real estate advisers, a banker, attorney, accountant, and contractors, especially if you intend to invest in more than one property.
- Create a budget and set up bookkeeping, or use a professional service.
- Budget your time. Property management, especially at first, requires a generous commitment.
- Determine if you have the do-it-yourself skills, and do an honest assessment of the time that any rehab will take, before acquiring property that will need work before tenants move in.
- Buy rental property close to home so you're nearby when something comes up.
- Choose neighborhoods that are on the way up but purchase property below its market value.
- Make sure monthly rent will more than cover expenses. Cash flow is more important than long-term appreciation when you're starting out. Ferguson said his formula is, “Cash flow [equals] rent, minus mortgage, taxes, insurance, vacancies and maintenance. I like [cash flow] to equal 15 percent investment.”
- Unless you're familiar with commercial property, start out with residential rentals.
But what if I'm not cut out to be a landlord?
Ferguson says that careful study before investing and even fantastic deals on property won't amount to success if you can't manage your units.
“Finding great deals on rental properties is only one step to a successful investment. You also must manage them well or have a great property manager. You can’t be soft on tenants, and you can’t be lazy renting homes or you will pay for it later on,” he says.
Many landlords have found, sometimes after years into it, that they just don't have the temperament and stamina to deal with prospective tenants, take calls at all hours, and hold firm when a tenant offers yet another sob story about late rent.
If that sounds like you, that doesn't have to mean that rental investment is off the table. In fact, Ferguson is one of many very successful real estate investors who lack the constitution for day-to-day land-lording. That's where property managers come in! They charge a percentage of the rent they collect, so factor that fee into potential expenses before making an offer on a property.
Investing in rentals is not for everyone, even with the help of professionals. If everything you learn about being a landlord turns you off, listen to your gut and consider another type of investment. However, if you've done your research and you're sold on the idea, start small and periodically re-evaluate your investment to make sure you're on track with goals. And, although you can delegate many aspects of being a landlord, the ultimate responsibility will lie with you so be prepared for that ongoing commitment.