Many people look at those who own and/or operate investment/rental properties, and wonder, wouldn’t it be great to do it themselves? While some individuals and properties make a lot of sense, others don’t! Like most things in life, owning an investment property has positives and negatives, and you owe it to yourself to fully consider, with your eyes wide open, some of the many factors and considerations involved. With that in mind, this article will attempt to consider, review, and briefly discuss some of these variables and considerations.
1. Comparisons/competitive, opportunity costs, uses for your money: Does buying and owning a particular property maximize your chances and return on investment, compared to other alternatives and uses? In other words, will doing so earn you the most money? When considering any real estate investment, start by fully evaluating not just the initial purchase price, but also how much will be needed, both in the short and long term! Take the purchase price, plus the most immediate costs (first 2 years of ownership), incurred and involved. Then conservatively consider and use projected rents (look at the local market and competition, and use a figure of 80%, or four-fifths of that number, to see your rate of return). Look for a minimum rate of return of 6% (for example, if the property’s purchase plus short-term price is $500,000, your total rent should be about $37,000, so your 80% figure is about $30,000 or 6% of the cost figure). Also, compare this to the opportunity: costs, for your money, or what you could probably receive from other investment vehicles).
two. Bookings: We suggest using the 80% figure, so you are prepared for openings, etc. In addition, proceed only when sufficient reserves have been established for contingencies, such as repairs, remodeling, maintenance, conservation. etc.
3. Down payment, vs. mortgage/loans: Most buy these smaller investment properties, with the help and assistance of obtaining a home loan. Be prepared to have enough rental records and reserves to be able to pay your monthly expenses, including interest and principal on the mortgage, property taxes, insurance, landlord’s payment, utilities, etc.
Four. Tenants and rents collected: Carefully consider your tenants and look for people who are trustworthy, trustworthy, with good credit, etc. There are various philosophies, and some owners proceed, seeking the highest possible rents, seeming to be willing to wait until they achieve that. However, that philosophy may or may not provide maximum rent-rolls, and the risk is longer periods with vacancies. The other approach, which I personally believe and follow, in the properties that I personally own and/or manage, is to seek rents, in the middle of the pack, provide maximum service to tenants, and maintain/maintain quality. tenants, for periods much longer than usual. Know your personal risk/reward tolerance and philosophy up front!
Is owning a rental home a good option for you? Know what you are looking for and what you can afford, as well as your risk/reward tolerance!
