Points to consider when investing in rental properties

So…you’re pondering the thought of investing in real estate as a landlord?  Many people do.  Many people succeed with rental properties and quite nicely.  There are also people who don’t succeed, but don’t let that deter you.  I am going to introduce some points for you to consider that I hope will be useful. These are points I cover with my real estate investing clients to help them with their investments whether they are just starting their journey to being a landlord or buying additional rental properties.  The following are highlights and they apply to both residential and commercial real estate purchases.

First point to understand is that you are starting a business.  You may not need a business license, although sometimes you will, but fundamentally you have a business operation.  This is what I mean…  You have a product you will buy and then offer to customers with the intent of making a profit – that is your real estate you will offer to tenants to make money called rent.  You need to have real estate that tenants will want and at a price that yields a profit for you.  That’s business. Make sense?

Just having real estate to offer for rent is not enough.  Like any business, you need to have real estate that will be in demand by tenants.  So, you need to select the right real estate and then be able to price it right for rent.

Market analysis is important in selecting viable investment real estate.  Market analysis for investing in rental properties should include identifying the extent of demand by tenants, the comparison between potential rent and the cost of real estate, and the state of neighborhoods and the region.  For this latter item I refer to the economy, development, condition and that sort of thing.  Add other items that are of interest to you.  You may be fortunate to succeed simply buying the first property you find and renting it for a good price, but doesn’t it make sense to do some homework first especially given you will have hundreds of thousands of dollars, perhaps millions of dollars, invested?  Please say “yes”.  And, you may still have a large monthly mortgage payment to pay regardless of whether you’re collecting rent from tenants or not.

A return on investment assessment is also very important.  This occurs when you identify a specific property.  With a return on investment assessment you’re deciding whether or not a particular real estate investment meets your financial interests.  Your interest may be to put extra money in your pocket each month or simply to break even.  With a real estate investment – a property you will lease – you should consider your expenses and revenue over a defined period of time.  I recommend that period of time be annually since that synchs up with tax cycles.

Your expenses may include a mortgage payment, HOA and/or condo association dues, renovations to get the property ready for leasing, and property management fees.  Your expenses definitely will include taxes and maintenance and repairs.  They also should include insurance.  I mention taxes… These will include real estate property taxes and taxes on your profit from the rent.  Yes, if you receive more rent revenue than your expenses, you get to pay taxes on that.  When you identify expenses for a property you are considering buying, identify the prospective rent and then compare those two figures.  Even if you break even each month or perhaps even have slightly higher expenses than revenue, you may still be fine since month-by-month you will accrue equity in the property.  That equity equates to money for you when you eventually sell the property.  Conducting a return on investment assessment encompasses a good deal of research and calculations, but it doesn’t need to be onerous.  Here is additional information and examples:  Assessing Return on Investment For Rental Properties.

I also recommend defining a goal and that you be guided by that.  For example, you may decide you want a positive cash flow each month.  You may be fine breaking even each month or perhaps operate in the red each month (that means expenses are more than revenue) because you will accrue equity in the real estate over the years. Equity is the value between the appraisal value, or future sales price, of the property and the balance of your loan that needs to be paid.  In other words, it’s money you get to keep when you sell the property. Here’s another wonderful thing about having equity accrued in your real estate.  You can borrow that equity and use the money for a variety of things.  People borrow on their equity in their real estate to invest in more real estate, pay medical bills, pay for kids’ college, and much more.  And, keep in mind that you’re accruing equity in your real estate (i.e., monetary value for you) by using your tenants’ rent payments to pay down your mortgage.  You may be thinking of retiring in one of your rental homes in later years and at that time you could have the mortgage paid off having used your tenants’ rent.

Many agents have expertise in real estate investing and leasing/property management, and they can help you with this process.