This is a guest post by Bret Engle.http://diyguys.net/
Brett Engle is an architect and co-creator along with Ray Flynn of DIY Guys.
Because real estate can be such a great investment, more homeowners are seeing the value in branching out into owning rental properties. Getting into the rental market helps you build wealth, but it also takes time and money. Before making the leap, any new investor needs to know these three main factors to consider — and what the pros and cons mean for you.
#1 Property Upkeep
Any property requires regular maintenance and occasional repairs, from leaky faucets to bigger issues, such as fixing a broken air conditioner. As a landlord, you have a responsibility to keep up with maintenance, not just to protect your investment but also to keep tenants happy.
Solution: Instead of trying to take on these maintenance tasks yourself, you can relieve a lot of that stress by hiring a property management company. Maintaining an investment property is different from upkeep of your own home. Property management companies know this, and they specialize in addressing those tasks for you — just be sure that the company you hire provides support around the clock. For a minimal investment, this is one of the best things you can do — and it may even be the deciding factor that makes being a rental property owner work for you.
Along with maintenance, having to deal with tenants is the other big headache that can come with owning a rental property. For your investment to be profitable, you have to find good tenants and keep your place rented consistently. On top of finding and keeping tenants, there can also be issues that come up; plus, you have to stay on top of collecting rent.
Solution: The good news is that the solution to this potential downside is the same solution you have for maintenance. A good property management company takes care of all of these tasks for you, from advertising your property to vetting tenants and collecting rent.
#3 Financial Considerations
The financial reward is the obvious benefit of investing in a rental property. Leverage is a major pro — in more ways than one. First, using leverage from the bank in the form of a loan is how you can buy a property without having the full cash amount available. Bigger Pockets explains how this leverage allows you to get more for less money.
The other way you have leverage is in flexibility. Unlike stocks, which are dependent on market trends that are out of your control, you ultimately decide when it’s a good time to purchase a rental property. You can research the local market, choose where to buy, what type of home to buy, and how much work you want to put into it.
The financial reward you get for this leverage is both short and long term. In the short term, your rental income should be greater than your expenses, which means you pocket the difference. This short-term way of supplementing your income is why rental properties are often considered passive investments. In the long term, once your mortgage is paid off, the property will generate even more income, and you’ve also built wealth in the form of owning the property outright.
With all of these considerations, the potential con is the risk of your property losing money rather than being profitable. The solution is to be thorough in estimating all potential costs. In addition to your down payment and mortgage, you also need to account for hidden expenses like closing costs, property taxes, and maintenance. Along with running all the numbers, decisions you make when purchasing the home will also impact profitability. For example, US News recommends researching the area’s vacancy rate and looking for properties that have the most potential.
In many ways, owning rental properties is similar to buying your own home. With each mortgage payment you make, and each rental check you earn, you’re building a nest egg that will pay off long term. This investment isn’t for everyone, and it does require work, but for those who take the risk, the rewards are worth the effort.