Building wealth entails diversifying your assets and generating as many different revenue streams as can. Owning rental properties is a great example of having established diversified revenue streams for your portfolio.
But just because you think it sounds enticing, that doesn’t mean you should jump into the saddle just yet. There’s a time to buy rental properties and a time to hold off.
In this article, we’re going to explore a few of the situations when it makes sense to do the latter. Take a look:
The best way to get out of debt is to pay down your balances … not to add even more debt to your balance sheet. For one reason or another, some people have the impression that investing in real estate is a magic bullet that will solve all other financial woes.
In reality, this isn’t the case. Throwing debt at debt will rarely get you right side up. Wait until you’ve reduced or preferably eliminated your bad debt — car payments, credit cards, unpaid taxes, etc. — and are in a position to make clear decisions about your finances.
By no means do you have to pay for a rental property in cash, but you certainly wouldn’t want to put three percent down and call it a day. The more you can invest in a property up front, the less risk you run.
You’ll also notice far better cash-flow figures. As a rule, try to put at least 20 percent down. Not only is this a benchmark number for lenders, but it also helps you avoid PMI insurance, which can cost hundreds of extra dollars per year.
If you’re preparing to move out of town, it’s probably not a smart idea to invest in real estate in the region you’re leaving behind. For one thing, this will complicate the paperwork and tax arrangements.
Second, it’s a logistical nightmare. Owning a rental property in another city or state means you will be an absentee landlord. This might work 95 percent of the time, but it runs the risk of creating problems the rest of the time and in the future.
Being unable to drive by the property means you’ll never really know what’s going on there. Is the yard getting mowed? Are your tenants subletting? Is there a dog on the property? You simply have no way of knowing for certain.
The same could be said for the opposite end of a move. If you’re new to a city or state, it’s better to hold off on investing in a rental until you’ve become better acquainted with the market. Wait at least six months, and preferably a year, before making an investment.
This will give you time to learn about the market, identify neighborhoods that may be on the rise, note the areas that appear to be in decline, and just generally avoid putting yourself in a situation where you don’t belong. (This also gives you more stability in the region and a chance to show lenders that you’re here to stay.)
A pool may seem like an attractive feature to renters — and often it is — but it can be a nightmare for you, the property owner. For one, a great deal of maintenance can come with owning a pool (and you can’t expect the tenants to do that for you).
Second, there’s a hefty amount of liability. Whether a tenant, a guest of a tenant, a pool maintenance guy, a neighborhood child, or a trespasser suffers injury from an incident associated with a swimming pool on the site, you can be held liable.
It can be truly dire if someone drowns in your pool. In addition to maintaining the proper insurance coverage, you’ll need to take proper safety precautions.
“If you have a rental property with a pool, you must have a fence that surrounds the pool and that has a self-closing gate that locks,” landlord Laura Agadoni notes. “Other safety measures include a pool cover that latches, and an alarm that sounds when there’s movement near the pool.”
It’s also not a great idea to buy a rental property on the water, unless it’s a vacation home that’s specifically designed for the purpose. As you can see from the last couple of points, water can be very bad news.
In addition to posing a risk for drowning, an adjacent body of water increases the chance of flooding and will likely pose additional insurance requirements. You can avoid these requirements by turning your back on the home.
It’s essential to run the numbers on any property you’re considering and figure out whether you’ve got enough cash flow to justify the investment. To determine cash flow, start with a realistic rental rate.
Subtract all the monthly expenses from your proposed rate. These may include any or all of the following: taxes, insurance, mortgage payment, property management fees, and HOA fees. You also need to account for vacancies (which will likely be at least one month per year).
“When you subtract these expenses from the amount of rent you’ll be collecting, the amount remaining is your profit,” JWB Real Estate Capital explains. “Does it meet your goals? If not, you may need to look for another property, revise your goals, or both.”
Be patient and wait for a real estate deal for which the numbers line up. There’s no sense in putting yourself in a compromising situation by accepting tight margins.
There are any number of reasons not to invest in a specific rental property. You may also identify plenty of reasons you should invest in a property. The key is to identify so-called “deal breakers” before they entrap and break you.
A lack of landlord experience isn’t enough reason not to invest. If the situational factors and numbers line up, you should go for it. You can always hire a property management company — such as Green Residential — to take care of the details.
Just give us a shout and we’ll be happy to assist!
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