I've been a landlord for years, and there are 5 questions I asked myself to decide if I was ready to own a rental property
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- My parents owned two rental properties growing up, so I knew what to expect before I became a landlord myself.
- Still, I had to ask myself if I had the temperament to deal with renters, if the numbers made sense, and if there was an active rental market in the area I was considering.
- I also had to think about financial surprises in the future, and whether or not the property could potentially appreciate.
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I grew up with parents who were landlords. They owned two multi-family houses and we lived in the bottom half of one of those homes. So I feel like I've seen it all, from tenants who became life-long friends to tenants who we took to court for non-payment of rent. And along the way, there were a good number of unexpected expenses that seemed to come at exactly the wrong time.
But, decades later, income from those apartments is keeping my mother comfortable in her retirement years, and the houses could be sold to support her further if need be. So it seemed to my husband and me that diversifying our investment portfolio with a hard asset was not a bad long-term financial strategy.
But were we really ready to buy a rental property? Here are some of the factors we considered.
Were we temperamentally suited to be landlords?
I knew from watching my parents that there's no such thing as a property that manages itself. Unless you're willing to hire a property manager (which cuts into your profits), you need to be willing to step into the role of landlord.
Yes, it's nice to get the checks every month. Spending a morning with an electrician at an apartment, or wet vacuuming a basement floor for hours after a massive rainstorm, meh! And managing disputes between tenants can sometimes make you feel like a preschool teacher.
For my husband and me, it helps that we have different M.O.s. He's chill; me, not so much! While I'm responsible for most of the property management, I know I can rely on my husband for help and, most of all, to be a level-headed sounding board or to talk me off the ledge if need be.
Do the numbers make sense?
A rental property only makes sense if your potential rental income can support your mortgage and all of your expenses.
In most locations, it should be pretty easy to calculate your fixed expenses, such as taxes, insurance, any utilities that are the landlord's responsibilities, etc. Be aware that if real estate taxes are based on an assessment that's lower than your purchase price, your taxes are likely to go up.
We made the numbers work for us by making a cash offer on a multi-family house in my hometown in western Massachusetts, just up the street from my mother's rental houses. Sellers love cash because it speeds up the process when there's no bank involved. That strategy took a chunk of money out of our savings, but we viewed this as a reallocation of assets.
It turned out to be a good decision; the house has been cash-flow positive for three years and we have solid chunk of cash in the bank to cover anything unexpected
Is there an active rental market?
Berkshire County, Massachusetts is increasingly toney, but our property is located in one of the few remaining towns where working families can still afford to live. My parents' apartments never stayed empty for very long, and ours haven't either, so far.
Average rent for our apartments, and the three I now manage for my mother, is approximately $850 plus utilities. Could we charge more? Probably. But just because there's a competitive rental market that could support higher rents doesn't mean you should jack up the rent every year. Good, loyal tenants who take care of your property and pay the rent on time are incredibly valuable.
For us, the long game is not to make a killing on rent, but to hold onto property as it appreciates, which brings us to…
What's the potential for property appreciation?
This is a tough one, because no one has a real estate crystal ball. It helps to have a long-term perspective, though.
When I was growing up, our town was populated by Polish immigrants who worked in the textile mills (including my grandparents). While there are still some long-time residents, the town is increasingly filled with young families who aspire to homeownership. The mills, and the elementary school I attended, are empty and crying out for revitalization and transformation. While other towns in Berkshire County may have reached their peak, our town has a long way to go. So I'm not just betting on my property, I'm betting on the economic growth of my hometown.
Do we have enough money socked away to deal with nasty surprises?
We knew from previous home purchases that the first year is always the toughest, financially. Three years into our investment, we've saved enough rent money to finance all expenses, plus repairs and improvements.
But that first year — when the basement flooded and we needed to install a sump pump, and then when the ancient water heater needed to be replaced — we had to dip into savings to finance the repairs and then gradually pay ourselves back out of cash flow.
Lesson: If you are at all financially strapped, investing in a rental property may not be for you. You've got to have some financial cushion because the first rule of owning property is pretty much set in stone: sh*t happens!
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