Is your rental property bringing you cash, breaking even, or breaking your heart?
So you have decided to be a full time investor or landlord. Congratulations! When you set out to dip your toes in the waters of rental property ownership, you may think you’ve got the market mastered just because you’ve got something that people need, but how much do you really know? There’s stormy weather ahead and you don’t’ want to get lost at sea.
Let’s talk about one very basic item, the money. You are either keeping it, losing it or abusing it. Like any good relationship it requires work. Don’t put the work in; the relationship is going to fail.
1. What is your mortgage payment going to be? Before you jump into that next investment property, stop and understand the numbers. What’s the best rate and term you can get on a mortgage? What’s your target acquisition cost? How much is the fix up going to cost, so you can attract the ideal renter? Be realistic, it’s always more than you think.
2. What will the rental market pay for your final product? Let’s assume you intend to fix up your property to the finest. Which means the fair market value, should be at it’s highest. In turn, you will attract higher quality tenants who are willing to pay TOP dollar in order to live in your product. Look at the competition and understand the demand before you buy.
3. Do you cash flow or cash grow? Simply put, cash flow is any amount of profits over and above the operating expenses of your property. Right now, we are seeing historically low interest rates, increasing rental demand and an overall positive real estate market. Cash grow is when you purchase property in an above average appreciating market. Regardless, if the rents cover the mortgage or not, you are buying based on future value not current cash flow.
4. Are you prepared for the heartbreak? So now that you’ve got the bills covered and you’ve got a little bit of cash in your pocket, the next thing to do is to figure out what to do with it. Put it in a slush fund for future improvements. Save it away for the next property. Take a vacation. You want to be in this position. You want to be sitting here right now, reading this blog and thinking about what you will do with your extra cash. But, if all does not go as planned, then what? You must be prepared for rough seas ahead. Tenants will have personal issues, markets will change, but you are the captain and must stay the course.
5. Choose a solid crew and don’t get caught with the castaways. People who buy rental properties, improve them, maintain them and hang on to them through every season and every reason are the ones who build legacies. Choose your investment properties wisely, fix them up attractively and don’t deviate from the plan. Surround yourself with a crew that supports what you do and applauds your financial success.