Disclaimer: The following is based off of my personal experience. I am not a lawyer, CPA, or financial advisor. Consider consulting with financial, legal, and tax professionals before making financial or business decisions.
I always had a passion for real estate and began to think seriously about investing years ago. Whenever you take an interest in something you begin to do the normal things read, learn, and talk about the subject. I read everything and listened to every podcast I could on the subject even networking with real estate investors when I had time. Then I began talking about it with family and friends and got mostly negative feed back: rentals are risky, the markets too high right now, why would you want the hassle, why would you want to evict people, invest in mutual funds, and a million more... When your best friends, family, and co-workers are questioning your decisions you must be wrong there's something you don't know right? Wrong! I now answer these objections with two of my favorite quotes "Free advice is the worst advice" and "Instead of thinking about the cost of doing something ask yourself what is the cost of not doing it".
IS RENTAL PROPERTY INVESTING FOR YOU?
The quick answer is I cannot answer that question you have to ask yourself what your goals are. For me I wanted an investment vehicle that would make more than traditional mutual/index funds. This leaves me with a few options the main two stock picking and rental property investing. I had always been interested in real estate and worked on houses growing up so I chose the latter. I realized that rental property investing wasn't going to be as easy as throwing money in a mutual fund and having it spit out a return year after year. The truth is rental property is a mix of an investment and a job you have to realize this before going into it. Initially it can be very hard because you probably don't know much about houses, leases, insurance etc.. If you work hard building your systems, team, and knowledge upfront everything becomes much more easier year after year!
THE BENEFITS OF RENTAL PROPERTY INVESTING
Live Rent Free: This is how I started investing in real estate. Save enough money for a down payment buy a house and rent out the other units/rooms. You then pay the mortgage, insurance, and taxes with the rents. I then put that saved rent towards my next house and the cycle keeps going!
Cash Flow: - The profit left over after the bills on the property are paid. IE: Your properties mortgage, taxes, and insurance are $500.00 and rents for $1000.00 your cash flow would be $500.00 per month. Many who invest would actually save 50% of that 500, $250.00 for expenses and vacancy which is good practice.
Equity: Your equity is the paid off principal on the property. In your mortgage you pay principal and interest every month. Without realizing it you are building your net worth just buy paying the mortgage every month. Say you bought a house for $200,000 and put it on a 30 year note when you were 25. When you are 55 that house will be paid off and that $200,000 in equity is yours. In 30 years however the value probably has gone up which brings us to our next benefit...appreciation!
Appreciation: Appreciation is the increase in value of your property over time. A Zillow article reports that national annual home appreciation hovers between 3-5% per year and this may change depending on the city. Appreciation is the icing on the cake and many suggest never investing with the sole purpose of appreciation.
Let's say I bought a house at $100,000.00 today and wonder what it will be worth in 30 years when the mortgage is paid. Using a simple online calculator I calculated this.
Starting value: $100,000
Average Appreciation 4% Over 30 Years
Ending Value: $324,339.75
That is $224,339.75 in profit besides cash flow and tax savings just for having your tenant pay your mortgage and you maintaining the property for 30 years!!!
Depriciation: "Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value." (Investopedia). Basically depreciation is reduction in value of the structure itself not the land over a certain period of time. This can be a huge tax write off each year and an overlooked benefit of real estate. I have my accountant do this for me and would suggest always consulting with a tax advisor.
Write offs: There are a number of tax write offs associated with real estate. Personally I am able to write off my interest, insurance, maintenance, repairs, and many more that can reduce my tax liability from a W-2 job. Again consult with a tax advisor on the amazing tax benefits you get from rental real estate!
THE BAD AND THE UGLY
Repairs: After I bought my first rental property I had little to no money. I thought nothing would go wrong because I didn't have any money for something to go wrong. Well stuff went wrong. My house was owned previously by a landlord and did the bare minimum and it became and Easter egg hunt of repairs.
Mitigating repairs: Upfront you should have a great property inspector do your due-diligence and find a good one. Go to the inspection with your inspector and hear what he or she has to say. I get all the inspections that I can. In my mind inspections are best thing to spend money on. I've walked away from deals due to bad inspections which was painful but I believe I'd still be fixing up that first bad house if I had bought it.
Expecting repairs: If your inspector points out that you may need a new furnace in a few years budget for that repair. I don't expect any cash flow my first year owning a property because most likely that money will be spent on repairs.
If you own a rental property eventually you will get a bad tenant it is part of the business. We cannot avoid this issue completely but we can put some preventions in place.
Screening: Screening your tenants is critical to the welfare of your business and your sanity. I use Cozy. I provide the client with a link then they fill it out and pay and I get a credit check, work history, and criminal history etc... This service is $40.00 per applicant there are other services out there but this one has been easiest for me.
Knowing the rules: If you are operating any business you should know the laws and regulations better than anyone. If the time comes in which you have to evict a tenant you should know how to execute that process. A great tip I also got at one of my real estate meetings is to go me your district judges and ask them about the process. One this will give you face to face and they will appreciate you trying to be proactive by learning the rules.
Leases: Have a great lease and try to predict situations that may arise and build that into your lease. If you know a Realtor cough cough me shameless plug. I can get you general Pennsylvania leases and other landlord forms.
Along with having a great inspector to mitigate the upfront risk of buying a money pit property having proper insurance will help manage your risk. In my basement I have steel pipes that are 80 years old and are likely to break at some point. This can be a $15,000 repair if they need to be replaced. Guess what, there is insurance for that! What if you have a no dog policy but your tenant has a service dog that is a German Shepard and this will violate your insurance policy? In most places you cannot deny a tenant based on having a service dog but you need insurance. Do you know what company does not have a breed exclusion? State Farm, I don't actually use them but if I ever come across the situation I know who I'm going to! It is important to mitigate these potential issues before they arise.
Rental Property Investing is Too Much Work:
Rental property investing is work which is why you can get higher returns. This work can be replaced by systems over time! My book keeping is done through QuickBooks which when I swipe my debit card automatically sends to my QuickBooks. I then submit this along with my other info to my accountant at the end of the year. My rent is collected through a paypal like service (Venmo) which goes right to my phone all I do is hit transfer to bank. Leases are electronically signed and stored on Google Drive so I can access them from my phone. Repairs and maintenance I still do myself but when I grow more this will be outsourced to property management.
WOULD I INVEST AGAIN? Absolutely! Rental property investing has been the greatest vehicle I have put my money into. It is hard work and at times it can be extremely stressful. You have to ask yourself if you are willing work hard for awhile and deal with some stress to gain the amazing yields real estate has to offer. This work and stress can always be outsourced too! Now that I have a great handyman the management is really easy. I have stopped trying to fix stuff myself which has made my life 10x easier. No other investment gives you the ability to scale as quickly and powerfully. Everyday I learn more, build more systems, and make my life easier. New problems arise but I realize that's one less problem I'll deal with down the road because I have learned the solution today. At first jumping in is scary but once you do the fear quickly wears off and the profits will come.
Matt Tallent is a Realtor with The How Group. His passions include rental property investing and helping others achieve their real estate goals.
Real Estate Investing
Buy and Hold