Important Questions to Ask Yourself
Rental properties can be a great investment when you compare them to the volatility and lack of transparency in the stock market. I encourage new investors to have an honest conversation, with themselves, as to what level of commitment they are prepared to offer to their investment.
After buying, rehabbing and selling real estate, for close to a decade, I find myself desiring a more regular, stable and fixed income aspect to my business. It would sure be nice to travel with the family and still have some income coming. I also want to be sure that I am building something for the long term and I suspect many other people are in the same boat– no matter which industry. If you decide to make the move to investing in rental properties, here are some items I encourage you to think through before taking that leap. Ask yourself:
- • What are my goals?
- • Do I want to invest longer term in higher price point properties which have smaller cash on cash return but more appreciation? OR
• Do I want to invest in cash flow properties that produce quite a nice cash on cash return but which are more management intense?
• What is more important at this point in my life? Once you decide, you will need to create a business plan which indicates the number of properties you plan to purchase in the next two to three years and factors in items like: average purchase price, average repairs to bring to rent-ready condition, vacancy rates, property taxes, insurance, vacancy and maintenance fees.
• What kind of capital commitment can I realistically allocate toward buying my first rental property? This includes evaluating IRAs, looking at personal properties which might be paid down and which might qualify for a Home Equity Line of Credit, and looking into lending sources that are available to landlords.
• What level of involvement do I want to have with the properties and the tenants? Managing real estate is not easy. It takes a very balanced approach; you have to be looking out for your tenants’ safety and concerns as well as your own interests.
• Do I have the time and desire to be a “hands-on” landlord dealing with maintenance phone calls, rent collections, late fees and paying the taxes and insurance? OR
• Do I want to start out in a more “executive-style” fashion and pay a property manager 10% plus a little extra on the repairs to have them handle these items?
I recommend sitting down and asking yourself these questions, discussing your answers to the questions and reasons for them with a friend or trusted business advisor. Once you are satisfied with your answers, you can begin creating your business plan and decide which direction you will be taking with your rental portfolio. Mapping out your preferred investment style and rental property portfolio plans, will help you avoid frustrations and expensive mistakes as you start your venture.
In future articles, we will examine different investing styles to grow your rental portfolio and many other ideas related to real estate investing.
Greg Kilper invests in real estate and enjoys working with real estate investors every day. If you have questions or suggestions for future topics please send them to: Info@FlipItFriday.com.