Today, investing in rental properties (1-4 units) may provide investors with the opportunity to create a positive income stream more quickly than was possible in the last decade or more. In the past, investors were often willing to purchase rental properties with a negative cash flow, and based their investment on the reasonable expectation that the market value would rise along with rents over time, as well as the available tax benefits of owning income property.
Recently, in addition to the tax advantages, lower purchase prices in some markets have allowed investors to realize a positive cash flow early in the process, or even immediately… This is not always the case, of course, and investors will benefit greatly from professional guidance.
For investors who enjoy the hands on experience of painting and repairing their own vacant units, the higher the profit will be. This is a satisfying experience for some investors.
There are two primary reasons that purchasing and operating rental properties is different in our current real estate climate. First, property values have declined. Lower prices become lower monthly costs. Mortgages and property taxes are smaller. It is possible your rental business may show a profit sooner. In many cases this profit will grow after the first year as rents steadily rise. The additional rent can be used to pay down the mortgage amount more quickly and enhance your equity position in the property. This is very important if the property’s market value does not rise quickly.
The second reason relates to property values as well. Where investors formerly may have assumed that their profit would come from the sale of properties due to rising property values, they no longer build their investment on that assumption, but rather use traditional business principles based on monthly expense vs. monthly income. Thus, rental properties are not treated as an investment that you purchase and have little to do with until you decide to sell them. Owning and managing rental properties is a job that you create for yourself according to your abilities and vision of how the properties can function in the most profitable way possible. And, if you enjoy the design, decor and improvement of homes and find pleasure in dealing with people, it may be a very gratifying and rewarding job for you.
Like most investments, your decision to invest in rental properties should be based on sound business principles, factoring in the costs to run the business, what income the business will generate and making sure the income exceeds the costs. The good news, as mentioned earlier, is that there may be opportunities to earn a positive cash flow sooner, due to low investment and operating costs, rather than waiting years for rents to increase and the property to appreciate in value.
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This is an investment that is best suited for someone who wants to be involved, to evaluate and get to know tenants, to handle tenant calls when problems arise, and to perform simple maintenance tasks. For some, this is a hassle. For others, it’s a welcome chance to maintain and improve the quality and profitability of your property. If you choose to engage a property management company to handle these details, be sure to factor in the cost before deciding to be a rental property investor.
When you buy a rental property, the experience should be very different from buying your own personal residence. Remember: This is a business. Evaluate the location, the practical qualities of the construction, the appeal to potential renters, and the likelihood that the property can be run with relatively low operating expenses. Further, consider a property that is fairly close to home, so that you can check up on it often.
Third, tally the expenses of the purchase, along with the monthly operating costs, and set aside funds for unexpected expenses. Most lenders require a certain level of reserves for loss of rents or other unforeseen expenses; I will be happy to provide you with information about investment property reserve requirements at Bank of America Home Loans. Against these expenses and “worst-case” scenario, add up your income from the property, including the possible tax benefits your property can provide, and make sure the potential profit from the venture will make your investment worthwhile.
Fourth, call upon your real estate professional and tax advisor for assistance in purchasing your property. And be sure to call upon me as well for help with your financing options, and to help make certain that yours is a solid and profitable investment.
Want to find out more about apartment building investing , then visit Steve Rangel’s site on how to choose the best apartment buildings for your real estate portfolio.