Real estate investing can be a great way to earn monthly income renting out a property while waiting for the market to appreciate. It can also be a good place to park some cash outside of fluctuations the stock market. People often ask how they can get started. Here are a couple of pieces of key advice:
- You Don’t Have to Live There. This the most important rule to real estate investing – you don’t have to live there, just find a place where someone else does. I get it, you want to be in a certain part of town near your work, trendy restaurants or in a specific school district. Maybe you can’t live without a bathtub, a garage or a fenced yard. That’s all fine for you personally. It’s just important that someone wants to live there and is willing to pay you for a fair market rent for it.
- You Still Don’t Have to Live There. There are a lot of factors that are important to you as an individual homeowner. Maybe you fancy yourself a chef and can’t live without a gas cooktop. Maybe you hate tile floors or wallpaper. Those are all luxuries you as a homeowner can factor in to your decision to buy and live in a home. However, many renters may not really care about those factors. What is important as a landlord is a property that is easier to maintain. Personally, I’ve found that tile is easier to maintain over carpet (easier to clean in between tenants) and electric appliances over gas (electric is generally safer than gas), but you will have you personal biases.
- Look at the Market Nearby. We’ve established you won’t be living in this rental, but it’s important to make sure someone wants to live there. Look around to see what similar properties rent for in the area. Zillow is a good place to start as it may give you a Zestimate of what your home would rent for. However, Zillow can be quirky and like all things free, sometimes unreliable so ask a realtor to pull some rental comparables in the area. Rental property prices listed by realtors tend to skew a little high compared to properties listed by owners, but between the two resources, you can see what the market is like in the area.
- Budget for the Unexpected. Renting out properties is never just collecting the check every month. Houses, even brand new ones, need repairs and updates. Plus, stuff just happens – plumbing breaks, air conditioning stops cooling or an appliance wears out. You’ll need at least one month’s rent to pay for these things. I know some people like to purchase a home warranty to cover for those unexpected problems. The bonus of a warranty is it’s a fixed cost at year that you can budget for ahead of time (plus any copays when there are claims). The downside is warranty companies usually focus on the cheapest fix, which may not fit with your long term goals for the property (for example, warranty companies may be happy to just put Freon in an old air conditioning unit to keep it limping along rather than replace a leaking and inefficient old unit).
- Plan for Vacancies. It’s unrealistic that your property will always be occupied. Leases end and tenants move (or worse, stop paying rent and have to be evicted). Make sure to give yourself a rent cushion so you can survive if the property is empty for a month or two.
- Make Sure It’s Worth It. Remember, this is a business. Factor in all your costs and make sure you can afford it. Here’s my back of the envelope calculation for a property that cost $100,000 to purchase.
Income:
Monthly rent $1000 x 11: $11000
Expenses:
Monthly Mortgage of 80% loan
(5% rate) $429 x 12: $5148
Yearly Repairs: $1000
Getting tenants (advertising,
expense of empty unit): $1000
Property taxes: $2000
Insurance: $500
Total Income: $11,000
Total Expenses: $ 9,648
Estimated Profit: $ 1,352
This is just a rough estimate. Obviously, lots can change your equation to the good – a higher down payment, paying cash for the home, higher rents for the property or 100% percent occupancy all year. Similarly, a lot can change the equation downward, such as an expensive repair like needing a new roof, higher than expected taxes or a lengthy spell without a tenant.
One thing this calculation doesn’t factor in is appreciation. Ideally, your property will increase in value over time and that $100,000 property may someday be worth $150,000. However, that’s hard to eat on that year to year appreciation. Ideally you want to be able to make a profit every year based on operating income without relying on the asset’s value. Think hard though – is all this worth it for you for that much a year? For me personally, yes, the risk and reward is worth it. I’m happy to help you get started. Contact me if you want help considering a real estate investment.