Owning and managing rental properties works great for some people, but it isn’t for everyone. Whether owning and operating a rental property is right for you depends not only on the physical characteristics, investment returns, and location of the property itself, but also on your personality, work ethic, other professional obligations, attitude, organizational capabilities, attention to detail, and other strengths and weaknesses. Additionally, there are financial concerns to take into consideration. Do you have sufficient cash reserves after you dish out 20-30% down on a rental property? Do you have enough cash for repairs and renovations? Finally, if you do have the necessary finances, are you prepared to deal with the hassle and stress of difficult tenants?
To discover if owning a rental property is the right move for you, let’s take a deep dive into some of the aforementioned issues.
Financing a rental property. Let’s start with the finances. A lot of prospective rental property owners don’t realize that lenders typically require a substantially higher down payment for a rental property than they would for an owner-occupied property. Typically, they require a minimum of 20-30% down. Therefore, on a $400,000 rental property, you should expect to put down $80,000-$120,000. Of course, assuming you can afford the down payment, the lender will want to see that you have sufficient cash reserves in case of emergency and to cover ongoing maintenance, repairs and renovations required to bring the property up to rental condition, taxes, insurance, and unforeseen vacancies. While there’s no hard and fast rule as to how much money you should hold in reserve, veteran investors often hold $10,000-$15,000 in reserve for each single family home in their portfolio.
Will the rental property pay for itself, and then some? For one reason or another, a lot of people believe the value in a rental property is the appreciation. While appreciation is certainly a benefit of owning real estate, a good rental property will provide much more than that. In addition to appreciation, a great rental property will have significant positive cash flow and a return on investment that exceeds the returns you could reasonably expect to achieve elsewhere. It’s important to note that cash flow refers to cash flow after paying all of the operating expenses, including property taxes, insurance, repairs, maintenance, etc. It’s relatively easy to find mediocre rental properties—rentals that pay the mortgage, but not much more than that. If you can find one that offers great returns, substantial positive cash flow, and great appreciation, then you’re well on your way to a successful career as a real estate investor. If you’re having trouble locating an investment property that fits the bill, consider contacting a Fort Lauderdale property management company to see if they have any recommendations.
Do you have what it takes to be a landlord? Let’s assume you’ve got enough money saved for a 20-30% down payment plus reserves and you’ve managed to find a rental property that knocks it out of the park from a return-on-investment perspective. The next question to consider is, “do you have what it takes to be a landlord?” Among other things, being a landlord requires a substantial time commitment (or, more importantly, a relatively flexible schedule that enables you to respond to unforeseen emergencies), a good work ethic (yes, you’ve got to keep those properties in good condition and stay on top of the books!), and the ability to deal with all sorts of different people. At some point in your rental property career, you’re likely to find yourself dealing with late-payers and otherwise difficult tenants. If you’re the type of person who avoids conflict at all costs, then you should definitely consider hiring a Fort Lauderdale property management company to help with this part of the business. Beyond that, your life as a landlord will be considerably easier if you’re a handy person; if not, hopefully you’ve got a good network of reliable contractors you can turn to for maintenance, renovations, and other repairs. If you don’t have this network, or if you’re not confident in your ability to negotiate fair prices and oversee the work of vendors, this is another sign you should consider hiring a property management company.
The good news. Hey, we know owning and operating a rental property isn’t for everyone. The good news is that, with the help of a good property management company, anyone can be a successful landlord without the headache. You still have to get your finances lined up in order to be able to finance the purchase of your investment property, but at least you don’t have to deal with the really tough part of the business and you can still reap the financial rewards of a sound investment.
Are you considering buying a rental property? If so, we’d love to hear from you, and we’d be happy to talk through the life of a landlord in more detail. Don’t hesitate to contact us with all of your questions!