Rental properties can make great investments that provide excellent returns year after year. On the other hand, being a landlord and a property owner isn’t for everyone. Before jumping into the rental property business, consider these three critical factors first.
#1. Reevaluate Your Finances
You’ve likely already taken a look at your income, savings, and investment portfolios to determine whether you can afford to purchase a property. However, there are more financial considerations after closing that could have a serious impact. In most cases, buying and maintaining a rental property is a long-term process. You’ll want to be sure that you’ve got enough in reserves to handle potential problems.
First, any property comes with a host of unexpected expenses, no matter how well it’s been inspected and repaired. From roofing incidents to an HVAC system failure, there are critical elements that won’t wait until you’re turning a profit to be addressed. Most landlords set aside at least five percent of the property’s value for these expenses. But it’s also important to be sure you can refill these reserves if you need to tap into them.
#2. Understand the Numbers
Owning a rental property is much like owning a business. While the numbers may be easier to compile on a single-family home than a multi-unit dwelling, there are still several figures to evaluate and get to ensure you’ll be earning a profit. For example, what is your projected income? What are all the income sources in addition to the rent (i.e., parking, storage units, laundry machines) as well as any expenses in addition to the basics (i.e., parking lot maintenance, storage security, machine maintenance)? What are you expecting in terms of return on your investment? While your finances are critical in the beginning stages after closing, you want to be sure that the property will be self-sustaining—and hopefully profitable—in the long run.
#3. Make Sure You Want to Be a Landlord
Being a landlord means being in control of a significant portion of someone else’s life: their home. While rental properties can be an excellent source of wealth creation and a passive income stream to an extent, it’s critical to understand that they also come with the people who will reside in your properties—and they are the ones that pay the rent that will make up your profit. That also means that rental properties come with the task of working with people and the ups and downs they experience in life.
For example, your tenants will be calling you at all hours of the night to report immediate problems such as plumbing backups, HVAC failures, or electrical issues and are likely to be in contact about a host of non-emergency repair issues throughout their tenancy. There is also the work of rent collection, tenant marketing and screening, and maintaining all areas of the building that tenants are not responsible for.
Bringing it All Together
In most cases, once the finances are worked out, the final obstacle can be overcome by engaging with a property management company that’s familiar with the area and has an excellent reputation for keeping both landlords and tenants happy. That way, you only need to worry about the most important issues; the day to day operations will be handled by a team that has the skills, experience, and temperament for the rental business.
Knowing the Best Cities to Invest in American Real Estate
The American economy is expected to grow this year and housing prices are following suit with the best markets expected to grow almost 20% in value this year. Investing in real estate in the United States is a popular method for growing and saving money because it is seemingly always growing. American homes are a good investment for their price security and growth potential. The only trouble is knowing where to invest because there are so many options from the Northeast, Texas, California, as well as up-and-coming cities across the nation.
Is the West Coast the Best Coast?
Properties along the American West Coast, ie. California, Washington, and Oregon have been popular for decades due to strong job growth, property protection laws in the US, and better weather. California, in particular, is one of the biggest property markets with cities such as San Jose offering the highest return on investment for property in the nation at over 18% per year in 2018. San Francisco offers similar returns with an average 12% growth in price per year.
Don’t Forget About the Formidable East
On the East Coast the market is more mature, offering smaller returns, but good property retention value in the north and strong growth in the south. Massachusetts stands out for growth in the Northeast because of the continuing education and medical industry in the state. In 2018, property values fell by 0.7% in the US, but Massachusetts still had a strong seller’s market. Properties stayed on the market for an average of 40-50 days, 20% less time than in most parts of the country. Homes in Massachusetts are still affordable for average Americans, but the values are increasing by as much as 5% per year.
Inland & Sun Belt Growth States
The non-coastal states have always had a weaker economy and thus lower housing prices. This is about to change however, as industry in Nevada, Arizona, Colorado, Illinois, Indiana, and Wisconsin have shown us that good growth can occur anywhere. The Las Vegas metropolitan area, for example, has a predicted housing price growth rate of 15% in 2019, with other cities like Reno, Boise in Idaho, and Colorado Springs, Colorado having estimated growth higher than 10%.
Property Investment in the US is all about location and sustainable growth of the region. There are many options in various states and climates around the country, from the sustainable and mature Northeast to the burgeoning markets in the South and West. This upcoming year will be one for good growth in these areas and good property retention values for those looking for a safe investment.