Many people look at those, who own and/ or, operate investment/ rental property, and ask themselves, wouldn’t it be great, to do so, themselves? While, some individuals, and properties, make a great degree of sense, others, fail to do so! Like most things in life, there are both positives and negatives, of investment property ownership, and you owe it to yourself, to fully consider, with your eyes, wide – open, some of the numerous factors, and considerations, involved. With that in mind, this article will attempt to briefly, consider, review, and discuss, some of these variables and considerations.
1. Comparisons/ competitive, opportunity costs, uses for your money: Does buying and owning a particular property, maximize your possibilities, and return on investment, when compared to other alternatives and uses? In other words, will doing so, provide, you, with the most, bang – for – your – buck? When considering any real estate investment, begin, by fully evaluating, not only, the initial, purchase price, but, also, how much, will be needed, both in the shorter – term, and longer – term! Take the purchase price, plus the more immediate (first 2 years of ownership) costs, incurred, and involved. Then, conservatively, consider, and use, the anticipated rent – rolls (look at the local market, and competition, and use an 80% figure, meaning, four – fifths of that number, to see your rate of return). Seek a minimum, 6% rate of return (for example, if the property purchase plus short – term price is $500,000, your full rent – rolls should be approximately, $37,000, so your 80% – figure, is roughly, $30,000, or 6% of the cost figure). In addition, compare this to the opportunity – costs, for your money, or, what you might, probably, receive from other investment vehicles).
2. Reserves: We suggest using the 80% – figure, so you are prepared for vacancies, etc. In addition, proceed, only, when you have put aside sufficient reserves, for contingencies, such as repairs, renovations, maintenance, upkeep. etc.
3. Money – down, versus mortgage/ loans: Most purchase these smaller investment properties, with the aid and assistance of securing a mortgage loan. Be prepared, to have sufficient, rent rolls, and reserves, to afford, your monthly expenses, including mortgage interest and principal, real estate taxes, insurance, landlord – paid, utilities, etc.
4. Tenants and rents charged: Carefully consider your tenants, and seek, reliable, dependable ones, with good credit, etc. There are various philosophies, and some owners proceed, seeking the highest possible rents, seeming to be willing to wait, until they secure that. However, that philosophy, may or may not, provide maximum rent – rolls, and the risk is, greater periods with vacancies. The other approach, is the one, I personally believe, and follow, in the properties, I personally own and/ or manage, is to seek rents, in the middle of the pack, provide maximum service to tenants, and maintain/ keep quality tenants, for far greater, than the usual, periods. Know your personal, risk/ reward tolerance, and philosophy, from the onset!
Is owning rental housing a good option, for you? Know what you seek, and what you can afford, as well as your risk/ reward tolerance!
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