You’ve been thinking of dipping your toes in the rental business for a while, but the idea of investing in real estate for the first time can be a bit daunting. And if you plan on being the landlord for said property, that can be even more intimidating. Alternatively, this can be a very rewarding gig or side gig—financial and otherwise. So is running a rental business right for you?
Do You Enjoy Home Improvement?
Sure, you can outsource work on your rental property but, again, keep in mind that’s more cash out the door. If you’re a DIYer and actually enjoy puttering around the yard and making improvements to the house, this could very well be a dream gig for you. And the thing is you need to do these tasks to get what’s called “sweat equity”. As Trent Hamm of The Simple Dollar notes, “Doing things like repainting the home, adding new siding, refinishing the inside, doing some basic landscaping to the yard, and so on will add value to the home without significant financial cost.” That way you can charge more rent and, ultimately, sell it for more money if that’s what you choose to do.
Do You Have the Necessary Capital?
Real estate isn’t cheap, and as banks continue to tighten the reins on their loan processes, it’s important to find other methods of financing. You can get hard money loans for homeowners that offer flexible terms and immediate funding. However, you’ll need to be at least somewhat liquid beyond that. The cash in from rent and then cash out to pay the mortgage thing works nicely most months but what if your renters decide to stop paying the rent? It’s one thing for them to miss one month but what if it happens consecutively? What if they ultimately become squatters? You have to have emergency funds for things like this if you get into the rental business as, sadly, you’ll likely have to hire attorneys. And even then—unless you followed the eviction process to the letter—you might not recoup the money. Are there benefits to the biz? Absolutely! But you also must have the cash flow for the possibilities of pitfalls.
You also need to be someone who doesn’t let big charges surprise you, as the taxes and insurance that come along with a rental property are no joke. You’ll know about them ahead of time so if you’re good at reserving money for things like that, go for it. If not, however, this could be a problem. And, remember, these bills will hit you no matter if there is a renter in your unit or not.
Are You Okay With Being On Call?
More than likely you’re going to be the one who gets the calls on anything from pests in the unit to a busted pipe. If you’re good on-the-spot and thrive on emergency situations, this is a good fit. If you’re not located near your rental property, you’ll definitely need to factor in the cost of paying someone who is to handle these situations for you. Someone needs to be within driving distance to make sure any maintenance issues are handled swiftly and efficiently.
Do You Have Investments In Other Areas?
As any financial advisor worth his or her salt will tell you, it’s important to have a diverse portfolio. If this is going to be your only investment, it might not be the way to go. Real estate is a cyclical business and if you jump at the first sign of trouble, you’re not going to recoup your investment money. You should ideally have other investments and the ability to see this one through for the long haul.
Are You a People Person?
Just as with maintenance issues, nagging tenants are nearly par for the course when it comes to owning property. Are you good at negotiating and compromise? Can you hold your tongue when someone is clearly out of line? Again, unless you’ve hired someone to be your go-between, these are distinct possibilities you need to consider.
Is running a rental business right for you? Think about the things we’ve presented here, do some soul searching, and if you decide it’s right for you—give it a go!
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