Investing In Rental Property – The Basics
Most of my blog articles are written to a seasoned landlord audience, but I know that there are folks out there who are considering purchasing a residential rental property for the first time. This week, I want to spend a few minutes addressing the most important questions people have when they are considering becoming a landlord for the first time.
Here’s the upside. Owning a residential rental property allows you to make money two ways, from net rental income and the appreciation of your rental home’s value over time. You must keep both of these factors in mind when you buy a rental property.
Next, let’s review the risks. To make rental income, you have to find quality tenants for your property. To realize appreciation over time, your property must be well maintained and periodically upgraded. Also, market forces beyond your control will play a large part in determining your rental home’s value in the future.
In December 2020, the residential home rental market in Westchester is strong due to the flight from New York City and a rebounding economy. This is encouraging people to become landlords. Is that wise? I think it generally is, but some homework and prudence are required to be successful.
Be sure the numbers make sense. To be a successful landlord, you must generate a positive cash flow. Rent earned must exceed expenses. This seems obvious, I know, but people make mistakes when they assume that expenses are limited to mortgage payments and the occasional replacement of a broken water heater.
Consider the rental income side. Will you always have paying tenants? Count on some vacancy time over the years. That’s a given. If, say, over 60 months, your rental is vacant 5% of the time or 3 months, you have to keep paying the mortgage on the rental property during those months with no income. What if the economy goes into recession and your rental is vacant for 6 months or more over 5 years? That’s possible, so you need to plan for the worst while hoping for the best.
How likely is it that your rental property will need significant repairs or upgrades? There’s a big difference between buying a twenty-year-old home to rent out whose heating, AC, water heater, and roof have not been replaced and one where those upgrades have been made. If you’re not knowledgeable in evaluating likely repair and replacement costs for rental properties, seek competent advice on this before you buy.
Let’s add in other expenses too. Your property must be insured. Taxes will have to be paid. Don’t leave out the cost of your time dealing with all aspects of your rental – finding tenants, managing tenants, and arranging for repairs.
Buying the right house, condo, or duplex. Searching for the best rental property to buy? Consider everything I’ve said above (age and condition of the property, the likelihood of having to make significant upgrades, etc.), plus focus your efforts on neighborhoods where homes are appreciating in value, have low crime rates, and well-rated schools.
Take the time to research what other landlords in the area are experiencing. Is the neighborhood generally a good fit for rental properties? Is it on the ascent or on the decline? How stable has the rental market been in the area for the past ten years?
It is difficult to calculate in advance all of your rental property’s potential expenses. Without experience and area-specific knowledge, rental income and home value appreciation returns can also be tough to estimate. If this is your first venture as a landlord, err on the conservative side and factor in an additional percentage for unforeseen costs.
My discussion of the risks and rewards of owning rental property was not meant to discourage you! Knowledge is power. Don’t cut corners, especially on your first landlord venture. If you do it right, owning and managing residential rental properties is, without question, one of the best ways to generate income and build wealth long term.
Sterling Property Solutions’ clients rely on us to handle all aspects of the property management equation. Most of them are busy people, with businesses and careers that require their full attention. They want to be involved and stay informed, but they also know that they do not have the time or expertise necessary to be hands-on landlords.
If you’re seriously considering becoming a landlord in Westchester County, now is a great time to find the right property and get rolling. Our team can answer all of your property management questions and help you address any challenges.
Together, let’s form a plan for you to take full advantage of the current conditions and put in place a robust, long term program for your success. Please give us a ring at 914-355-3277 or send us an email at info@sterlingpsi.com.