As a Realtor I should be telling everybody that they should have rental properties... Right?  WRONG!

 

Rentals is a numbers game and most people seem to be bad at math.  They are also work.

 

Numbers:  Here is what you must factor in order to property analyze the numbers.

 

Vacancy Rate

Repairs

Move in / Move out fees (for condos)

Advertising

Depreciation / Tax write off

 

If when you factor in all these numbers and you are even or positive then it is a rental worth considering.  During the last boom, EVERYBODY jumped into the Landlord role (myself included), banking on the equity growth.  It didn't matter if you were bleeding $300 / month because things were going up at 1%+ a month.  This calculates to an incredible return.  History consistently shows that properties do appreciate.  However, I would factor in a 3-7% rate of appreciation.  The smartest Landlord's I have met do not factor in appreciation.  They purchase the property strictly based on its monthly return.  They want to hold properties that generate cash flow after all the expenses are factored in.  One way to do this is to put down enough cash to generate a positive flow.  This is,and should be, a very realistic expectation.  In the NW I have found that a down payment of somewhere between 25-35% puts you in an break-even or positive position each month, once all your 'true' costs are factored in.  (Please note, this is not a formula, just an observation.)  The other way to find yourself in a positive cash flow situation is to purchase something at .70 cents on the dollar or less.  This generally means going to the auction or finding a distressed property (that is a whole blog on its own).

 

Work: A rental is work.  One way to avoid the work is to hire a property manager, but then you must factor this back into your numbers.  I have found that if I put the rent at just under the going market rent I tend to attract many more renters and I can put in a quality tenant.  However, you still need to show the property to 5 or 10 different people.  If your property is next door then that is not a big deal.  If your rental is across town then the time starts to add up.  Repairs, not only do they cost money, but you need to coordinate them and again this takes time.  Late rents & evictions, you must understand the Landlord/Tenant laws and know that 'Time is of the Essence' when you are responding to problems.  Damage - hopefully you picked a tenant that doesn't want to put anything on the walls and walks around in their socks on the hardwoods, however, I bet you didn't - know that there is going to be some wear and tear and possibly damage every time a tenant moves out.  Are you painting the walls yourself or hiring somebody? 

 

My goal is not to scare you off from owning rentals.  My goal is to help you understand the realities of being a Landlord BEFORE you take on the roll.  Even in the current economic state I am still an avid believer in Real Estate being one of, if not the, best investments out there.  Over time rentals will appreciate and, if you purchased wisely, they can generate consistent monthly income.  Overall, they can be a very wise investment.  Do plan on being in it for the long haul.  I currently have rentals and I am sure I will probably always have rentals.  History has shown that in this area a property doubles in value every ten years.  So if you don't mind the headaches and unexpected, it can be a very good investment, especially when you factor in leverage.  Just go in with your eyes wide open. 

 

I am always available to help you track down the right rental for your goals and situation or just to answer any questions you may have.