By Samantha Jones
This article is part one of a two-part series on purchasing and managing an investment property.
As agents and brokers, we believe real estate is the best investment we can make. And we act on it by embracing homeownership. For many real estate pros, there’s also a natural progression onto real estate investing.
I grew up in a family of landlords. For as far back as I can remember, summer started with “turning over” our rental home. We’d tackle a seemingly mammoth honey-do list of painting, cleaning, and updating the house to prepare for a new set of tenants. Pretty glamorous, right? I sure didn’t think so at the time, but now am immensely grateful for those skills. My husband, thankfully, also grew up the same way.
This spring, we took the plunge and purchased our first rental home. We renovated and successfully rented it despite COVID-19. Phew! Believe me, if we could pull off this endeavor amidst an unprecedented pandemic, so can you.
Real estate investing may not be for everyone, and that’s ok. Don’t let the fear of striking out keep you from excelling in the rental game. Here are the first five of my 10 tips that will help you become the owner and property manager of a successful rental property.
1. Run the Numbers. A rental property should serve as another source of income. Unlike purchasing an owner-occupied property, it’s all about your bottom line. That means you’ll have to consider the numbers rather than warm and fuzzy emotions when you’re looking for a property. You’re striving for a positive cash flow. (Hello stability! A rarity in our profession.) Consider the property’s monthly expenses and, in turn, how much the home can garner on the open rental market. This should be the driving force behind your decision. The goal is for rent to exceed your monthly home payment and repair budget. Remember, investors typically need 20% down to qualify for a mortgage. Not there yet? Start saving! You’ll get there.
2. The Rental Search. There are so many layers to this, but in my opinion, numbers are key, followed closely by location. Purchasing a home in an expensive area may help guarantee that the home will hold its value, or increase in price. Yet some prefer a more affordable area where purchase prices are lower, but may not gain equity as quickly. The difference is higher instant returns versus long-term returns. It’s also important to weigh the pros and cons of different property tax rates and potential assessments. You’ll also want to consider proximity to your home if you plan on handling repairs. If a pipe bursts in the middle of the night, drive time is crucial. Although, that shouldn’t happen frequently.
3. Single-Family Homes Vs. Attached Housing. When it comes to single-family rental properties, there may be more long-term expenses such as the roof, siding and potential mechanical replacements. You have to run the numbers when considering a single-family property as opposed to a townhome or a condo in a multi-unit building. Surprisingly, a single-family home isn’t always the way to go. If a condo can give you a higher positive cash-flow, go that route. Attached housing can also be a great opportunity to ease into investing.
4. Renovations. Keeping expenses low is key. We know the value of a little sweat equity. We purchased a house that was a time-warp back to the 1970s. All original everything—none of which is back in style, of course. With a couple thousand invested in painting the house, kitchen, and vanity cabinets, plus new carpet and the addition of a dishwasher (game changer!), we had a different house on our hands. Sure, this required us to front the funds for the update, but we’ll make that back in less than a year with the higher rent we can charge. We know everyone loves turn-key condition properties, renters included.
5. Maintenance. Are you Bob the Builder? If so, than I’m jealous, because I’m sure not. I can hold a paintbrush with the best of them, but drywall and plumbing repairs? Not in the least. Keep your costs down by tackling updates you can handle and hire out anything you’re not comfortable doing yourself—especially issues like plumbing, electrical, and heating and cooling. There’s no margin of error there. Some landlords prefer to hire a property manager; someone who will take a percentage of the rent each month to handle maintenance requests. This will usually cost you around 10% to 15%. Others want to manage repairs on their own. Also, it’s a misnomer that you can’t travel if you own rentals. Sure, the phone may ring in the dead of winter because the heat is out, but it’s not the norm. You can always make calls to HVAC techs from a distance. Consider purchasing a home warranty to address repairs. My parents do and it has saved their sanity. It makes repairs a quick phone call and minor deductible away.
Samantha Jones is an award-winning real estate broker with Coldwell Banker Residential Brokerage in the Chicagoland area. She is a top producer who specializes in residential sales. Connect with Samantha on Facebook, Instagram, and LinkedIn.