Part II – Building Wealth with Real Estate Part II: Rental Property
This article was also published with permission from Lisa Priest in the Saturday, November 22, 2014 edition of the Palestine Herald Press.
A “buy and hold” investment strategy is just like it sounds—buy it and hold it (typically as income-producing rental property). Rental property is a great way to create monthly income and will also yield a payoff should you ever decide to sell. The market in Palestine right now is ripe with investment opportunities for anyone wishing to get into the “rental game.”
ADVANTAGES OF RENTAL PROPERTY
- Increasing net worth—Unfortunately, I do not have a crystal ball; but the good news is that, historically, real estate values appreciate over time.
- Funding—You can use the equity gain in your real estate holdings to finance more properties (or other investments).
- Monthly Income—I wish I could call it a “passive income stream,” but unfortunately I can’t (unless you’ve hired a property manager, then it is pretty close!). Let’s face it though, steady monthly income is great no matter what income bracket you fall in! Don’t get me wrong, it is not all fun and games, there will be some months were it will cost you to have the property, but vacancy costs need to be part of your business plan as you look at the big picture. Try to think of the short term loss as a long term gain.
- Liquidation—If you ever find yourself needing to sell, you can sell. Rental property is not a liquid investment strategy, meaning that you aren’t holding the cash in hand (because the money is tied up in the home’s value) but if you ever need the cash, you can get it once the house sells.
- It’s tangible—Unlike the stock market, your house is tangible, not just a piece of paper. At the very least, even if the house were gone (not to be a worst case scenario person here, but hey…I’m a realist!), there is still value in the land.
The main downside to rental property is the property management end—it is time consuming and can overrun you, if you let it. If managed incorrectly, a rental property can quickly become a horrifically expensive albatross. Property management duties include: locating and screening tenants, collecting and handling rent monies, evictions and move-outs, tenant issues and relationship management, repairs and long term maintenance, advertising expenses and also staying legal—making sure all leasing paperwork follows the legal statutes and ensuring the property is compliant with all safety codes.
Rental property is not for the faint of heart. If managed correctly, rental property can provide steady monthly income and simultaneously increase your net worth. If the thought of managing the property is too much, hire a property manager. A good property manager will make your life easier (this is an understatement!) and make your investment profitable. A few other things you need to keep in mind while working on your investment planning is to account for vacancy costs. These costs can include utilities, remodeling, cleaning and mortgage payments. A good rental investment plan will have these vacancy costs built in to the income projections for the year. In a perfect world, there would be no vacancy costs; but it will happen, so plan for it. Some other costs to consider are property taxes and property insurance, both of which will always be a cost of doing business. I advise my clients to try to have at least 3 months worth of property expenses, that way you are prepared for most problems that could arise (of course, the more emergency money you have saved, the better!)
Don’t run away scared yet! There is a lot of planning that goes into a successful rental investment strategy. Rental property is a world all its own and one that has the potential for high profits and success (especially in this market). However, once you’ve got the numbers working, rental property is a great way to increase your net worth and simultaneously receive a monthly check—a combination that not many investment opportunities provide.
Lisa E. Priest is a self-proclaimed Real Estate addict, Property Manager and an East Texas Area REALTOR® with Picket Fence Realty, Inc. You can reach her via phone or text at 903-948-3343 or email Lisa@rentpalestine.com or at BuyPalestine.com.