Owning a rental property and collecting passive income can be one of the best things to happen to your real estate business. That being said, it can also be one of the most difficult to manage if you are not prepared. The idea of running to the post office or to your mail box every month and finding money without have to work for it certainly sounds appealing, but it is not very realistic. There will be problems along the way. However, there is a way to mitigate complications. Rental properties can enhance any portfolio, but they will not run themselves. Taking on rental properties requires the proper education.
The common misconception with rentals is that you will be rolling in the dough as soon as you find a tenant. You may certainly have cash flow, but you will probably not be able to retire from it. Mortgage payments, taxes, insurance, maintenance and other miscellaneous expenses will chip away at any overage, and often leave you with less than you thought. Before you look at any rental property, you need to know every expense that you will be paying, for how long and whether or not it can change over time. The windfall of cash flow that you think you have may not be the case once the true expenses are taken into account.
Due to the lack of an overwhelming amount of cash flow, most landlords will be forced to be on call if issues arise instead of hiring a property manager. This means that, as the owner, your phone may ring 24 hours a day/seven days a week. If the dishwasher suddenly starts spewing water in the kitchen, you will get a call. If the washing machine stops working, you will get a call. If the furnace goes off in the middle of a snow storm, guess what…you will get a call. How you handle these situations will largely define the success you have in the property. If you neglect these calls and deal with them only when it’s convenient for you, your tenants will feel the same way about sending in the rent. Your property can be problem free for nine months and in the course of a week have three issues to deal with. This is part of the responsibility of owning a property and being a landlord.
Because of the unexpected nature of owning rental property, you need to have ample reserves in the event something unexpected comes up. Inevitably, something will come up when you least expect it. Some of these items can be minor in nature, but others could cost thousands of dollars. Regardless of the size, it will be up to you to take care of them. If you don’t have money available to deal with them when they come about, you will be forced to scramble around. This could lead you to opening credit cards, borrowing money or pulling from accounts you weren’t prepared to. Just like that, a profitable property can turn into a black hole and impact every other area of your investing business. With every rent received or deal you close, you need to allocate a portion into a reserve fund for every property. Hopefully you will never have to dip into it, but the odds are that at some point you will.
Owing a rental also means doing things all the time to make sure your investment is protected. This means keeping up with seasonal maintenance on the furnace and water heater, taking the leaves out of the gutter in the fall and cleaning the chimney before winter hits. These things may seem minor in nature, but if you neglect them they will eventually come back to haunt you. In addition, you also need to take care of the lawn and exterior of the property. In many respects, you need to treat your rental property better than you treat your own. If you do not protect your investment and do items to improve the value, the strength of your investment will diminish over time.
If you can build a rental portfolio, you will be well on the path of long term wealth building. Getting to that point, however, will require you to do many things you may have never expected. The benefits of owning a rental property greatly outweigh the work required, even if it doesn’t seem that way all the time.