I was fortunate enough to own a multi-family property about a decade ago. For whatever reason, someone convinced me it was the right thing to do and would be a good investment. I owe them a debt of gratitude and likely a few six-packs! It was the best financial decision I have made in a long time and has continued to encourage me in the direction of making my money work FOR me!
One of the cornerstone principals in building wealth is creating positive cash flow. You don’t have to go to “Hahvahd” to know that more money coming in vs. going out is a good thing. Rental properties create a great opportunity for that cash flow. A property with multiple units can generate income each month that goes towards the mortgage (more on that later) and other expenses such as repairs and improvements.
There is certainly risk involved in owning rental properties and those should not be ignored. Mainly, the income generated by tenants is only going to work for you if you actually HAVE tenants! Occupancy rates are something to be aware of and should be considered when you’re working out your budget. The bank will certainly consider them when figuring out your mortgage (usually at around 70%), so you should be aware of that as well. There are lots of whack-jobs out there as well. A friend of mine had someone “plant” the walls of his apartment. By that I mean he mixed grass seed in with wallpaper paste and planted grass on the walls. Yeah, he didn’t last long.
Assuming you have tenants (and those tenants are paying their rent!) any improvements you make on the property will increase its value. While this seems like an obvious concept, the beauty of this lies in the difference between improvements on your home and improvements on the rental property. By utilizing the cash flow created by the tenants, you can improve the value of the home without decreasing your own wealth. Much like a business owner will re-invest any profits back into the company, you are taking the income, beyond what is covering the mortgage and other expenses, and reinvesting it into the home. See how smart you are!?
Tax benefits are another of the great features of owning rental property. You can use the improvement expenses, rental expenses, depreciation and mortgage interest all in your favor. In the first year of owning my duplex, I spent over $10,000 in updates and renovations. A big percentage of that was taken right off the top of my income that year and helped out a ton at tax time.
As we mentioned earlier, the bank will consider the occupancy rate when establishing the amount they are willing to loan you for this investment. The other side of this coin is the actual amount you are charging for rent. While you still need to stay competitive within your regional market, as you increase your rents, the value of your property increases. If the bank can see that your property generates “X” amount in rent each month, they are more inclined to lend you more money for that property because its value, in their eyes, has increased. This also comes in handy when it comes time for a home equity loan.
“Any investment is risky, but you need to take that first step to see if it is right for you,” notes Badger Realty owner, Dick Badger. He continued, “Investing in property that will pay you back is a fundamental principal in real estate. Whether your investment capacity is for a small duplex or a large commercial property, the benefits can be seen on any scale”.
The current condition of the real estate market is another factor in the value and appreciation of your rental asset. In the valley, we all understand that property is at a premium and the prices continue to remain strong. The same can be said of rental properties (Have you searched for a rental lately?!). With the basic economic concept of supply and demand at play, as the market appreciates, so does the value and rent-ability of your property.
Lastly, and my personal favorite portion of rental property, is that someone else is paying your mortgage. My first tenants ever were an adorable couple with two small kids. While they seemingly struggled to pay the rent, and almost always paid it at least a week late, they always came through and their check always cleared. They loved having a clean, safe and convenient place to live and raise their kids and I loved having respectful, quiet tenants living upstairs from me. Finding tenants that respect your property and continue to pay the rent is a welcome treat. Having money in the bank each month to make the mortgage payment (and not having that money come from my own personal paycheck) is a godsend.
Rental property is not for everyone. My brother and his wife just moved across the country and sold a house over in Cape Elizabeth that would have been a gold-mine in the rental market over there. The headache and stress was not going to be worth it to them and they decided to sell. I totally understand and appreciate their position. You’ll have to do some soul-searching to see if you are willing to deal with the stress. I think you’ll find that the payoff will outweigh the annoyances.