If you are thinking of owning investment property, here are some best- and worst-case considerations
Owning investment property is a dream come true for many people. But, it only takes one difficult tenant to turn that dream into a nightmare experience! And, navigating complicated ordinances and laws — that are often restrictive and unkind to landlords — can drive any property owner crazy!
Most landlords embrace the responsibilities that come with owning investment property. Who wants to be an insensitive landlord, or seen as money-hungry, greedy and only caring about collecting rents? Unfortunately, it’s the landlords who abuse investment property ownership that tend to make life difficult for the good landlords!
As a real estate professional, I’ve advocated on behalf of tenants AND landlords. When rental housing laws and guidelines are fair, the playing field is level, and everyone wins. In this blog post, we’ll explore the experience of becoming a landlord with your first investment property transaction.
Determine your “why”
You might want to make short-term investments like flipping properties for a profit, or, you may want the long-term income-generating potential of owning many units. Some people buy multi-unit buildings, then live in one of the units, while rents from the other units supplement their income and help pay the building’s mortgage, taxes and other expenses.
Whatever your motivation, if you are planning to invest in real estate — single family, multiple units, or commercial — hire a real estate or investment professional who understand the ins-and-outs of rental income property and can help you analyze whether the acquisition accomplishes your immediate and future goals.
Buy vacant or occupied?
My recommendation: Vacant investment property tends to be the best bet. That’s because you can establish market-rate rents from Day One, conduct your own tenant screenings, and establish the terms you want tenants to live by, based on your circumstances as a landlord.
Another good scenario: A property with units that already have market-rate rents established.
Buying a property that is already occupied could have you inheriting long-term tenants who are paying less than market-rate rents. This poses a big issue in rent control cities. Rent control means rents can only be raised by certain amounts per year. Owners governed by rent control are often unable to raise rents enough to cover the debt service, the costs to maintain a building, property taxes and in some cases, utilities. When these costs increase at a higher rate than the landlord’s ability to raise rents, the imbalance leaves the owner covering the shortfall. Meanwhile, the tenant proceeds to build a comfortable lifestyle on the predictability of minimal increases, while the owner is being run into the ground!
The annual Consumer Price Index, or CPI, which may average between two to four percent, governs rent increases. Sometimes, a percentage of the building’s capital improvements can be passed on to the tenants. NOTE: proving capital improvement costs, and, calculating how much can tenants can bear, is a time-intensive process with housing authority officials!
Other important tips:
- Talk with your CPA/tax consultant, or financial planner. Get a firm understanding of your tax consequences, both benefits AND obligations. Ask about 1031 Exchange guidelines.
- Determine your short- and long-term goals.
- Gauge the best time to buy or sell (watch the “buy low, sell high” cycles)
- Get familiar with county, city, state laws/ordinances affecting income generating, investment property.
- Understand rules and guidelines around rent controlled properties
- Study procedures and courses of action surrounding landlord/tenant disputes.
These are only a few of the things that come with starting your quest to own investment property. Investing in real estate is a proven, favorable investment strategy, but only when the investor does their due diligence, and analyzes whether the desired return on investment is possible.
Find good advisors, get informed, and you’ll make good investment property decisions, and enjoy the business of being a landlord.
Happy wealth building!!!