Investors are quick to rave about real estate, and owning a home – or multiple homes, for that matter – is deeply ingrained in the concept of the American Dream. Investing in residential real estate can be a great way to generate passive income. However, there are some important points to consider before jumping into the world of real estate, especially for those thinking about becoming a landlord.
It takes grit
One of the best ways for an investor to maximize cash flow from a property is to manage the property personally. This can mean late-night calls for faulty heaters or air conditioners, burst pipes, electric problems and more. The possibility of things going wrong with a property that will require a landlord's attention is seemingly endless, and this is especially true when dealing with older homes.
Another option is to hire the services of a property manager. This will dig into profit margins, which are likely to be tight at the onset. However, hiring a property manager can take some of the stress out of the process. The property manager will field and respond to emotional emergency calls from tenants and handle other day-to-day activities of running the property. Investors in multi-unit properties may choose to offer a free or low-cost apartment to the property manager as an incentive or a way to reduce salary or the percentage of ownership.
Account for maintenance costs
Those burst pipes, leaky roofs or electrical abnormalities can be signs of more serious problems. In many cases, according to local laws, these problems must be addressed by a licensed professional – and licensed professionals don't come cheap. A smart investor will want these issues taken care of by a competent professional to get them out of the way fast and with as few headaches as possible. Even relatively simple repairs can result in thousands of dollars of billable hours. So, an investor needs to have reserves to cover these unpredictable costs.
Consider macro trends
It's easy to get caught up in the romanticism of homeownership – all the more with single-family homes. In the midst of these heartfelt local connections, an investor needs to think on a much larger scale. For example, many cities in the Midwest are experiencing population loss as job-seekers migrate to big cities.
As companies merge and consolidate and we see more big-box stores than mom and pop shops, this macro trend is likely to continue. This can mean reduced demand for housing, lower rents and lower overall value should one choose to put the property up for sale. An investor would be better served purchasing property in an area with an upward population growth trend.
In conclusion
Rental properties can give you a respectable return for your down payment, but it's not always easy money. An investor – specifically one who plans to manage the property personally – can have a real challenge on their hands when the unexpected inevitably occurs. This can be a great opportunity for someone who has handyman abilities, a professional license and a strong stomach. However, if being a residential real estate owner or landlord sounds too intimidating and one is still interested in the market, REITs – Real Estate Investment Trusts – are another, simpler path to go down.