It’s hard to go a week without seeing a video or having a conversation with another person about how owning rental property and collecting passive income is the key that will unlock an unburdened future. The moment your algorithm catches wind of you wanting to own some extra property and rent it out to a nice family, Instagram, and even Facebook now, will be inundated with get-rich-quick guru’s talking about how they own 30 properties and drive a Bentley – if you buy their program, you too can have those riches.
Before you purchase that get rich quick scheme and start buying up all the property in your town, consider how risky it can be. Sure, the bank may give you the loan and the income equation might be looking good, but there are so many factors that could go wrong that it’s good to sit back and consider.. Consider also the impact you could have on your community by providing housing or a nice place for a family visiting town to rent for the weekend.
It’s time to key in on the word risky. In the first time homeowner class that none of us received in highschool or college, we should have learned that you need a bit of cash, good credit, and a stable job to pay the mortgage, property insurance, etc etc.
Due to the recently glamorous nature of rental properties, I feel it’s important to alert folks looking to buy an income generating property that this same checklist for becoming a home owner applies, and then some! I will not be diving into the mathematics of a rental property because there are simply too many equations that investors use to find out whether or not a property will make financial sense.
How stable is your current living situation? This may go without saying, but in chasing the dollar, I have seen folks go to extreme lengths to make a short term or long term rental become cash flow positive. Some gurus online will even tell you to crash on a friend’s couch or live in a camper van so that you can rent out your current home. This, over the long term, could leave you friendless, exhausted, and temporarily homeless.
Are you prepared to sacrifice big in order to learn? Leveraging your time and extra income is going to be the first card to play when owning a property. In those first few months, or longer, of fixing up, taking pictures, verifying possible tenants, you will be spending money, footing the bill for the mortgage and utilities, and there will be no extra income yet from the property.
Also, that simple bathroom renovation may in fact not be so simple. Same thing with the roof you and the inspector thought was in good shape, it’s not. One episode of any fixer upper HGTV show will illuminate on the variables a house is going to throw at you, but be prepared. If you ask any handy construction person if they know all there is to know, they will tell you “no” right away. Every successful rental property owner I know either has a team of contractors at the ready or has the knowledge of a team of contractors. But, do you think those people were just born with that knowledge or those connections? They had to start somewhere too!
Cash cash cash. I can’t say this enough. Anything goes wrong it’s on you to fix. Tenants go feral and start peeing in jars and stop paying the water bill? It’s up to you to float the cash to get the water turned back on and possibly pay for legal help to get them evicted (and hazmat suits to clean up after). Economy goes belly up and people stop vacationing to your town? Be ready to sit out a period of time you thought you’d be cash flow positive.
It’s not all bad… I don’t intend this article to serve as some scary warning to would-be rental property owners, but I talk to so many people that do not think through all of the work and money required to achieve the passive income dream. When I meet someone that’s experienced or fully prepared to dive in, these points I covered are the things they talk about.
If the property is purchased right, you have the resources, and you eventually get the perfect tenants, having a rental property is a beautiful thing. You’re either providing affordable living for families in your town or allowing folks to visit and experience the area you love so much. Up here in Northern Michigan, the need for stable housing is at an all time high and without these landlords, us locals might be in trouble. After reading this article and considering the content, find a good Realtor and write up some offers!
Eric Senff Realtor 