You’ve Decided to buy Rental Property. Congratulations…now what?
Most people would agree that owning revenue property is a good thing. In fact, one of the best ways of building sustainable and generational wealth, hedging against inflation, and creating a future income stream is through acquiring and managing real estate. I am going to assume that you are going to be a “hands on” real estate investor, so here are some ideas that you may find helpful moving forward with your new landlord career. This opinion article is focusing on residential revenue property ideas versus commercial property, although there are some principles that do cross over.
First of all what makes a good revenue property? Anything can become an income property, but some are better than others. At the threat of sounding like “captain obvious” the first important factor is that the rental income that can realistically be generated should exceed the expense of holding that property. Yes, the value of the asset and the appreciation of value over time is crucial, but the property should at least carry itself on a monthly basis, or achieve a minimal level of return that you expect (realistically of course).
Generally speaking, the more units there are under 1 roof the higher the return. That’s why a 4 plex can be an attractive purchase as you have cash flow from 4 different tenants, but still fall under the residential umbrella (unlike a 6 plex or 12 plex for example which have more commercial implications). Having more units can help offset the risk of vacancies too because if 1 unit goes empty another one can help keep things afloat. So suited homes show good return with their main level unit and basement unit. Garages are also potentially a good secondary income source, as there is a need for convenient storage space in most markets. The down side of managing more units though is that it is potentially more work/headache from a landlord’s perspective. But nobody said that running your rental homes would be a cake-walk!
Another criteria of a good revenue property is the quality of the home/property itself. The current condition of the building, the set up of the rental accommodation, not to mention the location, all factor in to the value as well as the rentability of the asset that you are investing in. So accordingly a “nicer” home is going to cost more. The tricky part of it of course is that the value/price of the property has to work within the revenue/expense model. Otherwise you are venturing into real estate speculation investing which is a different kettle of fish altogether.
Your tenant is kinda like your business partner, and there is no magic guidebook on how to find perfect tenants. Your ability to attract and select a good tenant will come from experience. At some point you gotta just jump in a learn on the fly. When I say a good tenant I simply mean someone who pays the rent on time; respects the property and other tenants; does not create disturbances; and communicates with you on any important issues with the property.
Written rental agreements are highly recommended, but you can have a verbal agreement too. Either way any agreement falls back to the Albert Landlord and Tenant Act when in doubt. A written agreement doesn’t have to be a 10 page document outlining every possible regulation that you can think of. Just a simple 1 page agreement that highlights the terms and timelines of the tenancy, as well as the basic responsibilities of the landlord and the tenant, will work just fine. Rules are there for a reason, but as a landlord there will be times when flexibility and reasonableness will be required.
There are 2 schools of thought on what to do with the equity of a rental property. One thought, and this is generally what I lean towards, is that the ultimate goal is to have the debt paid down so that the monthly rental income becomes real cash flow for you…particularly in “retirement.” This requires a steady and patient approach of managing the property over the years as the mortgage gets paid down (assuming there is a mortgage). Most of the cash flow at first will go toward debt and ongoing maintenance.
The other approach is to “suck the equity out” whenever it is available. Basically the rental property becomes your personal line of credit that the tenant is paying for. Admittedly it is nice to have a lump sum of capital available every few years to do with what you please (home renovations, kids’ college expense, purchase of another property), but the down side of this is that you defer any real cash flow every time you refinance a property. It comes down to personal preference as there are tax advantages and disadvantages on any approach you take (talk to your accountant).
So there you have it. Some points to consider when buying rental property. Of course there are lots of other factors that come into play (type of financing, taking on existing, and what type of property to buy just to name a few). But one thing my real estate broker told me years ago that still rings true is… “don’t wait to buy real estate, buy real estate and wait“. Let’s start YOUR adventure in revenue property today!