Investing in Rental Properties
By R Scott Corbridge, MPM, RMP
Are you considering purchasing a rental property for investment? Good idea. We believe that now is the best opportunity we have seen in many years to purchase property in Sarasota. Five years from now, many will look back and wish they did. Interest rates are still at historical lows and property values have tumbled to 2003 or earlier price levels. In many cases real estate is on sale at up to 50% off!
Our philosophy of investing in Real Estate is to take a medium to long term perspective, purchase the property in a way that will provide a positive cash flow to cover repairs, insurance and taxes, then sit back and let other people pay off your mortgage! Its a Beautiful concept!
A smart investor of 200 properties once told me “You can’t over pay for real estate that will pay itself off in 20 years”. “One day you will wake up with your properties paid off and life will be good.” It doesn’t matter what you paid for it. It’s a forever Annuity with returns that if done right, rivals any other investment out there with significantly less risk. It doesn’t even matter whether the value of the property decreases (which over the long term is hard to imagine, especially in Florida).
Of course if you purchase right, and your expenses are covered, you can also ride the Appreciation Train (or gravy train since appreciation is like icing on the cake). I know that train has been in reverse lately, but currently all signs point to a bottom with no where to go but up over time. That means that combining the current low point in the market plus historical interest rates which can be locked in for 15-30 years, now is the perfect time to take advantage of purchasing investment property. Keep in mind there are 78 million Baby Boomers getting ready to retire in the next 10-15 years and Florida sunshine is an irresistible draw for many of them.
The smart investor will minimize risk in the way of appreciation in the short term by taking a long term perspective and making sure you are not out of pocket financially while you wait. If, as is likely, the property continues to appreciate over time, you can sell out and take your gain. Your risk is minimized in that even in the worst case scenario, if you can’t sell, you can just hold on while the mortgage is paid off by your tenants. Since the property will eventually be paid off, there is little downside risk.
Also, keep in mind that Real Estate is one of the only tax shelters remaining. Its just smart investing. Stocks can go to zero. No one has ever seen that happen to real estate (unless a toxic waste dump is discovered in your back yard). It will always have value and the ability to produce income.
One Caveat though that must be considered (and this is the difference between winning and losing in real estate investing): When I spoke of minimized risk of owning rental property, there are steps you must take to avoid potential problems. Have we seen investors who get hurt owning rental property? Yes of course. Many! But these risks can be eliminated by the smart investor.
We have seen many, many investors who come to us with unrealistic expectations of what their property is worth on the rental market. Usually, this is due to purchasing their property from a real estate agent or bank which is less than knowledgeable about rentals. This is usually the difference between positive and negative cash flow (the most common cause of pain to an investor). Important considerations regarding your purchase which must be addressed included: What can I buy to insure the highest long term demand? What property characteristics are consistently considered by prospective tenants? How much rent can I conservatively factor into my financial equation? What are the long term prospects for rent increases?
Also critical to your success is maximizing your revenues while maintaining the condition of your property. If you do not use a Professional Property Manager who specializes in rental management through education, training and long term experience, you could end up with an expensive disaster on your hands. The minefield of owning rental property is extensive and fraught with risk. From legal liability to tenant screening and oversight, to efficient maintenance, you can’t afford to trust your investment to someone who dabbles in rentals or has not take the steps necessary to remain on the front line of education, technology and experience.
I can’t stress enough how critical it is to work with a Realtor who is also a Qualified Professional Property Manager both in acquiring the right property and also in professional property management. If you combine knowledgeable purchase with capable and professional management, the rewards are unparalleled.
Lets look at a few examples: Return on Investment Examples