Real estate investing has become a big part of my life the last couple of years. There are such wonderful generational benefits to owning real estate, and it is something I intend to pursue for the rest of my life. I bought my first rental a couple of years ago, and have made a few purchases and sales since. I’ve had my fair share of ups and downs in the process, so I’d like to share 5 things I would want to know going into my first rental property. If you already own rentals, it might still be worth a quick scan!
100 Year Old Homes are Tough
Major systems like plumbing, electrical, and HVAC are often in need of replacement. I like cosmetic fixers so that I can add value to the areas that produce the highest return on paper and offer the most satisfaction to my tenants. Counters, flooring, paint, fixtures, lighting, etc. This is not to say that a house built in the 70’s or the 50’s would be clear of those larger issues, but I’ve found that the 100 year old houses I invested in were a much heavier lift on the remodel than something solid built in the 70’s that had good bones but needed a full cosmetic redo.
Tax Advantages are Not Just the Icing, They’re the Cake
Depreciation, bonus depreciation, interest deductions, cost segregation studies, 1031 deferred exchanges, these are all ways investors can leverage the tax code to retain their income and grow their portfolio.
Good Debt is a Powerful Tool for Rentals
Getting a 30 year mortgage on a rental property isn’t something to be afraid of if used properly. That debt can be paid down every month by a tenant adding to your net worth. With a sufficient equity position, good debt can be very valuable.
Good Management is Key
Many new investors will self manage to avoid paying 10% to a property manager. This 10%, sometimes more, sometimes less, is the easiest and best way to scale your business and maintain your love for investing and avoid burnout. When I run numbers on a new property, I bake that cost(and all anticipated costs as best as I can) into the rental analysis. The property manager manages tenant relations and all marketing, coordinates repairs, and so much more. A good manager is worth their weight in gold!
Understand Your Objective – Cash Flow vs Appreciation vs Lifestyle
Deciding where to allocate your capital is a hard decision, and with modern technology and good management, the ability to invest anywhere you want has never been more real. In the midwest, properties with lower purchase prices and good rent ratios can generally have higher cash flow but less appreciation. On the coast where properties are more expensive and do not have as high of price to rent ratios, appreciation is usually the appeal rather than cash flow. It all depends on your goals, and those goals can adjust over time as your investing path develops. Some investors will make lifestyle purchases like an Air BnB in a market they wish to visit. This can be done without spending millions. There are some incredible places to vacation in the U.S. that are still reasonably priced and can be profitable with the right investing strategy.
***I’m not a financial advisor or an accountant, these are my opinions based on personal experiences in rental real estate investing.