Buying rental property: How to get rich with rental properties
I have two second cousins who serve in the military — both brave young men I am proud to call my family. We don't always talk much, though. The age gap can be a roadblock and those boys are always traveling around, serving overseas and living on bases in order to fulfill their military duties and finish school.
Still, social media makes it easier than it used to be, and emails are a quick and painless way to stay in touch. So I wasn't surprised to receive an email from my cousin, Michael, asking for advice on his future financial goals.
So, what's the deal? As part of his military compensation, Michael will soon start receiving $2,124 per month for housing and wanted ideas on how to parlay that money into long-term wealth.
But it wasn't random; he contacted me for a specific reason. He and his wife are toying with the idea of buying a property to live in temporarily, then rent out. And since he knew I own rental properties myself, I'm pretty sure he expected me to support this idea wholeheartedly.
Boy, was he in for a surprise.
Too Dumb to be Afraid
It's not that I think he's too young. Truth be told, my husband and I bought our rental properties when we were just a few years older than my cousin (at ages 25 and 26). It's been almost nine years since then and we've learned a lot in that short amount of time, including the fact that we were not prepared to be landlords when we first started out.
I've said it before and I'll say it again — when we bought our rentals, we were too dumb to be afraid. We were too young and inexperienced to understand the many things that could go wrong, and what those things really meant for us. Simply put, we were ignorant.
Asking the Right Questions
So when my cousin asked what I thought about his aspirations to be a landlord, I had a ton of questions to ask — the same questions I wish someone had asked me before I got started. After a short introduction email, here are the questions I sent in reply:
- What is the average price for housing where you live?
- What is the average rent where you live?
- Why do you want to buy a house?
- How long do you plan to live in Maryland? One year? Five to ten years?
- Would you plan to keep your rental property for the long term? If so, what is your plan to manage it from a distance?
- Would you get a 30-year loan?
- Would you hire a property manager? Have you factored that cost into the equation?
- Do you have considerable savings to take care of home repairs?
- Do you have the money to pay for multiple repairs and vacancies all at once?
- Do you have a down payment? Do you plan on paying PMI?
- Have you factored property taxes into the equation? How high are taxes where you live?
After talking through instant message for quite a while, I got answers to most of those questions. First, they planned on living in the house for a few years and intended to rent it out after that. He hoped to hire a property manager to manage the home while he moves elsewhere in the country. And since he could qualify for a VA loan, he didn't need to worry about paying private mortgage insurance (PMI).
However, I could tell he hadn't considered many of the other factors I mentioned — including a savings cushion for those inevitable repairs.
“No, I don't have the savings currently,” he told me, after some prodding.
The Truth About Being a Homeowner
Kristin Wong recently asked whether homeownership is still a good measure of financial success and examined why the appeal of owning a home is currently on the decline in some groups, including Millennials.
“Ownership is a sign of financial stability and freedom, but it seems like a lot of people are questioning the rush into that,” she wrote.
In my opinion, waiting it out seems like a good idea.
I spent my 20s watching shows like “House Hunters,” “My First Place,” and “Property Virgins,” and believing every word. While entertaining, they would have you believe that the housing market always goes up and that there are no bad investments — only good, better, and best.
That was before the housing crash of 2007-2008, a time when people believed that real estate could never go wrong.
Now we know better.
Where Things Break Down
But fluctuating real estate prices aren't the only reason homeownership isn't attractive for everyone. Let's talk about repairs.
Over the course of eight years in real estate, I've replaced a roof and two air conditioners, paid nearly $10,000 for interior and exterior drainage and sump pumps to be installed in the yard of a property with a water problem, and repaired $6,000 worth of damage left behind by a tenant.
Most of those repairs were paid for from the profits I brought in from our rental properties or insurance, but not all of them. Unfortunately, being a landlord (and a homeowner) means shelling out some of your own money for repairs from time to time.
The fact is, things break. Often. And as a landlord and homeowner, it is your sole responsibility to fix them when they do.
Far too many people rush into homeownership without realizing the financial implications of doing so, and it is generally to their detriment. Most experts recommend having an emergency fund of three to six months to take care of unexpected expenses, including home repairs.
But landlords need far more than that. Owning rental property generally means having multiple furnaces, air conditioners, and roofs to take care of, and more money to go with it.
Sometimes Your Best Route is to Think Long Term
After nearly scaring my cousin to death with all of these issues, I gave him the best advice I could muster.
“Rent the cheapest place you can while you're young,” I said. “Put all of your money into savings and investments and don't look back. One day, when you have the money to own a home, and perhaps rental property, you can reassess.”
“Sometimes progress means taking it slow,” I added.
That advice may sound funny, but I've found it to be true.
When I was 25, my thoughts on making progress in the wealth department were entirely different than they are now. In those days, progress meant taking huge risks and making moves. Progress meant doing something and making things happen — not just waiting to let things happen to me.
But now that I'm older, I realize that the opposite approach usually works best. I don't regret buying our rental properties or becoming a homeowner, but I also realize that I wasn't prepared at the time. We would have been better off if we had more savings ahead of time, for example, and done a whole lot of research. Instead, our success can mostly be attributed to luck … and good timing.
The truth is, sometimes progress is boring. Sometimes the best thing you can do for yourself is literally nothing, except to see where life takes you and make the best decisions you can with the information you have at the time.
One of the best decisions you can make is to keep saving because, as we all know, having money means having options — the option to stay put and rent, the option to buy a home or even to become a landlord if that's what you really want to do. Especially when you're 25 years old, the more options you can give yourself, the better.
Are you building wealth by taking risks or are you taking time to plan your investments more carefully? Has your idea of making progress on building wealth changed over time? Do you regret any of your financial decisions?