Investing in rental properties can be profitable provided you start out with a strategy and clear goals. Some of the advantages of real estate investing include: Diversifying your portfolio with an asset that will be a hedge against inflation Reducing your tax burden while generating income/steady cash flow Owning hard assets that provide an excellent basis for financing other investment opportunities Mitigating legal risks thanks to a well-defined legal structure, such as a limited liability corporation (LLC) But real estate can be a tough business, and you’ll want to consider the pros and cons before you begin. What are Your Investment Goals? Most people who buy an investment property to rent have one of two main goals: Either they want to invest to generate cash flow (passive income), or They want to achieve aggressive equity growth. Let’s look at the pros and cons of each. Investing to Generate Cash Flow This is usually a longer-term approach. Buy-and-hold properties generate greater cash flow and are less management-intensive. You’ll have more stability with lower tenant turnover, too. However, while property values may grow with time, a more aggressively managed property will see a greater increase in value in the same period. On the other hand, it’s easy to let your attention slip. Because of that, we recommend a compulsory review of the property on a quarterly basis. This will help you preserve your investment, generate top dollar in your market, and avoid nasty surprises. Investing to generate cash flow can be the right choice for you if: Your goal is to have a revenue stream from rental property Investing in and holding real estate is a core part of your long-term financial plan You want to build equity to finance other investment opportunities Investing for Maximum Sales Price or Value for Refinance If you’re looking for a shorter-term gain and are not so concerned about ongoing cash flow, this might be the right approach for you. The advantage here is that you’ll receive a higher valuation for a sale, or to recapitalize and re-invest to generate maximum returns. You’ll realize gains more quickly, freeing capital for other purposes. However, you may see higher tenant turnover because rents will be higher and this will negatively impact the cash flow of the property. You’ll have the challenge of finding tenants and maintaining the property, too. There will also be a higher risk of cash losses because of higher fixed costs and you may not be able to take advantage of long-term capital gains rules. Investing for a maximum sales price or value for refinancing might make sense for you if: You are looking for ways to increase your short-term investment returns You are not looking to live off of, or depend on the cash flow from your investment, in the current period The stock market is not offering good investment prospects in the short term Which Approach Is Right For You? Which approach you take depends on your unique situation and goals.
One of the biggest headaches a property owner or investor faces is tenant turnover. The root cause is often unhappy residents. They are more likely to abuse or neglect your property and may not report a maintenance issue until it becomes an expensive repair. They can give your building a bad reputation and make it difficult to find new residents. Furthermore, too many empty units make it difficult to raise rents for the units that are occupied. The good news: the best weapon you have is a customer-focused property manager who: Communicates with you, vendors, and tenants frequently Is transparent and does not withhold information Treats everyone with respect and honesty Does the right thing and looks for ways to solve problems, not escalate them Attends to maintenance issues promptly Keeps you informed, so there are no surprises Find a Hidden Gem: Build Your Property Manager's Skills and Confidence What happens if your property manager is not up to the job? Sometimes all it takes are simple changes on your part to discover your property manager has potential after all. Adjust your expectations. Have you been clear and consistent from the start? Are you expecting your property manager to work the way you do? If either of these is true, reassess your behaviors first. Learn more about your property manager, especially now with the challenges presented by the coronavirus. Even if you already have a good relationship, reach out and find out how they are doing. Discover what has changed for them. They may be facing eldercare issue, homeschooling for young ones, and their own fears, stresses, and uncertainties. Understand their underlying concerns and, if necessary, adjust your approach and expectations accordingly. Level with them. It is not fair if you are not honest and open with your property manager. Give feedback as promptly as possible. Use specific examples whenever you can. Ask for their thoughts, explain what you observed without blaming your manager, then give guidance for improvement. For example, "Ms. Jones seemed pretty upset. What do you think was going on?" After hearing your property manager out, provide feedback, and suggest a better way to handle the issue. Do not lecture. Make this a two-way conversation and an opportunity for learning. Help them learn to self-correct. Ask questions like, "How do you think you could do better in the future?" or "What else could you do to avoid this the next time it happens?" Build self-awareness and confidence by showing you trust they can improve. Stay in touch. It is your job to communicate with your property manager and keep them in the loop. This is not one of those times where "no news is good news." Schedule regular contact and stick to the schedule. This critical touchpoint communicates respect and encourages openness. Our Secret for Success At Borba Property Group, we work with our heads and our hearts to help owners and investors overcome challenges like tenant turnover. We believe in keeping our team of top-notch property managers happy, starting with hiring the right person for the job. Then we ask them to embrace our family spirit, have fun, play as a team, and acknowledge a higher power that moves our company. If these sound like the type of managers you would want for your property, contact us to see how we can help you.
