Becoming a Successful Entrepreneur

Sunday, August 28, 2005

Owning Rental Property

Owning rental property can be very rewarding financially. It can also be a pit to toss money into for a long time. The upside of owning property is obvious. You do a monster leverage loan from the bank (called a mortgage) and then have someone else pay it off while your asset appreciates. Sweet. As long as:

  • You can come up with the 25% of the house value you need for the down payment;
  • You can find half-decent tenants relatively quickly, and they don’t end their marriages partway through their rental lease;
  • The house does not need major repairs, such as a new roof or a major renovation to repair the flood damage left over from the frozen, burst pipes;
  • You can maintain the property over the next few years and do not have to sell into a falling market;
  • You recognize that the net rental proceeds and eventual sale of the property are taxable events; and
  • You don’t mind heading over to the house at 4 a.m. on a Tuesday morning in January because the furnace stopped working OR paying some expensive 24-hour repairman to go for you.
Becoming a successful rental property owner requires you to think like a business person and be prepared to devote time and energy to keeping tenants happy. You need to think about the best locations, which may be different for a landlord looking for tenants than for a homeowner looking to raise a family. You don’t necessarily want property in an expensive area, because it’s likely that those who can afford to rent in the area can also afford to buy. The property should be relatively central, or at least close to public transportation. And you need to have the resources and time to handle repairs and upgrades to the property. You also need an emergency fund to cover the mortgage during those periods when you don’t have renters. A rental property is really more like a small business than an investment. Proceed with caution.

- Information quoted from "The Investment Book", by Kevin Cork

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