Real estate can be a great source of income, whether you’re looking for steady, supplemental retirement income or a secure financial future. Most residential rental property owners want to become financially independent, and real estate is a proven investment strategy for achieving that goal. But after you sign your name on the dotted line and officially enter the world of residential rental property ownership, you face some tough decisions. One of the very first concerns is who handles the day-to-day management of your residential rental property. You have units to lease, rents to collect, tenant complaints to respond to, and a whole host of property management issues to deal with. So you need to determine whether you have what it takes to manage your own residential rental property or whether you should hire and oversee a professional property management firm.
Owning investment real estate and managing rental units are two separate functions, and although nearly everyone can invest in real estate, managing it takes time, special skills, and the right personality. In this chapter, I highlight the importance of relationships with people, because property management is really people management. I also give you the lowdown on some of the advantages of owning residential rental property and help you assess whether you have what it takes to manage your own property.
Understanding That Managing Residential Rental Property Is a People Business
Some rental property owners find themselves managing their own properties without even knowing what management requires. Managing the physical aspects of your properties (the buildings and common areas) and keeping track of your income and expenses are fairly straightforward tasks. But many rental property owners’ most difficult lesson is the management of people.
Rental housing management requires you to deal with many more people than you may think. In addition to your tenants, you interact with rental prospects, contractors, vendors, suppliers, neighbors, and government employees. People, not the property, create most rental management problems. An unpredictable aspect always exists in any relationship with people.
Identifying the Types of Real Estate Owners
Residential rental property management has been around for hundreds of years, ever since property owners first realized that they could earn income on their land and buildings by renting them to tenants. These days, the title landlord is no longer bestowed only on the landed gentry. There are as many different ways that people become property owners as there are types of rental properties. Although the nature of the business has changed over the centuries, today you can classify rental property owners in two categories: the inadvertent rental property owner and the long-term investment rental property owner. No matter which category you find yourself in, one thing is constant: The key to your success is sound management.
The inadvertent rental property owner
Many property owners find that they’re in the rental housing business almost by accident. Although solid reasons to invest in and own rental real estate exist, many owners begin their real estate careers by chance or through circumstances beyond their control, such as the following:
Some people inherit a house or condominium from a relative and don’t want it to sit empty.
Other people transfer to a job in another city and can’t sell their old home, so they’re forced to rent the property because they want some income to help cover their new mortgage and operating expenses.
Some folks who are looking to own their own place find a great duplex where they can live in one unit and rent out the one.
Other owners are upside down on their mortgage (owe more than the house is worth) and can’t sell their property for enough money, so they rent it (while finding more modest accommodations for themselves) until the market improves for sellers. Note that this scenario also applies to some couples who are going through a divorce.
Whatever the circumstances, the bottom line is the same: The property owner hopes to generate sufficient income from the property to cover the debt service and all operating expenses, and possibly even to provide some cash flow, along with tax benefits, appreciation, and equity buildup.
The buy, fix, and flip or refinance owner
If you have ever had insomnia, you have likely seen infomercials about people who have made great fortunes buying and flipping properties. Although this concept is fundamentally sound, it is much easier said than done. Just as gamblers tell you only about their great wins, the reality is that many pitfalls await the novice. But there is a place for this type of real estate investor — another category of real estate ownership in which a competent and savvy property manager can make a real difference.
In a solid real estate market, you often find properties appreciating at an annual rate of 3 to 5 percent — a solid, sustainable rate of appreciation that rewards investors with long-term investment horizons who take the buy-and-hold approach with their real estate assets. This buy-and-hold strategy works and should always be the foundation of your wealth-building.
But in some areas, the demand for housing is so great that the limited supply of new and existing properties on the market is insufficient to meet demand. It’s in markets with high demand and rapidly escalating prices that real estate speculators with a buy-and-flip strategy tend to appear.
The buy-and-flip strategy can also work with existing homes or condominiums that the investor can purchase from a motivated seller at a wholesale price that’s below market value. The investor may not even have to close escrow before finding a buyer who’s willing to pay retail price. Some minor cosmetic work or simple improvements may be needed before reselling, but typically, buy-and-flip investors really make their money when they buy at a discount, renovate and then locate a buyer at full market value.
With the buy, fix, and refinance strategy, you invest in rental housing properties to which value can be added through repairs, upgrades, and improvements. You take a distressed property and turn it into a solid, well-maintained property with a good, stable tenant. Over the years, with increased equity in the property and as long as interest rates are attractive, you could refinance the property if you so choose and use some of your equity to make other real estate investments.
The long-term investment rental property owner
Although we have seen real estate demand ebb and flow during up and down cycles over the past 12 years, and lately even through a pandemic, residential real estate remains one of the best, most reliable, and most consistent investments in terms of long-term return. For many current landlords, of course, the popularity of real estate started with the tremendous increase