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The idea of passive income excites just about everyone. The million dollar question is where doest that passive income comes from? If you’re reading this blog, chances are you’re thinking real estate. Perhaps you live in a home now and you’re considering selling it. Should you hold on to that property as a rental or sell it and take the equity? Or, maybe you have a family property that is just sitting there. Do you turn that into a long term rental? The answer is – it depends. Here’s a few questions to ask before making the decision.
First, do you NEED the equity from your current property to buy a new home? If yes, take it and save your rental property for another day. Don’t let your excitement make you house poor.
If that one seems too obvious, here’s one to really mull over – are you READY to be a landlord? Renting a property is more than an investment, it’s a part time job. Do you have the stomach to evict a bad tenant? Are you ready to receive calls and texts at any hour about leaky pipes and broken light bulbs? Do you have the time to learn the laws that dictate housing in your state?
Not everyone is built to be a landlord. It’s hard to look someone in the eyes, who just lost their job, and tell them if they don’t pay rent on time they have to leave. That is not easy. Time management alone can be a hassle - finding contractors, parts, appliances, etc. These are all the not-t00-sexy elements of the job that you have to be willing to take on.
Next, know thy numbers. There are a lot of expenses that go beyond the mortgage. These include vacancy periods, repairs, maintenance, property management, and admin costs. As a rule of thumb, expenses will run you about 50% of the rental income. If the rent is $1,000, and your mortgage payment (P&I) is $400/month, you can expect roughly $500 in additional expenses, leaving you with a cash flow of $100/month.
So before you make a decision, make sure you have an understanding of what rental prices are averaging in the neighborhood. What is the typical vacancy rate? What are the typical turnover costs between tenants? Not every house Is meant to be a rental. On the other hand some houses are so great that they practically rent themselves. Make sure to know what category you are in.
If after reading this you think, “Eh, this all seems to tough” don’t be discouraged. There are a number of options for real estate income. You could always hire a property manager to take care of the day to day. Or perhaps hold off on getting a rental property until your own home situation is on solid ground. There are a lot of options out there, and the key is to make educated decisions based on finances, market value, and risk.