Rental Property: Dynamite or Dud?
Updated: Jul 11, 2019
Owning rental property has historically been one of the easiest ways for an average Joe to create wealth over the course of his or her life. How many times have we heard of a person with little or no education that created a small empire through starting a business or inventing a product?
For every one of those stories, there are dozens of instances where someone invested in an inexpensive rental home, and then another, and then a duplex, and over the course of 20 or 30 years amasses a real estate portfolio that makes them a millionaire on paper.
Many continue working a regular job while allowing the equity to build in their properties until one day when the mortgages are paid off and they begin to receive substantial cash flow, often opting to retire and allow the passive income to become their primary income. Does it always work out that way? Does anything always work out well for every person that endeavors in a new venture?
The landscape of residential property ownership has been shifting for decades and for various reasons. The most recent US Census data as of this writing shows national home ownership at 64.8%.
It has been on a steady decline since the housing market crash of 2008, and is statistically similar to homeownership rates in the 1960’s.
I have a senior friend who told me that his mortgage payment, which would have begun in the 1960’s, was somewhere in the $30.00 per month range. Most people under the age of 60, including myself, find that unbelievable!
The US Census department indicates that the average mortgage today is $1030.00 per month. If we do some simple math, we realize that’s $1000 more per month than my friend’s payment from less than 60 years ago. If there were no other factors to consider but the change in average cost for a mortgage, that alone would be enough to see why homeownership is declining. But there are additional factors that are causing the rental market to swell as more people opt to rent instead of buy a home.
1. The staggering increases in college tuition are forcing millennials to deal with tremendous monthly college loan payments that are consuming funds that could otherwise be used for a mortgage.
2. Health insurance is yet another ballooning cost that is forcing many people to choose between health care and what have traditionally been considered givens for working class people like homes, cars, or vacations.
All of these factors have resulted in an unprecedented reliance on debt, which, if not managed well, will damage the unholy credit report, which in turn can be a major impediment to qualifying for a home mortgage.
Now enter the Landlord. I’ve never liked that word, but most people recognize it and understand what it means. As more people have struggled to keep up their house payments, foreclosures have become a booming market. A foreclosed property can be one of the easiest ways to start in the rental property business.
They are often sold below market value because banks know that vacant properties are often subject to vandalism or unreported damage. And banks are not designed to manage property. The longer they hold the property the greater likelihood they will lose more money.
There are also opportunities in apartment buildings, multi-family units, commercial property and even vacation property. Each has its own set of challenges. Some require deeper pockets and others require more involvement in the month to month management. You can be hands on or have someone manage the property for you. It’s something that almost anyone can do, simply keeping up the maintenance, and staying current on payments, taxes, and insurance. Oh, and making sure your tenants pay the rent and don’t burn the place to the ground!
Should you take the leap and invest in your first rental property? Ask five people and you’ll get six opinions. The people that I know that have continued on in the rental property business would say absolutely. I’ve seen their portfolios grow and their lifestyles improve.
Your cousin Billy Bob may tell you he once had a rental house and it was a nightmare and it is the worst thing anyone could ever get involved in to make money. Any venture will have challenges.
The level of the reward is directly proportional to the level of risk associated with it. To dare greatly is to risk greatly. Now don’t go out and buy a property if you’re already struggling financially. Use your head and get wise counsel. But, when the time is right, and the opportunity presents itself, take a chance. It just might change the way you live for the better.