During my 22 years investing in DFW real estate, I’ve made a lot of mistakes and learned a lot of lessons the hard way. By sharing some key learnings from my experience, I hope to help others avoid some of the pitfalls of investing in residential real estate. Here are 5 things to consider before investing in rental properties:
Hassles of Being a Landlord – Owning rental properties is stressful, especially when you first start out. There’s a steep learning curve. During my early years as an investor, I wasn’t great at screening applicants, so I ended up with a number of problem tenants. I also had the weight of large mortgages hanging over my head, which only compounded my poor decision making when it came to tenants. I felt I had to avoid vacancy at all cost, and so would sometimes take on tenants I shouldn’t have.
It can also be
Calculating a Good Value – When evaluating a property, it’s very important to determine whether it makes financial sense. A “quick and dirty” tool to evaluate the financial viability of a property is the rent-to-value ratio (monthly rent divided by the purchase price of the home). It used to be that a 1% rent-to-value was the “gold standard”. These days, that’s no longer realistic for most homes in major metropolitan areas, but the closer you can get to that value the better off you will be. You can be fairly certain that a home with a rent-to-value that is under .5%, won’t be a good bet.
A more accurate but time-consuming method to determine the viability of an investment is to create a spreadsheet that determines Return on Investment (ROI) and cash flow. You’ll want to create this for any property you target before you make an offer. You’ll also want to use this spreadsheet to track your investment and categorize expenses for tax purposes after you’ve purchased it. My background as a CPA made this an easy task for me, but you may want to consult a Realtor with investment experience for advice on how best to set this up. A Realtor with this kind of experience can also help guide you to the best areas to invest based on your objectives, and provide you with crucial information such as projected rental income for a targeted property.