Disclaimer: we are not investment consultants. We are not offering investment or legal advice. We are simply pointing out what we’ve experienced and why we are doing what we do … we selectively acquire or create entire notes, then sell off the first part of the payment stream.
Rental properties sounded good … we tried it. Later that year on Thanksgiving Day, we got a call … the garbage disposal quit working, and the kitchen sink is plugged. That’ll be $500 – induced by potato peels. A few months later the heater isn’t working and it’s going to be close to zero outside. Turns out the unit is shot. $10,000 … an entire year’s profit gone.
The location and timing of owning a rental are key in determining whether an investor will be profitable.
Location is an obvious factor as it drives fair market value of what you can and should charge for a rental property. Location also encompasses the desirability of the neighborhood – schools, crime rate, commute times, employment rate, migration trends, demographics. The list goes on and on.
Timing is important as well. If a rental is acquired during the same timeframe as a large apartment complex is coming online in the same neighborhood, there will be considerable competition. Another way of describing this is summed up in the term “occupancy rate”. Other timing-related factors include major repairs (how new is the roof? heat pump? wiring? plumbing? etc.), insurance rate trend, tax rate trends. These two trends tend to ebb and flow. For instance, if several new schools or roads are being built in the municipality, the tax rate may be rising. If a major natural disaster has recently hit the area, insurance rates may be set to increase.
A case study follows.
Click here for a comparison of rental investments vs note investing.