We sat down for a Q&A about rental properties with long-time rental property owner and friend of WCP, Andrew Michael.
- What are the benefits of renting versus selling?
- With renting, you have a passive income while your tenants are paying down your mortgage on the property. Plus, eventually, you will have a fully paid-off asset to sell.
- When you rent out a property you can utilize a multitude of tax right-offs. You probably want to seek guidance from a CPA to take full advantage of these.
- How do you determine which exit strategy is better?
- It starts with what your investing goals and strategies are. Renting and selling a property give you two different forms of income; with renting you receive long-term passive income, while selling gives you short-term cash infusions. Ideally, you want to find a combination of renting and flipping that provides your business with stable growth.
- Often times, location will heavily influence what your best exit strategy is. Looking at the rental clientele (Class A, B, C) versus the retail buyers should give you a good idea of which strategy will give you better results.
- As a long-time rental property owner, what are some tips for those starting out?
- I like to keep all of my rentals pretty consistent when it comes to materials. I use the same paint, flooring, and tiles when rehabbing my properties. Buying materials in bulk and keeping a stash for quick repairs has saved me a lot of time and money.
- Know your short-term and long-term business goals. Do you need a short-term cash infusion to start scaling? Are you in a position to focus on growing your rental portfolio for long-term passive income?
- Ask yourself – am I willing and able to become a landlord for rental properties? I personally hated being a landlord. It just wasn’t worth it for me – between the time consumption and added stress I quickly saw the writing on the wall. Now all of my rental properties are professionally managed and I can focus on scaling my business rather than dealing with clogged toilets.
- Take the time to properly vet your tenants. It’s tempting to just focus on getting your units filled quickly, but in my experience, it ends up costing you more money in the end. Bad tenants are notorious for causing damage to properties, so I think it’s better to protect your property by waiting an additional month or two until you find and vet tenants that will be respectful of your asset. One easy way to vet tenants is to use their credit score. People with a 620 or above typically make good tenants and often take care of smaller issues themselves.
- The notorious “2% Rule” is only a guideline for starting out. Just because a property won’t go for 2% of its purchase price in rent doesn’t mean it’s a bad deal – in fact, most properties in the DC area won’t fall under the 2% Rule. The ones that have a low enough purchase price to fit this metric are likely to be in a “war zone” area and may be more trouble than they are worth. Baltimore and Hagerstown, MD are two areas where you may find deals that fit the 2% Rule, but I’d recommend that new investors get some experience under their belts before taking on these markets.