Thoughts on Rental Property as an Investment Tool

As homeowners, we tend to treat our property very personally.   That’s great!   You’ve worked hard for your money, purchased wisely, and are proud of your property investment.   I believe there is something ingrained in most of us that forms a special bond with our homes.

However, for the investment property owner, it’s sometimes easy to forget that a rental home is just a part of your overall investment portfolio.   Just like stocks, bonds, mutual funds and other investment instruments, you shouldn’t get too attached emotionally to your rental property investment.

I’m currently fighting this “syndrome.”  I invested a couple of years ago in a certain condo community.   Because of special assessments and other unexpected maintenance costs within the condo itself, my returns have been anemic.   My attachment, in this case, is not so much my affinity for the property.   It’s more based around my desire to be “successful” with my investment choices.   If I sell, am I somehow admitting defeat?   Of course, this seems ridiculous when it’s written out.  But emotion often drives our most important investment decisions.

The answer ultimately lies in my (and your) strategy for the investment.  If you’re not meeting your goals and see no compelling reason for this to change in the future, maybe it’s time to re-evaluate your ownership and move on while the market is high.  If you’re still bullish, to use a stock market term, on the long term growth aspect of this property and the broader real estate market, perhaps you’re willing to withstand a little “blip” in cash flow.  Like any other investment, it’s difficult to keep emotion out of your decision making when you’re experiencing the normal ups and downs throughout the ownership of an asset.

Speaking of emotion, people often look at me oddly, when I answer their question about where to look for good rental property.   In many situations, my answer may be “low-income housing” or “double-wide trailers in the middle of nowhere”.   Sure, it’s not as sexy as a beachfront condo on the Isle of Palms, but it all depends on what your goals are for the property, your appetite for risk, your ability/desire for leverage, etc.

A parallel can be drawn with your stock portfolio.  It may sound really cool to talk about owning the latest Silicon Valley tech stock.   But perhaps an old tried and true dividend stock is a much better fit for your portfolio.  No one gets excited about discussing your 3-4% yield on General Motors.  However, it can certainly play an important role in a diversified portfolio.  And it’s a reasonable bet that you won’t get badly hurt buying Blue Chip stock.

At the end of the day, rental property is an investment and should be treated accordingly.  Just like any other part of your investment portfolio, you should be asking the following questions:

  • What are my goals for this investment?  Is it cash flow or long term value?   Or both?
  • What is my rate-of-return of the investment over a year period?  (In real estate, this return is often referred to as a Capitalization Rate or “Cap Rate”.  Cap Rate = Net Operating Income / Current Market Value.)
  • What is the expected growth rate of my investment over the life of ownership?  (Commercial Real Estate investors often use a rather complex calculation called the Internal Rate of Return or “IRR” to express the projected rate of growth an investment can potentially generate.)
  • And never forget this important question:  What is my exit strategy?  It’s often easy to just “let it roll” when the times are good.  But every market rises and falls over time.  You should always have a good idea of how long you plan on holding the asset before investing.

There are a variety of reasons people invest in single family homes as part of their investment strategy.   At Bridgepoint Property Management, we certainly don’t have all of the answers.  But we do have a lot of experience in rental property ownership and management.   Give us a call if you’d like to talk over your strategy.   And I’ll bet we know someone who can manage your property to help you make the most of your investment!

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