How to Get the Most Out of Your Rental Property Investments Investing in real estate can be a smart move -- but like any investment, making the most of your money and time is key.
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It might not seem like the perfect time to invest in rental property considering current real estate trends indicate we're in a seller's market, but now might very well be. According to HousingWire, property appreciation was double its already healthy rate in 2020, and there are plenty of indications that home values will continue to rise steadily in 2021 and beyond. Even large institutional investors continue to bet more on the single-family rental space.
Related: 2021 Home Buying Trends in the U.S.
Rental properties, then, have the potential to deliver a steady stream of income for investors both now and into the foreseeable future. If you're an entrepreneur looking to diversify your portfolio — or are just looking for a vacation home that can double as a sound investment — you would do well to consider adding real estate to your list of assets.
Once you do make that decision to invest, however, another question quickly arises: How do you manage that investment? Owning a rental property comes with plenty of rewards, but there's no denying there's also hard work involved. The day-to-day management of a rental property can take up days or even weeks of time every year, and not everyone is able to take on that responsibility.
Working with a variety of owners and property managers over the years, I've seen how running a property can be either successful or unsuccessful. During this time, I've learned a few ways to make property management easier on you, the owner — and better for renters. That journey begins with the decision of who will actually manage the property.
Should you self-manage or hire out?
Many rental owners choose to self-manage their rental properties in order to save money and be more directly involved in tenant screening, property maintenance and pricing decisions. If you have the time, it might make sense to take this route. According to data from Millionacres, professional property managers tend to take between 8 percent to 12 percent of a unit's rent on top of other potential premiums, so cutting that cost can feel like a good start for an investment property.
Before you jump solely into the self-managed world, though, there's a reason property managers are able to charge that amount; they tend to make your life a lot easier and can also protect you from certain legal situations that you might not know how to handle. Property managers already have best practices in place for dealing with residents — from resident communication, to expectation-setting, to maintenance needs — which means you can avoid the hiccups and risks that can arise with self-management.
Managing a property comes with many variables and considerations that can affect whether your property is a moneymaker or a money pit. This is true if you choose to self-manage or leave the day-to-day operations to a property manager. In both cases, the key is to strike a balance between cutting costs and satisfying everyone's needs, keeping your time and mental wellbeing as the owner in mind. Luckily, there are a few things you can do to make property management easier regardless of which path you choose:
1. Do your homework on the market upfront
As with any investment, it's important you know what you're getting into before financially committing. That means visiting the neighborhood yourself and reading various real estate reports and government surveys on topics such as census data and home price appreciation.
Ask yourself a few questions: What's the population growth trend like in the area where you are planning to buy rental property? What about local unemployment and job trends? How is the growth of remote work affecting rental prices in the area? Knowing the answers to these questions can make a huge difference in how a property is managed.
Related: Here Are Real Estate's Winners and Losers In the New Normal
Industry magazines such as Realtor and Multifamily Executive are useful tools to stay up to date on general real estate and long-term rental management trends. Meanwhile, tools such as Transparent and Key Data can help you find information relevant to short-term rental management, such as seasonal demand.
2. Take a proactive approach
The more proactive you are when managing a property, the easier that task is. For one, residents will be significantly happier, which can lead to positive reviews and more units being filled due to retention and positive word-of-mouth. For another, a proactive approach to things such as maintenance and repairs can save you money during the life of your investment.
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One of the best ways to stay on top of things is to spend more at the beginning. High-traffic flooring materials and paints might cost more upfront, but you'll get your money back (and then some) when it comes to the maintenance costs.
For instance, you also should consider investing in smart technology for your units. Tools such as smart thermostats help keep energy costs down for owners during vacancy and for residents during occupancy. Similarly, new HVAC system monitoring services can alert landlords of maintenance needs before residents have to pick up their phones, and keyless locks curb re-key costs and improve safety and transparency for residents, because floating keys are eliminated and residents can see who entered their property.
I would also highly recommend installing smart sensors for moisture and leak detection. I've seen firsthand how these devices can save owners a significant amount of money and time on repairs. Water leak damage is the second-most-filed insurance claim, and it costs around $7,000 to repair. Even a small crack in a pipe can leak up to 250 gallons of water in 24 hours. Smart sensors can catch leaks before they become costly floods, and this means less water damage and no mold growth — huge wins for both you and your renters.
3. Figure out how much you want to take on
Even if you're not concerned about the time commitment involved with managing your property, there are other aspects of management to think about when deciding how much you want to take on yourself. I've seen plenty of investors-turned-landlords realize after the fact that they bit off more than they could chew — especially when it comes to dealing with regulatory and compliance issues.
As with any property, there are short-term liabilities to deal with (such as noise regulations and zoning laws) alongside more long-term issues (such as fair housing laws). All of these are often more complicated than they might seem at first.
The recent trend of upzoning in cities such as New York and San Francisco is a good example of the kind of complex web you could be dealing with. In fact, more and more cities are removing old zoning laws that prevented the development of mixed-use and multifamily housing units in order to deal with housing shortages. Although this opens up new opportunities for developers and investors, it also shows how quickly regulations can change.
If it turns out you don't want to take all of this on but you're uncertain about hiring a property manager, consider looking at industry associations (such as the Vacation Rental Management Association and the National Association of Residential Property Managers) to find real estate agents in your area who also operate as property managers. An agent-manager will likely know more about local trends and have a vested interest in managing the property, which means their services will be more competitive. They might even be willing to give you a discount or make their commission part of their property management fees, meaning they'll save you money.
Real estate is not a short-term market, even with short-term fluctuations. Buying a rental property is a long-term commitment that requires real work to pay off. As long as you get into it for the right reasons and are willing to do your homework -— or hire a property manager to do it for you — you can expect a solid return on your investment.