[fusion_text]Online or on cable these days, you’ll find many self-described real estate experts who want to teach you their systems for finding and financing great real estate deals. According to these self-described millionaires, people can make money in real estate if they think like an investor and have the right system. The temptations they offer are many: inflation-adjusted income, rising home prices, leverage and avoiding stock market risk. I’m a rental property investor myself, so I know firsthand both the benefits and the challenges.
While single family homes, commercial properties and multi-family units may be good investments for some people, they are not for everyone. The truth is, rental real estate investing may seem safer than it really is. Each property investment has unique risks. A rental real estate investment that remains vacant or results in large, unexpected maintenance costs could be financially devastating.
Still, real estate evangelists aside, rental property investments can contribute to your income diversification, net worth and financial security if you choose wisely and at the right time. How will you know when you’re ready to be a landlord? Take this assessment to find out if you have landlord potential. Give yourself one point for each “yes” answer:
My financial position:
____I have zero credit card and other high interest debt
____My credit score is 740 or higher.
____I have enough cash to put down 20% of the value of the property
____I have enough cash to pay for any necessary renovations
____I have enough cash to cover vacancies and maintenance on the target property for a year
____I am already contributing the maximum to my retirement plan at work ($18,000 plus $6,000 catch up contribution if 50 or older)
____I am already contributing the maximum to a Roth or Traditional IRA ($5,500 plus $1,000 catch up contribution if 50 or older)
____I am maxing out other work-sponsored employee benefits that fit my financial situation (e.g., HSA, FSA, etc.)
____I have enough other income to pay the rental property mortgage if there’s a sustained period of vacancy
____Total financial position score
Did you score 8 points or higher? Then you can move on to the next round.
If you scored 7 or lower, you aren’t yet in a strong enough financial position to be a rental property investor. Without sufficient cash reserves, a real estate investment that turned out badly could send you into bankruptcy. If you carry balances on your credit cards, the most important investment you can make is paying them off. Before you even consider diversifying into individual rental properties, make sure you are on track to meet your retirement goals and maximize all your tax-advantaged benefits at work.
Real Estate Knowledge:
____I’ve read some basic guidebooks on rental real estate investing and landlording, such as Nolo’s First Time Landlord
____I’ve done a review of rentals in my target neighborhood and I know average rents, time on the market, crime and school statistics
____I have owned my own home for more than three years, so I have a very good idea of how much time is needed to take care of one
____I don’t yet own a home, but I plan to buy a multi-unit property and live in one unit
____I have enough time to manage the property myself
____I’ve run the numbers, and the gross monthly rent on my target property is 1% or more of the total property value
____I can afford a property manager and the investment is still profitable
____ I like to fix things and do home improvement work around the house
____I understand that one or a few properties in the same area are not a diversified investment and that means there is higher risk
____I have run income and expense projections for the property for a year, including worst case scenarios
____I have researched the pros and cons of different legal entities in my state to hold the property, such as a limited liability company
____I have spoken to a mortgage lender and am confident I’ll be approved for financing
If you scored at 8 on real estate knowledge and 8 on financial position, it looks like you have landlord potential. Happy property hunting!
If you scored 7 or lower, take some time to rethink this. Will this be a profitable investment? Do you have the time to manage the property yourself? Are there risks you are not comfortable taking? What additional steps are needed before you move forward?