At some point, most homeowners have thought about using they're home as an investment by turning it into a rental.
This may or may not be a great idea, it really depends on a number of factors.
First of all, where are you and life? Are you just starting out? If you need the proceeds from the sale of your current home to go towards your down payment on your next home, then becoming a landlord is probably not a good idea.
Also, If cash or liquidity if tight, you probably don’t want to risk spending money you don’t have on possible repairs. You are better off working on building equity for yourself and your family.
If on the other hand, you're closer to retirement, own your house free and clear or have enough cash to use for your next purchase then yes being a landlord might be a good idea.
The key takeaway here is to not overextend yourself In order to get into the real estate investment world. You don't want to jeopardize what you already have.
Cash Flow
As we move forward, the most important factor we're going to want to take a look at is cash flow. Cash flow can be defined as “the total amount of money being transferred into or out of a business”.
Figuring this out is not difficult but does require a little homework. first, you're going to want to determine how much income your property will produce.
This involves getting a real sense of what you will be able to quickly lease the property for in any type of Market. I say quickly because you don't want the property to sit vacant very long, like more than one month this will negatively impact your cash flow. There are a number of good ways to get this information. I just finished that talks about establishing a realistic rental rate this in more detail.
Next, you’ll want to tally all of your possible expenses, things like Mortgage, Taxes, Insurance, etc… Here's How.
Subtract your estimated expenses from your estimated income. If the number is positive then you have an estimated positive cash flow.
This is really simple but I’m constantly surprised by how many people get into an investment deal that was never going to cash flow positive.
Patience
The final thing you’re going to want to consider is your personal tolerance for dealing with rental property and tenants. The article I’ve linked to below takes a detailed look at what can be a real challenge for most people and why you might want to factor in a property management company the expenses side of your cash flow analysis.
At the end of the day, investing in rental property can be very rewarding both personally and financially but it’s important not to just get started but to get started the right way.
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