Rental Property: How to Know Whether It's Worth the Hassle
By Leonard Baron
If you bought a rental property during the pre-crash era, you may be feeling the lingering pain of the investment. Whether you're experiencing negative cash flow or the property is simply not as terrific as you'd first hoped, either in terms of quality or location, you're probably wondering if this investment is worth the hassle. Before you make any rash selling decisions, here are some issues you should consider:
Do you want to be a landlord? In the mid-2000s, many people jumped into the rental market, assuming they'd buy rental properties, prices would go up, and they'd get rich with little effort. Chances are, you've already learned that isn't true. Being a good landlord is work. Are you willing to put forth the time and effort required to keep properties full and tenants happy? If you've decided rental ownership isn't for you, now is probably a good time to unload the property -- even if you have to take a loss on the property.
What if the property is underwater with major negative equity? Fortunately, the values of rental properties in many markets have bounced back in the past six months. Negative equity is bad, but not necessarily the end of the world. A more important consideration: Cash flow. If your income from renters minus expenses and mortgage is positive (or very close to it) and your experience has been a good one, keep the property. A decade or two down the road, you will have forgotten the recent economic downturn and, instead, you'll have a paid-off property, positive cash flow, and the satisfaction of knowing your current tenants paying for your retirement.
What if your cash flow is negative? Some properties are never going to make money. If you picked up one of these well-located "Prize Properties" for very little money, you're probably realizing it's no prize at all. Did you do an analysis of the property's cash flow potential before you bought? If you had, you might have realized it could be decades before you see positive cash flow. If you are in the red by $1,000 or more per month, it's probably best to dump the property and cut your losses.
What if you want to be a landlord but this property is a stinker? Ask yourself: Is a little short-term pain worth a long-term gain? If your current situation isn't totally unbearable, you may want to buckle down, hold on to this first property and consider this sometimes uncomfortable situation a "life lesson." If, on the other hand, the future of the property is bleaker than bleak, this may be a good time to dump it. Take the loss and start fresh with a new property.
As you consider your next move, remember that owning rental properties is hard work and unloading one property in favor of another may not make your job easier. If you have the desire, time and energy -- and a willingness to get your hands a little dirty -- you will likely make it work.
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Leonard Baron, MBA, is America's Real Estate Professor®. His unbiased, neutral and inexpensive "Real Estate Ownership, Investment and Due Diligence 101" textbook teaches real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.