Investing in Rental Properties - Why It's A Long Term Game

In some ways, rental properties are like reptiles. They don't need to be fed every day, but periodically, they do require a rather substantial meal.

For example, let's say that you have a pretty decent rental with about $200 per month in positive cash flow. Great! That's $2,400 extra dollars of income a year! But...not so fast. This extra money is critical to your success as an investor, but it should be looked at as part of the reserve you should keep on hand to feed your rental when it gets hungry.

So, let's say that in your pretty decent rental, you have a pretty decent tenant that pays their rent on time every month for two years. Great! That's $4,800 extra dollars in the bank. But, like I said before, not so fast. During these two years, you were only plagued periodically with small maintenance items. There was a little trouble with some ants which cost you $95 in pest control. Then the plumber had to pay a visit - that was $200. And, of course, the furnace needed to be serviced which ran you close to $300.

Still, not so bad, $595 from your $4,800 leaves you up $4,205. But then

Follow up:

your tenant moves out. The good news is that a portion of their security deposit covers the clean up as was mandated in the lease. The bad news is that you need to replace the carpet and that's going to cost you about $1,500. Between getting it fixed up and placing a qualified new tenant, your rental ends up sitting vacant for about a month, which means another $700 going out for your mortgage payment.

But still, you're at a healthy $2,005 profit for this property. Not too bad. But then, and here's the kicker, a nasty winter storm blows through and causes the roof to sprout a leak. The contractor comes out and tells you that your roof was already in poor condition, and it's time to put a whole new roof on.

The cost for this? $5,000. Ouch. No more profits left, you come out of pocket $2,995 because, after two years of sparse meals, your rental property is hungry.

What exactly am I trying to say here? Only this: investing in rental real estate is a long term commitment.

Should you acquire properties that cash flow? Absolutely! Should you expect this cash flow to supplement your income in the short term? Probably not, unless you either got an extraordinarily good deal (above and beyond what most investors get), or you put a significant amount of money down.

Investing in rental real estate has many benefits, but, in my opinion, short term income is usually not one of them.

Until my next post,

James