If you’re in the business, you probably already know that real estate investment can be one of the most lucrative financial pursuits out there. In a prosperous economy and a housing market that seems to be going from strong to stronger, it’s easy to get caught up in maximizing your profit. But all good things eventually come to an end — or at least become, well, less optimal. So, the real question you should be asking yourself is “what’s my long-term plan?”
Noble Capital has been in the real estate investment sector since 2002. And when the Great Recession hit, we had to take a step back and figure out how we, as a company, were going to survive. The proliferation of sub-prime mortgages and subsequent creation of collateralized debt products infected almost every corner of the American economy. As a result, all lending activity froze, and traditional real estate investment opportunities completely dried up. But packing it up and walking away just wasn’t an option.
In a housing market downturn, the sales of residential properties typically suffer. Since this is a key strategy for our borrowers, we had to change direction. A down economy may decrease demand from home buyers, but people still need a place to live in any economic environment. So, the logical strategy was to shift from selling properties to renting them. That way, our investments could still flow in cash rather than sit idle and lose money.
If you aren’t taking advantage of the strong housing market to build your portfolio of rental properties, you’re leaving yourself wide open to failure. The robust housing market in many areas of the country right now is a blessing for savvy forward-looking real estate investors. You should resist the urge to go from one flip to the next without building your real estate portfolio. The wise strategy is to flip a couple of properties then renovate the third with the goal of holding it as a rental, so you have regular income in the event that there’s downward pressure on the housing market.
The concept makes a lot of sense — build an income-generating portfolio to sustain you during the lean times. But, being a real estate investor doesn’t so neatly equate to being a property manager, so mind the gap! Completing a renovation or construction project is one thing, but managing properties is a completely different beast. Being a property manager requires a different skillset than home construction and renovation and comes with its own set of unique problems.
If you aren’t a people person, you’ll need to become one quickly (or at least learn to fake it). Interacting with tenants is probably the most significant difference you’ll encounter when you become a landlord. Keeping the property occupied is a critical function of your operation. If you don’t have tenants, you’re losing money. You need to anticipate move outs (tenants don’t always give you proper notice), and you need ample time to market, make-ready, and rent the property. Conversely, you may be forced to evict tenants on occasion. This is never an easy thing to do, but you have to be ready to step in if your tenant’s occupancy jeopardizes your investment. Falling far behind on rent or allowing the property to fall into disrepair both cost you money.
Not only do you lose money if you don’t have renters, but the longer your rental property sits vacant, the greater the chance that problems could occur. Unused plumbing and other systems in the home can begin to degrade, and if a pipe bursts, there is no one there to report it to you in a timely manner. But a vacant property can also become a target. Occasionally, properties are vandalized, but in some areas, the more distressing scenario is that your property may become an attractive habitation for squatters. It may seem like a random concern, but we’ve had to deal with it on many different occasions. Unauthorized occupants, or what I’ve heard referred to as “Property Pirates,” can cause any number of problems and cost you loads of money from repairing property damage to clean-up costs. If you’re dealing with squatters, typically law enforcement will need to check on the property daily. Installing lights with motion sensors (particularly around the back of the house) is a good deterrent, and it helps to have a good relationship with your neighbors who can help keep an eye out for you and alert you of any unusual activity.
If you delve into the world of property management, you’ll also likely need to augment your professional network. If you’ve built or renovated homes in the past, you probably have a list of preferred contractors for various types of work. But you’ll need plumbers, handymen, electricians, etc. who can be available for smaller jobs on short notice. And unless you plan to be available 24/7 for as long as you rent the property, you’ll need to have someone you trust to serve as a backup when you can’t tend to tenant requests.
While this isn’t an exhaustive discussion of a property manager’s responsibilities, you can see that there are some significant differences from being a traditional real estate investor and some unique challenges, as well. Ultimately, being able to flip the switch from investor to landlord could be your safety net if the market takes a turn for the worst. So, start thinking about your strategy for building your real estate portfolio sooner rather than later. That way, you’ll be prepared when that day comes. And history has taught us that, eventually, it will.
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