After several years of diligently saving money, I’m nearly ready to purchase my first home. Because I’ve been thinking about buying a home for so long, I know exactly what I want my house to look like. I desire a place that has three bedrooms and three bathrooms. I also need a quiet space to set up my home office in. I want a massive, walk-in closet in my master bedroom. My master bathroom needs to have double vanities, a tiled, walk-in shower, and a Jacuzzi tub. On this blog, I hope you will discover how to set priorities during your new home search. Enjoy!
Real estate investment is a lucrative way to create a long-term passive income stream. As you build your rental property business, you will eventually face the question of when to stop growing the number of rental properties you own. How much is the right amount for you? To help you make the right decision, here are the most important factors you must decide.
1. Income vs. Equity
Which is more important to you as a landlord — monthly income or the buildup of equity? Many new landlords focus on creating a current monthly income stream by minimizing expenses and getting steady renters. If your goal is to continue this path, you might focus on more properties that have greater rent potential — such as units in a university area where renters are plentiful.
However, if your goal is to build a nest egg from the home equity — such as for retirement — current income is less of a driving concern. You would just need to earn enough rental income to pay expenses. But the goal would be to improve the sales potential of the properties. You might, in this case, look for fewer properties in more affluent areas or ones that have certain sought-after amenities (like a pool) that will increase the profit margin when you sell the unit.
2. Time Spent
How much time do you want to (or are able to) spend on your investment properties? If you are doing all the work by yourself, this is a big factor to find the right number of units. A landlord who has a full-time day job wouldn't want to overextend themselves by taking on more rentals than they can provide proper maintenance and tenant management. If you use a property manager, though, you have more room to grow.
If you want to make the landlord gig your full-time job, ensure that the number of units grows only as your available time grows. You may limit growth until you can reduce your work hours to part-time, then ramp up the landlord business accordingly.
3. Profit Margins
There are two basic paths toward turning a profit as a landlord. The first is to have a small number of rental units that each brings in a steady, high profit. The second route is to have a larger inventory of lower-profit and slightly less stable units.
Many individual landlords start out with the first method — high volume with low margins. But they often end up gravitating toward the higher profit margin units as they have more options. You might, for example, trade in several single-family homes for a smaller number of duplexes, resulting in fewer buildings to maintain for double the rent payments.
As you decide the right path in these three key areas, the perfect number of rental units will become clear. And then you can focus on creating the financially independent life of your dreams.