Be Ready For the Long Haul Before Buying Rental Property

If you know you’d like to be a landlord, rental property may be a long term investment path for you. Investments in rental property should be viewed as longer term. The money you sink into a down payment should be funds that you would otherwise put into long term funds, so don’t sweat the smaller ups and downs in property value. Yes, with the real estate market rise in the last decade, many people have done well in the short term, but you can’t count on that to repeat or to continue. Here’s one view of Seattle’s property value timeline.

If you buy now and must wait seven years for that property value to rise, it’s okay! You aren’t supposed to touch that money until you retire anyway. Say you put down $15,000 on a $150,000 property (10% down.) Assuming the rent (or use of it) covers your mortgage and monthly expenses without a significant profit, your main financial concern then is probably the selling price.

If the market value falls to $130,000 2 years after your purchase date, you’re not really affected because you’re not selling it yet. (Hopefully your property taxes went down too.)

If the market value then spends the next 5 years rising to $190,000, you may be ready to sell. This would mean a $40,000 increase from your original purchase price, which if you had paid cash (100%) would have been about 3% rate of return over seven years. Not great.

However, you put down 10% not 100%, so based on a $15,000 investment, you took away $55,000 ($190,000 - $135,000 mortgage). That’s an over 18% rate of return over seven years plus possible tax deductions along the way. You leveraged your $15,000 with a mortgage, giving you a better chance of a high rate of return, and helping weather the time through lower market value periods.

You have to be ready to be in it for the long haul. As long as you only use money earmarked for long term investments or retirement, and leverage your down payment at a rate with which you are comfortable, rental property may be a great idea for you.

My disclaimer: This, of course, doesn’t take into account certain aspects like real estate commissions, closing costs, periods without rent, paid mortgage principal etc. This is just a very general illustration of how to think long term about rental property investment and the power of leveraging your investment dollars. Every investor needs to carefully analyze the property for rental potential and that’s a whole other series of posts. Please consult a professional for advice.