You’ve got a little extra money in your pocket. You’re hoping to make it grow into a lot of extra money in your pocket. Investing in real estate and managing property sound like solid ways to increase your cash. Before you run out and buy the first house you see, don’t fall for these myths about managing property.
Myth #1: Incoming Rent Will Cover All Expenses
Do not count on tenants to cover your monthly mortgage payment. You may have months in which you do not have a tenant in your property, in which case you’re covering the mortgage yourself. Even if you do have a tenant, there are the added expenses of insurance, taxes, and other potential expenses such as repairs and maintenance.
If you’ve hired a Rent Manager or Residential Property Manager to manage your property, their salary needs to be paid as well. To cover all expenses, you’d likely have to charge a much higher rate than just what your monthly mortgage payment is, which isn’t reasonable if you want to obtain and keep a good tenant.
While it is possible for rental income to cover the mortgage payment, it is not guaranteed in all cases. For this reason, property owners should not rely solely on rental income to cover both mortgage payments and operating expenses. This is particularly true during the early years of your mortgage when the larger portion of your payment goes to interest alone. That is why it isn’t uncommon for rental property owners to seek refinancing to secure lower interest rates or lower monthly mortgage dues.
Myth #2: Rental Property Income is Passive Income
Another prevalent myth is that rental property management solely revolves around rent collection. While rent collection is undoubtedly a crucial aspect, a lot of work goes into managing a rental property. It’s not as simple as buying a house and just collecting rent from your tenant. Things break and need to be fixed. Rent needs to be collected and accounting needs to be done on an ongoing basis. There is nothing passive about it!
Property management also encompasses a wide range of other responsibilities such as marketing vacancies, screening potential tenants, addressing maintenance and repairs, enforcing lease agreements, handling legal issues, and maintaining positive tenant relationships.
If you opt to be your own Rent Manager, you’ll have to complete all these tasks yourself. If you hire someone to act as your Property Manager, you need to make sure you can afford their fees. However you proceed, you’re going to have to work to manage your income property.
Myth #3: Haunted Houses Are Cheaper
It’s worth noting that the perception of haunted houses being cheaper could stem from the potential challenges in marketing and selling such properties. The narrower pool of interested buyers may lead to longer listing times, increased negotiation, or a perception of reduced value. However, these factors are not necessarily reflected in consistent price reductions across the board.
Even if you can find out if the house you’re considering purchasing as an investment property is haunted (which can be difficult to do), there is no truth to this myth. Homes in which a tragedy occurred do not sell for less money either. And the leg-work required to determine if something unfortunate happened within a home is not worth your time and effort (there are no laws requiring the disclosure of tragedies occurring on a property).
In some jurisdictions, properties with a reputation for being haunted or associated with criminal activities may be considered stigmatized properties. However, the impact on pricing can vary significantly depending on local laws, cultural beliefs, and buyer perceptions. Some buyers may be attracted to the unique story or historical significance of a haunted property, while others may be deterred.
Overall, buyers expect to get more bang for their buck on supposedly haunted homes, but that is not usually the case. You may want to check out our other article on 10 Awesome Properties with Horrifying Secrets to see how some have faired in the market over time.
Myth #4: Don’t Pay Extra On Your Mortgage
You may be tempted to not pay extra on your mortgage even if you have the liquid cash to do so. But making additional payments towards the principal can expedite equity growth. By paying more than the required mortgage payment or making lump-sum payments, you reduce the outstanding principal amount faster, resulting in increased equity.
Building equity in your investment property contributes to your overall net worth. As you pay down the mortgage and the amount you owe decreases, your ownership stake in the property increases. This can be an important component of your financial portfolio and can contribute to long-term wealth accumulation.
The equity you build in your investment property can also give you better access to home equity loans and lines of credit. These financial tools allow you to borrow against the equity in your home to fund home improvements, debt consolidation, or other major expenses. Home equity loans often have lower interest rates compared to other forms of credit.
Myth #5: An Improving Economy Makes Property Management Less Lucrative
A strong and improved economy can have both positive and negative effects on property management profitability. There is often increased job growth and higher disposable income, leading to a higher demand for rental properties. This can result in a larger pool of potential tenants and lower vacancy rates, increasing the revenue potential for property managers.
Rental rates may increase as demand for housing grows. Property managers can capitalize on this by adjusting rental prices accordingly and potentially boosting their profits. An improved economy generally offers greater economic stability, reducing the risk of defaults on rental payments. This stability can result in more consistent rental income for property managers.
On the other hand, a strong economy often leads to rising property values, which may also mean higher property taxes and insurance costs. The cost of labor and materials may also increase, so property managers may experience higher expenses related to property maintenance, repairs, and other operating costs. All these can impact the overall profitability of property management.
The Plain Truth
There is, without a doubt, money to be made by managing property. Not falling prey to the myths and fallacies that exist regarding property management can ensure you have a long and successful career as a rental property investor or residential property manager.