So You Want To Be A Landlord?
After selling our technology companies in 2001, my wife and I invested in real estate. Our first purchase was a small office building in Edmond. We have continued to purchase real estate assets over the last 15 or so years, constantly adjusting our portfolio by buying and selling, depending on market conditions and our appetite.
Owning rental property has been the key to our family’s flexibility and financial security. Investors purchase income-producing property for different reasons. Most desire income, some crave appreciation, and still others are interested in the tax advantages that are available.
While I believe real estate is a wonderful investment, what most people don’t understand is that, over time, increases in property value have been highly correlated with inflation. So much so, it has lived up to its reputation of being a hedge against inflation.
This is why I teach and believe that the best opportunity is purchasing quality property, with the proper leverage (loans) and sufficient income to cash flow with the intent of holding, managing, and paying off the asset. We refer to this as equity gain.
The most important and difficult aspect is management. Real estate, unlike other more passive investments, requires sophisticated management. This entails getting the property ready to market, showing the property, insuring the property, qualifying potential tenants, signing leases, collecting rent, and even occasionally evicting tenants. More people are now renting in the U.S. than at any other time in history. This presents a great opportunity for landlords and investors.
However, the challenge is rental rates have increased 66% since 2000 while household incomes have increased only 35%. At a time when more people are renting, those people are generally less qualified to do so. These statistics simply reinforce the need for prudent qualification of tenants, which might be the most difficult task for a new landlord.
Obviously, I am a big proponent of real estate as an investment, but only when potential investors understand the challenges and legal responsibilities that are placed on landlords to do those tasks appropriately.
Now, go out there and build the financial freedom you desire!
Dr. J. David Chapman is an Associate Professor of Finance & Real Estate at UCO.