Top Reasons Real Estate Investors Need a Financial Plan
Welcome to month three of our real estate newsletter mini-series! For the month of June, we will identify ways to optimize your growing rental portfolio. We will address ownership of multiple properties and the complexities that follow. We will touch on the subject of raising rents and having a strategy to keep up with inflation, as well as the “sweet spot” for down payments, leveraging a property manager, and developing financial independence.
How do I keep up with inflation on my rental rates?
Keeping up with market rental rates is a challenging but necessary practice. What works best for many of our clients is to only raise rent when there’s a turnover of tenants. Use that turnover as an opportunity to evaluate the market and raise the rent at that time. Work into your lease that rents will remain the same for a period of years—commit to that and you will earn long-term tenants as your reward. Once those tenants vacate, raise rents on the new lease and that will be your opportunity to ‘catch up’ on inflation. While it may be challenging to keep up with real inflation when you are a property owner, do your best to stay at or above a 10% rate hike every 5 years (a 2% average annual increase is what we tend to model in our custom financial plans to be conservative). Ideally, to keep up with real inflation, you would need to average a touch over 3% per year, so if you can do that, you are ahead of the curve.
How much should I plan to put down on an investment property?
While we remain in a historically low interest rate environment, plan on financing the property to the greatest extent you can while putting down the least amount needed to close on a conventional loan. Most of the time, this means you’ll need to come up with 20% for single family homes, and 25% for multi-family homes such as duplexes and fourplexes. Doing so will help you avoid higher interest rates, private mortgage insurance, and assuming more risk than needed. Also, keep in mind that if you cannot cash flow on a property that you have put down at least 20% on, it may be a sign that it’s a poor income-producing investment.
Should I hire a Property Manager?
We get this question a lot, and we might have to bust out the cliché…it depends! For some, managing a simple rental property is no big deal, especially with the digital tools available online for lease construction and listing. However, once your real estate portfolio starts to consume your life and your tenants are calling you for the 4th time this year complaining about the broken garbage disposal…you may be thinking about your options. The main consideration is: what is your time worth? If you are a working professional with active kids, it’s probably going to be worth your time to hire someone. If you do choose to hire a property manager and you are in Denver, check out https://keyrenterdenver.com. Great pricing and a variety of service options.
How many ‘doors’ will it take to create financial independence?
While this is a very specific question that we get quite often, the answer is different for nearly everyone. We recently had a client hire us to run this exact model for them, so let’s use them as an example. As a hard-working couple, Mr. and Mrs. Client are in their early 40’s and make great income already in their W2 salaried jobs. They have slowly purchased a duplex and two fourplexes out of state. They currently have 10 total doors and came to us to find out how many they still needed in order to achieve complete financial independence, keeping in mind they were also maximizing 401(k) plans and other savings strategies while at work. In the end, the financial independence ‘sweet spot’ for this high income (and comfortable lifestyle) couple was 24 doors. Could it be the same for you? The only way to know is by running a customized financial plan that accounts for your current salaried incomes, savings rates, lifestyle, debt, type of property, appreciation, and inflation, among other factors. When it comes down to it, real estate can be one of the best investments you can make, but take a lesson from our new clients…get a plan!
If you are interested in diving deeper into planning with real estate or would like to find out more information about Colorado Wealth Group, please browse through our website, www.coloradowealthgroup.com. Initial consults are always complimentary and make sure you let us know you found us by reading this blog!
Stay tuned for next month’s mini-series topic, Asset Allocation (and where real estate fits in).
