Plenty of people look at buying rental properties or investing in real estate as a way to earn extra income. While the money you make from rental properties is often called "passive income," in reality, there isn't much that's passive about it. Whether investing in rental property in PA is worth it for you or if you're better off choosing another option for your money depends on several factors.
Guide to Investing in Property in Central PA
Should You Invest in Property?
One way to see if investing in property is right for you is to ask yourself if you have realistic expectations regarding what's involved in buying property. If you watch enough reality TV, you've probably seen plenty of shows that make buying cheap houses, fixing them up and selling them or renting them out for huge profits look like child's play. Although those shows do play up the challenges involved in real estate investing for dramatic effect, everything is usually neatly resolved at the end of 22 or 46 minutes.
In real life, things aren't so easy. If you've already got a jam-packed schedule, becoming a landlord might not be the best option for you, unless your plan includes a full-service property manager such as Harrisburg Property Management Group. Sure, there might be months when your tenants don't need you at all. But then again, there will also be months when you need to be available to them pretty much around the clock, these are months when a quality and reputable property manager are invaluable.
Another thing to consider before you invest in property is the actual cost versus the potential rental property ROI (return on investment). What is a good return on real estate investment? The average rental property return on investment is around six-to-ten percent after expenses, but it depends on the neighborhood and rental market in which you purchase your investment property. How much profit you should make on a rental property, though, depends largely on your goals.
ROI can also be tricky to calculate since it involves more than just adding up what you believe you can earn from rent and subtracting anticipated expenses. You also need to think about possible unexpected expenses, vacancy, turnovers, capital expenses, property taxes, insurance costs and any utilities you may pay during vacancy. Since there is a chance that a property can be empty for several months, you need to think about lost rental income when deciding if investing is worth it for you.
What Type of Investor Are You?
- Landlords by Default. Pennsylvania didn't escape the housing market bubble and crash. Between 2001 and 2006, home prices in the state rose by 54 percent. By the second quarter of 2008, home prices fell by nearly seven percent compared to the year before, and only continued to decline well beyond 2010-11. As a result, many people who bought houses before the recession and wanted to sell couldn't, because they would lose so much money or were not capable of funding the deficit of their upside-down mortgage. So, instead of selling, they started renting out the homes, waiting for the day when a sale would let them break even or get to a level they could fund the deficit.
- Landlord by Design. Unlike a landlord by default, who started renting because it was the only option, a landlord by design is someone who buys a home, lives in it for a short period, then moves out and into to a larger property or something more fitting for their long-term plans. Instead of selling the "starter home," this landlord decides to hang onto it as a rental property, which was their original plan when they purchased the starter home.
- Purposeful Landlord. A purposeful landlord is another landlord by choice, rather than default. This type landlord is a typical investor, an individual who buys homes with the goal of investing for the future or creating a source of income. They often own several rental properties in different neighborhoods. People who inherit a house and decide to rent it out rather than move in or sell are also considered purposeful landlords.
Since each type of investor has different goals and concerns, the advice that makes sense for each of them will be slightly different. When considering your rental property investment strategy, what questions you ask yourself will vary based on the type of landlord you are.
Questions to Ask Yourself if You're a Landlord by Default
These questions will help you make the right decision regarding your property:
1. How much do you still owe on the property?
If you currently owe less than the property is worth, and the market value of the home is more than your initial mortgage, it might be time to sell.
2. Is the property vacant?
Selling a property that's been sitting empty can often be the best move, especially if the home's value has gone up since the last time the house was vacant. That said, it can be worth selling a home with tenants already living in it, as such a property might be particularly appealing to a new investor.
3. How long are similar houses staying on the market?
If your property is vacant and you're considering selling it, take a look at how long similar homes in your area remain on the market. You might make money by hanging on to the property and finding another tenant if the typical home is lingering for sale for more than 60-120 days.
You know what they say - time is money. If you list your property, without a tenant, and it takes 90 days to sell, you've missed out three months worth of rent. In comparison, if you find a tenant quickly, you can earn a monthly income for the duration of the lease, if not longer.
4. Do you see the value of the home increasing over the next decade?
You don't have a crystal ball and can't say for certain whether the value of your home will continue to go up over the next 10 years. But having a general idea of how the market is doing will help you decide if now's the time to sell or if you should hold on to the property.
The more likely you think it is that the house will continue to gain value over the next few years, the better off you might be holding onto it.
Questions to Ask if You're a Landlord by Design or Purposeful Landlord
Ask yourself these questions:
1. Would you rather buy a property that is low-risk/low reward or high-risk/high reward?
When it comes to buying rental properties in Central PA, you have two main choices. You can invest in homes or apartments in areas with more urban attributes such as the midtown or uptown area, such as in the heart of Harrisburg. Your other option is to buy properties in suburban areas.
Generally speaking, properties in central PA cities like Harrisburg cost less up front than suburban homes. You can expect to pay a higher price for a house in the suburbs. In comparison to the cost of the house plus other expenses like flood insurance, urban homes can bring in a relatively high rent. The rent you can charge for a suburban house might not be that much in comparison to the overall cost of the property.
The trade off is this: Properties in urban areas tend to be riskier. You might get a higher rent in comparison to the price. But you also face more of a risk for things such as evictions or for having the property sit vacant for months at a time. Suburban properties are usually less risky than urban ones. People tend to rent them for longer and you are less likely to experience things such as evictions. You might not bring in a lot of cash right away from a suburban property – in fact, it might cost you money here and there – but the payout, in the long run, can be more compared to an urban property. Perceived short-term cash flow versus long-term asset appreciation is a critical point to consider when assessing your investment property decision.
2. What's your overall tolerance for risk?
Understanding your tolerance for risk goes hand in hand with understanding whether you prefer a high risk/high reward property or a low-risk/low reward property. When you look at your investment portfolio as a whole, do you have a preference for low-risk investments or are you out there on the front line, putting your money in stocks and start-ups?
How much time you have for investing can also influence your appetite for risk. If you're thinking about renting as a long-term way to increase your retirement funds, going the low-risk route can work for you. You won't see heaps of cash right away, but over the course of 15 or 20 years, you can put away a sizeable nest egg – especially cash flow potential when you own the property free and clear or the return when you sell the property.
3. Where do you want your properties to be?
Your preference for the city versus the suburbs can influence where you buy your investment properties. If you're a city person, renting out a property in the 'burbs can be less than convenient. You might never have time to go out there and check on it. If you prefer the suburbs, it doesn't make sense to buy a home in the city. This decision may be one of more individual preference than direct financial performance.
4. How much maintenance/upkeep can you handle yourself?
Knowing how much maintenance you can handle or are willing to take on yourself can influence not only whether you buy an investment property but also how you manage it. If you are a DIY type and love to fix things, then you might be happy acting as an independent landlord.
If you'd rather separate your investment property from your personal life, it might be a better option to hire a property management company. A property management company can be there to respond to tenant's needs at three in the morning and can arrange for repairs and uptake as needed.
What Not to Do When Investing in Rental Property in PA
Everyone makes mistakes, especially when they’re just starting out as a rental property owner. When you're considering investing in rental property in PA, it helps to know what common errors to avoid and why. To protect your investment and your finances, don't do the following.
Underestimate costs. Underestimating how much it costs to buy and rent out a home is one of the main mistakes new investors make. When looking at the cost of owning a property, you need to look beyond the price of the home. There's also the cost of utilities and taxes, plus the cost of any surprise repairs and maintenance. Along with having enough money to pay the mortgage and other fees on the property each month, it's a good idea to have an emergency fund dedicated to property repairs. You never know when an appliance will break or when a tenant might cause some damage. Many times new investors are so anxious to do a deal, they put on their optimistic glasses and severely underestimate expenses and overestimate income potential. Do not make the numbers fit the deal just to do the deal, run the numbers until you find the right deal that fits the numbers.
Overcharge for rent. Sometimes, investors try to make up for higher-than-expected costs or try to counteract a risky purchase by charging more for rent. Generally speaking, overcharging for rent doesn't turn out well. You're not going to attract high-quality, dependable tenants when you overcharge.
Why? Because people who have their finances in order are going to know a bad deal when they see one. It sounds counter-intuitive, but charging too much for rent makes you more likely to rent to someone who won't be able to pay regularly. Plus, if you competitively price your rental, you'll be more likely to find a tenant for it – and have your choice of multiple tenants applying for the property, giving you the best opportunity to find the best one.
Make decisions based on emotions. "Well, he/she seems like a decent person" is not a way to make a decision about a tenant. Someone might be nice, but not have the income to pay the rent every month. A friendly person might have a terrible credit score or a history of evictions. Do your diligence when checking out renters, or hire a property management company to take care of the detail work for you.
Use a one-size-fits-all lease. You may be able to find a lease template online, which seems like an easy way to draft up an agreement between you and your tenant. But keep in mind that each state has its own rules when it comes to rentals and lease laws. For example, in PA, your lease needs to make certain disclosures and contain clear information about paying rent and late payment fees. Set yourself up for success, not failure!
Set Yourself Up for Renting Success
The good news is that you don't have to go it alone as a landlord. Whether you're a landlord by default, a landlord by design or a purposeful landlord, Harrisburg Property Management Group can help you with everything involved in renting properties from tenant screening to rent collection to property maintenance to tenant eviction. Contact us today to see how we can help you get the best ROI from your rental property.