Rental Investment May Seem Safer Than it

¶ … Rental Investment May Seem Safer than it Really Is" offers counsel regarding the pros and cons of venturing into rental property investments (Bernard, 2013). The article explains the appeals of using rental investments to create a new profit stream -- low interest rates, low home prices, potential for supplemental income and the potential for rents to rise in the future. With a turbulent stock market and fickle returns on mutual funds and other investments, many people have come to view owning and operating rental properties as a safer alternative.

However, the piece also warns about the other considerations that many fail to take into account -- tenant issues, unforeseen expenses and competition for the best deals. Many new investors may underestimate the amount of work required to successfully manage and maintain a property. As the article points out, screening tenants, collecting rents, or evicting when a tenant loses a job or otherwise cannot pay can be daunting tasks and while property management companies can be brought in to provide such services, they will also take a percentage fee which reduces monthly profits. Maintenance issues might require bids from technicians and vendors and tenants may also put a great deal of wear and tear on a property. All of these could mean large expenses or carrying costs.

The article further discusses the true reality of tying up financial resources in rental properties. The properties are not as easily leveraged as a primary residence may be. There may be no immediate way to take advantage of equity or refinance. Rental appraisals and histories are often demanded by banks and depending on business and market conditions such records might be negative. Even qualifying for an rental property mortgage is difficult and ultimately involves a great deal of financial exposure should the housing market slump. The mortgage, if it is approved, is also more likely to carry a higher interest rate and require a sizable down payment. One could also be putting all their eggs in one basket. As brought out by Bernard, a highly diversified financial portfolio is more desirable than one with nearly half of the assets tied to one investment (2013).

Opinion/Analysis

My overall opinion of the article is that it is well-written, timely and offers a great deal of insight into the pitfalls that anyone venturing into this arena should consider. There is stiff competition for acquiring rental properties right and due to housing trends at the moment, what looks simple and profitable may not be ideal for everyone. I particularly liked the mention of the fact that private equity firms are major players in the investment property business (Bernard, 2013). They have the resources and experience to buy properties and turn a profit quickly by buying in cash and in bulk. That makes it harder for the little guy to compete and keep things afloat once a rental property has been purchased. It takes reserve cash to manage it properly and the magnitude of that can often be underestimated (Neuman, 2005).

In addition, the article does a good job of describing the present state of financing. Mortgage companies are still leery and while there are loans available qualifying is much more difficult than it used to be and costs are higher. In addition, it's important to think about the unanticipated. What if a tenant cannot pay their rent? The investor is forced to cover those payments, often in addition to carrying a primary mortgage elsewhere (The Big Long, 2012). Reserves are important and without them one could be in financial danger, ruining their credit and taking major losses (Birger, Caplin & Feldman, 2004).

The moral of the story is all that glitters is not gold. The market is still relatively unpredictable and unless one is a seasoned landlord it might be best to start slow with one property and learn about the ups and downs of holding this type of investment (Neuman, 2005). There are many questions that need to be answered in regard to disaster and vacancy contingency plans, management decisions, tax liabilities, and financing in general. This article does a great job of presenting considerations for each of these areas, but could perhaps be improved by talking about the actual profits some independent investors are seeing right now.

Relevance to Financial Management

The rental investment information presented is extremely relevant to financial management, because the ultimate goal in investing is to create and maintain a positive cash flow (Birger, Caplin, & Feldman, 2004). The information presented regarding pitfalls and questions that should be asked beforehand can help would-be landlords gauge the market, steady themselves for fluctuations, better evaluate the financial health of a property, and safeguard the overall financial health of their entire portfolio (The Big Long, 2012). Negative cash flow can result from unanticipated repairs and having units occasionally unavailable -- which could be disastrous. A prudent financial manager will take the necessary precautions to be prepared in the event of the unexpected.