Rental Property Owners: What Are Your Income Goals?
The goal of any investment property owner is to make money. A house flip can turn a quick profit, but it also takes a lot of work. Buy and hold investing is a slower and steadier path to long-term profitability. It takes patience, planning and property management skills to make you the most money over time.
Setting Rental Income Goals
It’s important as a rental property owner to set income goals. This can not only help you identify the right properties to buy, but also make sure your business stays on track as long as you own the rental unit. How much do you want to pull in each year? How much do you need to make to turn a profit? How long do you plan to hold onto the property and what kind of appreciation can you expect? These are all good questions to ask yourself as you build your investment plan.
Let’s take a look at the first couple of questions above. An annual income goal is a good place to start. It’s important to understand how much you need to make each fiscal year in order to make a rental property investment worthwhile.
Covering Your Ownership Expenses
It starts with your ownership expenses. Any down payment you apply may not factor into your first-year income goals, but should be considered over the length of time you intend to own the property. Otherwise, you can calculate your projected ownership and property management expenses for the year. We’re talking about general maintenance and repairs, property taxes, mortgage payments, insurance and other costs.
Let’s say you are expecting to spend $20,000 this year on ownership and management of the property. You set your income goal at $24,000 because that’s the annual profit you want to make. That means you need to average $2,000 in rent each month over the course of the year. That may be simple if that’s a realistic rental price and you have a tenant on lease for the whole year. It can get more complicated if you are anticipating any vacancy periods. You may expect the unit to be empty for a couple months as you find a new tenant. This may affect your rental price if you need to make up for lost income because of vacancy. You do have to be careful about compensating too much and setting your rental price too high—so high that it actually extends your vacancy periods and costs you steady income!
Seasonal Rentals vs. Long-Term Rentals
Rental property owners in seasonal markets may have different priorities and plans. They may only be renting out the unit for 4-6 months out of the year during peak seasons. However, they can ask for a lot more for these short-term rentals. The unit may only be occupied a portion of the year, but the higher rent prices make up for it.
Long-Term Property Appreciation
Some rental property owners may only be aiming to break even from month to month and year to year. They have $20,000 in ownership expenses and they pull in around $20,000 that year. Costs are likely to go up as long as you own the property, so that’s when it makes sense to raise rent prices. Either way, these investors are pretty much just breaking even. Their income goal is long-term. They are looking at the appreciation of the property as the main reason to buy and hold a particular rental unit. They hold onto the property for 10 years and cover their ownership costs along the way. Then, they can sell the property for a higher price than they purchased it. It may have appreciated $150,000 in that time and that’s a pretty nice profit of $15,000 a year over that period. It just took longer to see the liquid return.
All rental property owners should benefit from long-term property appreciation if they take care of the home and are smart about when and where they buy. It’s important to set annual and monthly income goals along the way. Ideally, you should at least cover your ownership expenses. Any additional profit from year to year is nice, but may not be your top priority with a buy and hold investment strategy.
If you are looking to purchase and own rental properties, join the PropertyLark home buying network for access to off-market deals and property analytics resources that will help you make smart rental management decisions.