View Rental Real Estate as an Investment Opportunity | Business

Based on data from the Pew Research Center, which was re-released in 2021, many rental housing units in the United States are owned by individual investors. The second largest number of rental units are owned by institutions and businesses.

Among individual investors who own rental housing, most own between five and 24 units.

In my practice, I seem to have identified at least two types of people when I proposed residential rental property as an investment strategy. Those who see a huge “headache” in owning rentals are those who see an “opportunity”.

That said, it’s understandable that some people see this investment strategy as a headache. After all, we’ve all heard horrible stories of rental housing being trashed, of tenants not paying on time or maybe not paying at all. To say that there is a potential stigma associated with owning rental housing is a fair and understandable statement.

However, as a campaign lawyer once said in defending his client against a charge of embezzlement, “No matter how badly you make a pancake, there are always two sides.”

Here is the other side of the pancake. Most residential rental investors are doing quite well. The value of their investment, especially in recent years, has exploded and made many people rich.

The mindset of active real estate investors is that this is a business and like all businesses there are challenges and decisions to be made.

Before we get to two great approaches to becoming a successful residential rental investor, let’s take a look at the systems and processes that mitigate much of the potential risk of being an investor.

Real estate investing is a “team sport”, but who is on the team?

A professional property management company is the # 1 key. To manage paid real estate investments in Kentucky, a person must be a licensed Kentucky real estate broker and have (or be) a designated prime broker. A real estate agent or John / Jane Doe who provides this service to the public for a fee is potentially in violation of state law, and the Kentucky Protection Cabinet is known to take legal action against such individuals. The Kentucky Protection Cabinet encourages Kentuckians to report any unauthorized activity by calling 502-782-2736. The prime broker of a property management company must adhere to strict regulations when it comes to the mixing and conversion of funds or there may be serious repercussions, and rightly so.

A CPA is key # 2. Tax accounting for real estate investments is more complex than that of the average individual who works for an employer and receives a W2 at the end of the year. Calculating depreciation alone, which is potentially one of the biggest advantages of this investment strategy, should not be left to the neighbor who “likes to do tax returns” or to a volunteer. Choose a CPA to be part of the team and stay with them.

A maintenance person is key 3. Some investors prefer to take care of the maintenance themselves, especially when the owner is local and few units are involved. The most common approach is for the property manager to have a level of authority to handle the maintenance of minor issues up to a point and then seek approval for larger projects. The advantage of this approach is that the end of year income statement will contain a true picture of the expenses and that it will not be necessary to collect the receipts and merge them into the annual income statement. In addition, tenants benefit from better customer service.

Another benefit of a professional property manager is to develop a “maintenance plan” for each unit. Predicting when appliances, roof, HVAC, and water heater may need to be replaced is good information to have and easy to determine.

A real estate broker is key # 4. This one is pretty cut and dried. You will need someone to help you identify, appraise and possibly set up financing for potential properties. This person’s dp can help identify an insurance broker and other services that might be needed.

Let’s take a look at the two possible approaches to owning real estate as an investment.

The first is property as an individual. It works like it sounds. The property belongs only to an individual or as a husband and wife, as we own our own homes. This is by far the most common property style in the one to five unit category.

The second is ownership with partners. The obvious benefit is the ability to access more funds, own larger projects with more units, and share the financial risk. This is especially where a local lawyer ends up on your team. The structuring of the entity that will hold the asset, the operation of fund accounting, the development of an operating agreement and the eventual disposal of the asset are elements to be addressed in the operating agreement. and other documents. Leave this process only to a local lawyer.

In conclusion, while real estate ownership is not an investment strategy for everyone, it has proven to be the basis of wealth for many Americans. It is also possible to develop commercial real estate investment opportunities in concert with others, particularly in retail, restaurant and office building projects. While this is a bit more complicated and usually requires a lot of cash to start with, it can be a good investment strategy for some.

As always, I recommend seeking legal advice if you are asked to sign a document that you do not understand.

TW Shortt is a past president of the Heart of KY Association of Realtors and broker of the RealtyWorld Knox Realty Group.

TW Shortt is a past president of the Heart of KY Association of Realtors and broker of the RealtyWorld Knox Realty Group.