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Investing in rental properties

Chris Farrell Aug 9, 2011

Question: Hi Chris, I have $120k setting in a saving account. I do not need this money for several years to come 5-10 yrs. I am considering investing it and thinking to buy and finance a rental property (house-condo) that can generate positive cash flow. I know I can catch a steal in this market, yet vacancy rate could be high as well. What do you advice? What other options should I consider? Many thanks -Alex, Seattle, WA

Answer: It’s an intriguing idea. I have been looking at a number of research reports and the dynamics of a rental property investment seem attractive: The demand for rental units is growing and there is very little new supply coming on the market.

That said, you’re taking money from essentially a risk-free account and putting it into a risky small enterprise. The bottom line: Is this the kind of business venture you want to spend time and effort developing?

Here are a couple of things to consider as you investigate the investment.

You’ll want to become familiar with all the major aspects of the business, including landlord regulations in your area, prospects for good tenants, insurance on the business, cost of the financing and repairs. You’ll need to figure out the potential cash flow that could be generated from the rental property. Like any small business it’s all about generating positive cash flow.

The self-help legal organization Nolo.com is a good resource for potential and existing landlords. It will give you an overview of the business.

I would also talk to landlords in your area and attend landlord gatherings, such as those sponsored by the Washington Landlord Association. You’ll get a feel for what are the major current concerns of landlords and how their business is doing.

You could also meet with a CPA to find out how you would be doing after taxes with the investment.

What other options might you consider? It’s a huge question. My one thought is don’t let the measely rate on your savings burn a hole in your pocket. Make sure you’re protected from downside risks, that you have an adequate margin of safety. I would ensure that you’re well-diversified. By the way, 5 to 10 years isn’t that long a period of time. I would lean toward conservative investments.

However, once that’s done you may still have money left over to invest in a more speculative venture, I’d figure out what kind of investments would you enjoy, from researching and buying stocks (a mini-Warren Buffett) to owning and managing a rental property to investing in local businesses alongside like-minded entrepreneurs.

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