The title of this post is a line attributed to Phil Murphy of Forrester Research. Its relevance to rental properties is the importance of being able to remove some of the emotion from this very emotional business. Here are some of the metrics we use for measuring.
Is this a good tenant? This is for tenants who are currently living in a home and here we use a three step evaluator.
- Do the pay their rent on time?
- Do they take care of the house?
- Do they report any potential problem?
Is this a good house? This is the question we ask to decide if we want to buy this house/keep this house as an investment property and it is used to compare with other houses. Again we have a basic three step evaluator.
- What is the expected "rent/value ratio"?
- What is the "expected appreciation"?
- What are the expected "repair/tenant replacement costs" over the next 10 year period?
The last item I am constantly measuring is how does the performance of this asset measure against other types of investments. People often question the value of real estate against simply investing in an S&P index fund. Real estate can be as dynamic as growth stocks or gold investments or as boring as corporate bonds. The type of real estate you buy should depend on your risk tolerance. The big mistake many make when investing in real estate is they measure the growth of the asset, which may be a meager 3%/year over time, instead of measuring the growth of their actual investment. If I invest $20,000 in a $100,000 home (converting a cash asset into real estate) and the home appreciates 3%/year over a 10 year period I end up with a $60,000-$70,000 asset. I end up with this large number because of appreciation of the asset and the tenants paying down my mortgage. My friends told how great the performance of their stock portfolio is, but it is rare for anyone but extremely wealthy people and their hedge fund managers to outperform my modest rental property, if you remember to measure the performance based on the actual money you invested. Just tell your friends "My lowly real estate only grew at 3%/year over the past ten years", but watch your personal balance sheet grow faster then your friends.
I hope this helps you keep your wits while you are a landlord. I am part mercenary; financial returns are my measure of whether to stay in this game. I am proud to provide a quality home to the renting public, but I am not a total mercenary. If I had to offer a quality product and lose money, then I would run from this business as fast as I could. If I had to be an unethical slumlord in order to make money I would run from this business as fast as I could. I think this is the best of all worlds, I get to add value and get a higher then average return by participating!