Management and cash flow are the two most important keys to success in rental property. Here's how to analyze these factors to determine if you should sell or rent.

There is no end to the stories of people who have become wealthy collecting rental properties, many of them starting with their former home as their first rental. There are also plenty of horror stories from those who tried it once and will never own a rental property again. What makes the difference in these two potential outcomes?

There are actually just two factors that can predict if you will become one of the wealthy or one of the miserable.

Rental Property Management

The most important factor is managing your rental property business well. Yes, it is a business. If well managed, it will prosper. If poorly managed, it will fail.

As a general rule, you will not be very financially successful if you hire a real estate or property management company to manage your rental home for you. There are two reasons.

One is that a management company, no matter how good, just doesn’t attach the same importance to selecting good tenants and maintaining the property that you do. To succeed, you’ll need to live nearby where you can manage the property yourself, and you’ll need the personality and willingness to do a better job picking your tenants and keeping your property in good condition than a hired manager.

The other reason is that management fees eat up part of your profits. In many cases, management and leasing fees can make the difference between positive cash flow (money left over after all expenses) and negative cash flow (your cash losses each year.) Yes, there are tax benefits, but unless you’re already wealthy, making cash on your investment is more important than collecting paper losses.

Rental Property Cash Flow

Positive cash flow is an important consideration because it affects your management psychology. If the money you earn on your rental isn’t sufficient to carry you over during a vacancy, you’re going to feel pressured to rent to the first person that comes along. You need to be choosier than that. One bad tenant can cost you far more than a month’s rent.

Without positive cash flow, you’re also going to be tempted to put off maintenance. This is the start of a vicious cycle. When the tenants perceive you don’t care, they stop caring. Wear and tear accelerates. When you have to rent the property to the next tenants, the quality people will perceive the home as a little rundown and they’ll rent elsewhere. That leaves only less desirable tenants to rent to. And it continues downhill from there.

In theory, predicting whether you will have positive cash flow seems easy. If the monthly rent is more than the mortgage payment, you’re making money right? Well, not exactly.

If you put all the leftover rent in a savings account each month, would it be enough to pay for maintenance and repairs, to pay the mortgage when the house is vacant, and also cover advertising and other costs necessary to re-rent the property?

If not, you’ll need another source of funds to keep your business going until the rent increases enough to cover expenses, or the property has appreciated enough for you to cash out with a nice profit.

Deciding if You Should Sell or Rent

To determine if you should sell your home or rent it, take the following test:

• Will the rent (minus vacancies) be enough to cover all expenses, or do you have enough back-up funds to cover the shortfall for several years if necessary?
• Are you going to live near enough that you can actively manage the property yourself?
• Are you willing to let the home sit vacant until you can find a quality tenant rather than renting to the first person who shows up with a deposit check?
• Are you willing to put in the time, money, and effort necessary to keep the home in good repair so that it will attract a quality tenant?

If you can't answer yes to all the questions above, sell your home; don't rent it.

Related Articles

Investing in Foreclosures

House Flipping Expenses

Financing Is Key to House Flipping