You want to be an investor in residential rental properties and you want to insure that your efforts are profitable. This is of course an assumption since you are reading this article. The next question that you may have is “how do I get started”? Please start by reading our article about being a first time property investor. This will give you a good overview of the process.

This article deals with a key aspect of the process, setting goals. Without goals, you can not measure success. An example, you buy a property and after one year you are earning X% cash-on-cash return. Is this good? If you failed to set goals in advance that questions can not be answered. If you however decided at the start that you wanted to make at least Y% than your what you have achieved is falling short of your goal.

Setting goals is part of the process and attached to that is how do you achieve your goals. The what, where, when, why and how are all segments of the overall goals you set. Another blog on this site will cover return on investment an other financial indicators of success. One of your goals will be to determine where you want to be in five years. That is, what type of return on investment are you looking for.

Before I get into the questions that you have to answer, let’s explore what type of investor you are. What I mean by this is your goals will differ from another based upon your life situation. To start, if you are young e.g. well short of retirement e.g. 20’s-50’s. your goals may focus on the long term from five to thirty years. At your age, your property has time to season.

If you are close to retirement or in retirement, you may be interested in short term benefits e.g. current income from rentals. Short and long term goals are not always that different based upon the property and your goal for return on investment.

Of course the longer you own the property the more profitable you will be. There are several reasons for this:

  • Mortgage is paid down increasing equity
  • Value of property increases improving equity
  • Up front cost of acquisition. repairs etc. are paid
  • Rents increase and possibly at a rate greater than your expenses
  • When you sell, the selling costs are divided by the total profit you have earned since the purchase. This lowers the percentage of those costs compared to the profit you earn.

You can see why it makes sense to hold property at least for a few years. If you are a flipper that is a different model and does not apply here. Holding property for five years is a good practice and longer if it makes sense. Some investors will refinance after a few years e.g. five when there is enough equity to pull out for other properties.

If you are younger you can afford to hold for ten, fifteen years etc. If you are in retirement this can work on the five year plan but depending your age perhaps not a longer term plan. You may want to spend the principal at some point.

If you are younger you may want to reinvest the capital in new properties. If you are older you may want to take the rental income every month. These are all things that you should have decided before you take the plunge into residential rental property investment.

My initial goals are:

  • I want to earn x% five year return on investment
  • I want to spend/invest monthly rental income
  • I do or do not want to buy additional properties in the near future
  • I want to be a passive investor or eventual active investor (full time)
  • I plan to hold my properties for x years or I am not sure yet
  • I want to buy an investment property to eventually live in it (or one of them)
  • I prefer to put my properties in an LLC/Sub chapter S or hold as sole proprietor

Answer the questions and you have started your investment program. You can of course change your goals. You may want to earn XX% five return on investment but that may not be possible depending upon how much you have to invest, the type of mortgage and the price of housing relative to the rental market. Given this information, you may need to adjust your goal to YY%.

You will want to earn as much possible of course, your goal for return on investment is essentially a floor (you do not want to make less than X). You should compare your target return to your income from existing investments e.g. stocks. You should expect at minimum to do as well with the potential to do much better with rental property.

Determine if you want to buy more than one property and how often. Go through the questions and formulate answers which will be needed to find properties and financial tools to help you reach your goals.

I recommend that you start with a single family home. There are many reasons for not starting with condos, duplexes or large apartment complexes. You can read about my reasons in the blog about your first investment property.

Be sure that you read our other blog as we have directed the elements of successful investing into separate topics. You may also want to visit our page about our unique first time investment program.