Real estate investments -- specifically, real estate you buy and hold in an effort to generate income -- can be one way to build wealth and generate passive income. But one question that might be asked when it comes to this type of asset is, how much is too much? In other words, how many rental properties can you own?
The answer to the above would likely be: As many as you want. Depending on your resources, and property availability, you could own blocks and blocks of apartment buildings and commercial structures. But before you launch your next real estate spending spree on those rental properties, it’s a good idea to consider the following four points.
1) Your investment goals. Are you seeking out higher risk with potentially higher return with your investments? Or are you seeking to protect and maintain the capital you already have? If your intent is more cash, and you have a high risk appetite, then buying more real estate could be a good strategy. But when you’re figuring total income, also be sure you understand the expenses you would be undertaking, as you increase the number of properties you own.
2) Your time. Obtaining real estate as a direct investment means you are hands-on throughout the process of buying, owning, maintaining, and selling those assets. Before deciding how many properties you want to own, it’s important to understand whether you have the time to devote to the upkeep. You’ll be responsible for everything, from ensuring the lawns are mowed, to fixing leaky faucets, to updating fixtures and countertops, as they wear out. You’ll also be taking those midnight calls, when air conditioners stop working, or furnaces suddenly shut down. While hiring a property manager can free up some of your tasks, real estate ownership can be a very time-intensive endeavor.
3) Your capital resources. While real estate can be a great way to generate income, it also requires capital expenditures for maintenance, upkeep, and unforeseen situations. Even if you have enough parked in your savings account for any of the situations mentioned in the above section, you could find yourself dipping into those funds more often than you’d like. Or, you could find yourself having to take on more unintended debt. If one of your tenants trashes a unit, that’s an unexpected expense. If a storm removes a roof from one of the properties, more money will be needed to replace it. A tenant who decides not to renew means empty space -- and less cash flow. When considering buying more properties, be sure you understand the hard costs of increasing your asset count.
4) Your diversification strategy. If portfolio diversification is your goal, then owning more real estate could be beneficial. But you might need a lot of money -- and many properties -- to achieve true diversification through direct real estate ownership. Another option to pursue more real estate diversification involves investment in Delaware Statutory Trusts (DSTs) or Real Estate Investment Trusts (REITS), rather than taking on the responsibilities of owning many properties. In fact, investment in these financial and ownership structures can help remove the “trash, tenant, and toilet” headaches that may occur with hands-on property ownership, while providing you with access to different quality real estate assets.
The takeaway here is that, while there is no hard and fast number when it comes to the number of rental properties you can own, it’s important to take a good look at what multiple asset ownership might look like. Certainly, more properties could mean more income. But it can also lead to higher costs, less time on your hands, and unavoidable landlord headaches.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. There is no guarantee that the investment objectives of any particular program will be achieved. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time. Diversification does not guarantee a profit, or protect against loss, in a declining market. It is a method used to help manage investment risk. Programs that depend on tenants for their revenue may suffer adverse consequences as a result of any financial difficulties, bankruptcy, or insolvency of their tenants. All real estate investments have the potential to lose value during the life of the investment. All financial real estate investments have the potential for foreclosure. No public market currently exists, and one may never exist. DST programs are speculative and suitable only for accredited investors who do not anticipate a need for liquidity, or can afford to lose their entire investment. TIC properties employ professional asset and property management, so while TIC co-owners vote on major issues, they do not have direct say over day-to-day property management situations.
