If you have ever had to rent out a home that you were unable to sell, you might wonder why anyone would ever buy multiple rental properties. After all, renting out a single unit can be an incredible hassle involving collection problems, maintenance and other frustrating issues. Given all these concerns why would anyone choose to buy multiple residences and rent them out to strangers? Here are three very good reasons why people choose to do that:
Reason 1: spread the risk of vacancy. If you own a single real estate property or even a few rental properties you always have the risk that your renters will move out leaving you with mortgage payments and no stream of income to cover those payments. If you have one rental unit sitting vacant you have to pay 100% of the mortgage on that unit even though you have no dollars coming in. This risk is reduced when people buy multiple rental properties instead of only one unit. Imagine that you have 100 units; when one of those units becomes vacant you can be far less concerned because the profit you are making from the other units will more than make up for the costs absorbed in covering the mortgage and other expenses on the vacant unit. In other words, the more rentals properties you have the more you spread the risk of vacancy.
Reason two: economies of scale. With multiple properties you can also benefit from economies of scale. A landlord who owns a single unit does not have much leverage with repairmen and other vendors if you own 100 units though you have significant clout with these providers of services. A carpenter for example might be willing to install cabinets fairly cheaply for you if you can guarantee that he will have 100 separate installation jobs (i.e., 1 in each of your properties).
Reason three: higher gross income. Despite the compelling nature of the first two reasons listed above most people who own multiple real estate rental units do so simply so they can increase their income from real estate rental. The more units you have the more money you can make potentially. Obviously with more units you also run certain risks. In the recent economic downturn of 2008 and 2009 many individuals who bought up real estate properties became unable to pay their mortgages and saw a domino effect as property after property went into foreclosure. If run responsibly however a portfolio full of real estate properties can be quite profitable.
While the decision to own multiple real estate properties does not make a lot of sense to some people, for the reasons listed above many people are not content to buy one real estate rental property and instead build an entire empire.