premiums, and higher maintenance costs, especially if the new property is significantly larger or has high-end finishes and landscaping. High-end properties often also require security systems, community maintenance or association dues, and can have higher utility bills. Trading up a rental property can also have a significant impact on your cash flows. While a more expensive property may appreciate at a higher rate than a less expensive one, in the meantime, a lot of your cash will be tied up in mortgage payments and other fixed costs. This is true whether the market goes up or down, and no matter how much rental rates may fluctuate. A more expensive property will also typically produce a high gross income. But all your costs will also increase. You may expect the rental income to cover your increased costs, but if something does not quite go according to plan, you
could rapidly find yourself in serious financial trouble. When taken together, all these aspects point to the importance of including all the costs of trading up your rental property into your profit calculations. It is the net profit, not gross income, that should guide your decision of whether to trade up or not. In the end, you may find that despite the increases in rental income and property values, a more expensive property simply is not as profitable as the ones you already own. If, however, trading up does make sense, do so wisely. •
Jeff Pepperney is the President of Real Property Management, the largest single-family property management organization in North America. Learn more at realpropertymgt.com.
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