Want to Become a Landlord?
Wondering if it’s time to get into rental real estate? With housing prices and interest rates at lower levels, and the possibility of rates rising again in early 2016, the opportunities for landlords are certainly tempting right now.
Buying the right property at the right price allows you to generate long-term profits – maybe even short-term income – with a minimum of cash. That can spell double-digit returns, as well as tax benefits.
In many areas, renters are bracing themselves for tough times. There’s a housing inventory shortage in many markets, rents are soaring, and homeownership is at an all-time low: meaning renters are low on choices. Researchers blame the increase in renters on a number of factors, including record foreclosures in 2008 and economic troubles caused by the Great Recession.
Becoming a landlord isn’t for everyone, but it’s a great way to earn passive income. If early retirement, money for college, or financial independence are your goals, it’s just another way to make them happen, but is the income you’ll receive from tenants really worth the time, money, and effort?
Before jumping into the Landlord business, consider what it takes.
Research the rental market in your area and gain an understanding of current and past trends in rents and occupancy. It’s also important to figure out what you need to earn to cover your expenses and turn a profit.
If you don’t like dealing with people or doing repairs, you can also research property managers in your area. For a monthly fee, they’ll do most of the heavy lifting for you—including finding tenants, hiring out repairs, and more.
Checklist for would-be landlords when looking at a property:
Why is this property for sale?
How stable have the tenants been, and has the rent gone up over the years?
How much money do you have to put in, and how much does that mean you have to up the rent?
For how long can you handle it remaining vacant without losing money?
Who’ll manage the property, and how much will those services cost?
Managing a rental property is a job, and the cost and the calculation aren’t as simple as rent – mortgage costs = profit.
You have to also factor in things like: destruction of property, late payments, loss of tenants, vacant apartments that need to be cleaned and repaired to be ready for the next potential renter, loss of income when renters change over, credit checks, maintenance, utilities, exterminators, insurance, legal advice, advertising and other additional costs.
Don’t forget the cost of your own time. Before you rent to anyone, you also need to pull their credit report; get their criminal record, if applicable; talk to their personal references; and their former landlords.
Pay attention to the details and collecting the rent will be a relative breeze. But lose sight of the checklist that ensures you rent to responsible, well-adjusted people and your rental can become a nightmare:
You need plenty of cash — Banks have tightened lending standards significantly over the last decade, which means that a down payment of at least 20 percent is almost always required. If you can’t afford to come up with the down payment, then you probably can’t afford to own rental property in the first place.
You are taking a risk — Many people think owning rental property is always a money-making endeavor. Investing has plenty of risks including: nonpayment, property damage, prolonged vacancies, and more.
Bad things do happen — When you’re a landlord, “no news” is typically good news, but there’s a reason why so many people are hesitant to get into renting. Horror stories do indeed exist. The kind of damage people can leave behind can be extensive, and can cause many a headache.
It’s a lot of work – You will spend many weekends painting and cleaning properties in between tenants. Count on meetings to discuss remodeling projects and repairs, and time spent dealing with, for example, late rent payments, feuding neighbors, and secret pets.
Is your temperament fit to be a landlord? -There are some people who just don’t have the temperament to be landlords. This is one investment where your personality can kill your profits, so it’s important to be realistic. Otherwise, you can lose your investment and your credit rating all at the same time.
You may want to reconsider if you any of the following ring true:
1. You’re a soft touch: You can love your renters, but you can’t let your personal feelings get in the way of your business judgment. If your contract states rent on the 1st of the month, you should start eviction proceedings on the 5th of the month. The faster you file the paperwork, the sooner you can replace the late paying tenants with somebody who can afford your rental unit.
2. You think a “cushion” is what goes on the couch: Before you buy a rental, you need to amass an economic cushion amounting to at least six months of housing expenses, plus extra to pay attorneys. That gives you the staying power required to manage most worst-case scenarios, because you’re still on the hook for the mortgage, taxes, insurance, repairs and other costs, even when there’s no income coming in.
3. Payments always come as a surprise. When you own a rental, ordinary/extraordinary expenses are a common occurrence. To be a good landlord, you have to be a master of cash flow, planning ahead for everything from property taxes and insurance to major repairs, which can pop up at any time.
4. You love to over decorate. If you’re a master at inexpensive home decorating, you may be fine. But if you’re thinking designer tile and a Viking stove, you’re pricing yourself out of the rental market. Decorating should be light, bright and inexpensive, unless you want to have the sharpest vacant rental on the market.
5. You’re a heavy sleeper. Renters can have a broken water pipe at any hour of the day or night. If you don’t have a 24-hour handyman to call, you are the 24-hour handyman. It’s the kind of nightmare you can’t just snooze through and ignore.
6. You hate technicalities. If you’re going to become a landlord, you need to get familiar with tenant’s rights laws in the area where you buy. If you don’t know the rules and follow them fastidiously, you can be sued by your tenant and they could be allowed to stay in your home – rent free – almost indefinitely.
The fact is, renting has simply become the best option for many. In fact, recent reports show that rents have skyrocketed in many parts of the country due to increased demand, so much so that the cost of renting has moved out of reach for many middle-class families. While that’s bad news for those who simply want an affordable place to call home, it’s a real estate investor’s dream.