Many real estate investors long for owning a rental property for a passive income, increase in wealth and financial independence. Before stepping into rental property investing you should make sure that you invest some of your time in learning the market and its basics. In this blog we will be discussing all the things to know before investing in rental property. The most imperative question you have to ask yourself is would you like to be a landlord? Do you have the temperament to become one and manage your property and also address the complaints of tenants? It is easier said than done. Most landlords like to hire a property management company to handle all of this and pay them a monthly fee. The management of a rental property is a not an easy task for most of the investors. Differences between tenants, tenants that won't pay, sudden and costly repairs, long vacancies are some of the drawbacks of owning a rental property. But if you manage all the affairs very well, a rental property investment can become a steady source of income for your family. Best investors always do their due diligence before taking the plunge.
Here are a few things to know before investing in rental property
If you're not careful rental property can be an expense, instead of an investment. Here are the things you must consider before buying rental property.
It's not an easy money as it seems
Investing in a rental property is frequently placed in the category of income sans work. However, it's not like that at all. In spite of the fact that it actually qualifies as passive income, that doesn't mean you're not going to buckle down. Actually, in the event that you choose to manage the property yourself, you must know that unlike stocks it is not a hands-off management. You will be required to do a lot of work for managing the rental property as wells as your tenants. Making money in real estate is not necessarily as easy or simple as you've been told. Even if you hire property managers to help you manage your rental properties, you still have to manage them. Buying rental property is not for everyone. It should be an investment option you consider only once you’ve achieved a certain level of financial independence. If you do it right, you can put yourself on the road to success with cash regularly flowing into your bank account.
There are is no assurance that it will be a successful investment
Investing in a rental property is a bit risky. Just like any other business there is always an element of risk involved. Rental property investing is no different. No one can give you a guarantee that your investment will be a successful one. With fluctuating market and economic conditions, you really need to ascertain whether it is worth your time and money. In rental property investing, you should not forget that the reason for investing in rental property is to generate a steady income stream for yourself. Therefore, it is important to do some research before choosing the property as well as the market in which it is located. Do not make a hasty decision, if you don't want to regret later on.
More money is needed than the cost of the property
When investing in a rental property, the underlying purchase price of the property is just the start. All potential landlords consider the cost of purchasing an investment property, but many overlook the costs to remodel. If you are buying a distressed asset such as a REO, Shortsale or any old property which may require some repairs and renovation before it can be put on market for rent, you need money to do all of this. Any damage to the foundation, plumbing, or wiring can cost thousands of dollars to repair. But even if you buy a property in good condition, you may still have to make changes to get it up to code. These additional expenses are over and above the purchase price of the property. You should have a strong income or enough savings to accomplish all of this. The other way, which is easier, is to buy a “turnkey” rental property from a turnkey property seller. In this case the purchase price of the property would be higher than a REO or Shortsale asset.
Click on the link to know what is turnkey property investing.
Be Careful with Leverage
Loans are convenient but may come at a big cost. Understanding how to handle loans of this nature allows you to benefit from it to the maximum. While ignoring the risks can lead to major financial entanglements in the near future. According to Investopedia.com,
- Decide on the type of mortgage loan that best fits your situation (Fixed Rate, Adjustable Floating Rate, Interest Only or Zero Down Payment)
- Be aware of the terms and conditions and other charges levied by lenders.
- Hunt around and bargain for a better deal using a tool like a mortgage calculator to find lower interest rates. Also look for lower insurance premiums.
If you do it right, you will be able to add more and more rental properties in your investment portfolio. If you wanted to buy $100,000 worth of stocks, you need to invest $100,000 out of your savings. But, if you want to buy a rental property that costs $100,000, you can use other people’s money to make this purchase. A bank or other lender will generally give you 80% of the purchase price. You just need to make a down payment of remaining 20%. Click on the link to know about buying rental property with no money down. You will get to learn about several loan options.
To read more about how to finance turnkey rental properties, click on the link.
Importance of location
As you already know, “Location, Location, Location” still rules and remains the most important factor for profitability in any form of real estate investment whether it is “fix and flip” or a rental property investing. Before you get your heart set on a specific location, bring the property's location into serious consideration.
- Find out what is crime rate in that location.
- Are there schools close by and how are they rated?
- How far are the amenities like parks, supermarkets, transport hubs and restaurants?
- How good is the rental property market of that location? What are the comparable rents and purchase prices?
- How is the economic development of the area?
- How the locality is expected to evolve over the investment period? If the area develops, the rent price will increase and so will your income and vice-versa.
Property inspection before buying
Property inspections are important for helping to disclose issues that may detract from the property's value. Before you finalize your rental property investing, be sure the property is in good condition. Doing an inspection can be a daunting task for anyone, no matter how experienced you are. Knowing as much as you can about the condition of the property before you buy will help you avoid problems and extra costs down the track. A good property inspection will provide you with information that could ultimately influence your decision to purchase the property. The best way is to have a professional inspection. Hiring a professional inspector for $300 – $500 will tell you whether the property has termites or molds, what is the condition of the foundation and the roof. They will also give you a correct estimate of the rehab costs. Some of important things that they will look for during property inspection are:
- Mold and Mildew
- Damp Basements and Crawlspaces
- Roof and Chimney Conditions
- Plumbing Issues
- Electrical Issues
- HVAC and Hot Water Heater Issues
- Conditions of Doors, Windows and Trim
- Pest Inspections
- Structural Issues
- Condition of the Kitchen
Expect the difficult circumstances
A sudden storm or hurricane, flooded basements, clogged toilets, burst water heaters are some of the issues that you need to be prepared for. Things like these cannot be foreseen in a real estate investment. If they happen, you need to be patient and handle the situation at your best. There are very less preemptive measures that can be taken to avoid such circumstances, especially for natural calamities. According to multiple reports, Hurricane Harvey damaged a quarter of Houston's real estate. The best you can do is research the natural hazards in any area you're looking at for rental property investing. Learn about risks and likelihood of hurricanes, flooding, earthquakes, tornadoes, mudslides and other extreme events. This can help you in mitigating the risks to a certain extent.
Damage by renters
A damage by renters can be accidental, deliberate or malicious. It's every landlord's worst nightmare — a tenant who destroys the property because he or she is disgruntled for some reason. A disgruntled tenant can cause havoc on your rental property. Some of the damages to expect from them are graffiti on the walls, torn or stained rugs, broken windows and doors, scratches on the hardwood floors, a hole punched in the wall and any other damaging mischief your disgruntled tenant can think of. It should be clearly mentioned in the lease agreement as to who will pay for these damages. If it is the renter, then they will highly unlikely think of doing such things.
Screening of tenants to find a good one
Virtually all of the problems a landlord faces with the tenants can be eliminated through a good screening process. With a good tenant, the rent will get paid on time and the property will stay relatively undamaged. With a bad tenant, you’re left to worry about the state of your property. To start off, you should always ask your prospective tenant to complete an application form that covers their personal, professional and financial information (credit report). Go through the lease agreement with them carefully and make sure all the rules are completely understood. It’s not too late to rip up the lease if things aren’t going well. By doing this you will find good tenants, who will pay rent on time, take pride in their home and yard by keeping everything clean and in great working condition, treating the property like their own.
Collecting rent from tenants
You’ll have the tenants that don’t pay and don’t call in case of delayed payment. As a landlord, you’re going to have to face this problem from time to time. Ask yourself if you’re comfortable confronting your tenants before you start renting. Keep in mind that you’ll have to make judgment calls as a landlord. For instance, envision you've had a tenant for six months and one month he doesn't pay the rent. You don't get a notification from him for seven days. When you call the tenant, he discloses to you he won't be able to pay for an additional 7 days. In these circumstances you'll need to settle on a decision to either let the tenant slide or to begin the eviction process. Ensure you're happy with settling on this sort of decision and adhering to it.
Vacancy is the bane of every landlord's existence. If the vacancy persists, you may be unable to make your mortgage payment. While there are many things that can lead to high vacancy rates, there are specific steps you can take to reduce the vacancy rate of your rental property. The best way to minimize vacancies is to find a long-term tenant. Keep your property clean. A clean dwelling is a place where people will want to live. Make timely repairs and address complaints of your tenants. Invest the time and the money that is necessary to keep your rental properties operating in good condition. Landscaping is also very important in attracting and keeping new tenants. Make your rental property beautiful from the exterior as well as interior.
Hiring a property management company
Hiring a property management company has its own advantages and disadvantages. Not every rental property owner needs to hire a property manager. However, if you have more than one property to manage, this task can be quite time-consuming, so hiring a property management company can take off your burden to a great extent. While this can save you a ton of the hands-on work and the headaches that keep running with it, you'll be losing around 10 percent of the rents to pay for this property management. You should consider hiring a property management company – if you have lots of rental properties, you're not interested in hands-on management, your time is limited, you can afford the cost and you feel overwhelmed with management tasks. A good property management firm can easily become one of your greatest assets, second only to the properties that they manage on your behalf. If you do intend to hire someone, you should at least plan on being there in the beginning, to make sure the tenants are properly screened by them. Moreover, you'd be placing yourself in a situation where you have less learning of what's really going ahead with the property—a decision that could cause issues down the road for you additionally not far off. Therefore, you should also take some time to visit the property and check if it is well maintained. After all it is your own asset.
One thing you can't ignore is taxes. Renting property is your business thus you'll need to report the income you earn while filing your taxes. You can deduct the expenses if they are deductible rental expenses such as mortgage interest, property tax, operating expenses, depreciation, and repairs. You can deduct the costs of certain materials, supplies, repairs, and maintenance that you make to your rental property to keep your property in good operating condition. All rental income must be reported on your tax return, and in general the associated expenses can be deducted from your rental income.
Being a landlord is not easy
Being a landlord isn't for the timid. In spite of the fact that you may like giving a place to people to live, if your renters don't pay on time, or they're causing inconvenience, you can't be insipid about implementing the rules, or hinting at any violation of the terms of lease agreement. You must assert yourself and be firm wherever necessary and do not let your tenants exploit your property.
Conclusion: Things to know before investing in rental property
Rental property investing offers a good high-value risk-return profile. With a little thinking ahead and some watchful steps you can make your rental property investment the success you had always wanted. Buying rental properties is a great way to make money. You’ll work hard for your money and may be faced with adversity from time to time. With enough passion and determination, you will find success eventually creating a better life for yourself and your family.
Some of the best real estate markets you can choose for rental property investing:
- Houston Real Estate Market
- Atlanta Real Estate Market
- Dallas Real Estate Market
- Birmingham Real Estate Market