If you’re looking for a great way to bring in extra income each month, the decision to own rental property could be a great one for you. Rental property enables you to increase your real estate assets without living on a particular property. There are a number of challenges specific to dealing with renters, several things that you need to know about requirements for landlords, and plenty of information about how to choose a great rental property–and this is the best place to start.
Owning rental properties, something many consider to be part of the proverbial American dream, is easier to achieve than some people realize. Depending on how much you want to own rental property and become a landlord, it can be both a profitable and rewarding experience personally. If you want to own rental property, do it right. If done improperly, or halfheartedly, you might end up wishing you had never thought of rental properties.
Our article below covers several areas and bits of advice to better help you take the first step towards owning rental properties of your very own. Let’s get started:
1. Start Small
Many first timers have begun their real estate journey by simply renting a room or rooms in their home. Although it’s not a bad idea, and it is a perfect way to learn what it is to become a landlord, it does have its drawbacks. Moreover, if the occasion ever arose to have to evict a person from your own home, it can turn into a very unpleasant situation.
Some first-time landlords opt to convert a garage, basement or outside attached area into an efficiency or small apartment. In Miami, for instance, many garages disappeared during the 1960s as first time homeowners who wanted to own a rental property converted their garage space to efficiency units. Most landlords neglected to check with zoning regulations. The endless stream of troubles for the landlords, as well as the neighbors, continues even to this day.
If you have the good fortune to purchase a duplex, all the better. You can manage your own property and still have the proceeds generated to cover your own expenses in many cases.
2. Don’t Rush In
Having determined whether it’s best for you to start really small or somewhat larger when wanting to own rental property, don’t rush in like the proverbial bull in a china shop.
Careful research is recommended as well as considering some of the below factors:
- What kind of neighborhood is it, and what is the crime situation?
- Is the area conducive to having employment facilities?
- What repairs and improvements are required, if any?
- Are there schools or health facilities nearby?
- How far is the rental property from where you personally live?
- Will you personally be managing the property?
- Has a pre-sale inspection been done of the property?
Likewise, having a contingency network in place is vitally important. Having a good real estate agent, an attorney, an accountant and the contact number of several plumbing contractors, handymen and HVAC repairmen on hand is always highly recommended. Don’t wait for an emergency to develop before having a plan in place.
3. Will Cash Flow Be Generated?
By simply making out a cash in and cash out sheet, you’ll know if the property can sustain itself by generating a positive cash flow. In a positive cash flow scenario, the rental income exceeds the expenses of ownership. Some such expenses are the mortgage payment, taxes, insurance, maintenance and those periods between tenant occupancy.
That being said, a net cash inflow is the money you’ll have left over each month after the expenses are deducted. Budgeting your money, keeping an emergency fund on hand and carefully monitoring your tax appraisal will prove essential when you own rental property and become a landlord.
4. Find a Good Mortgage
This takes some real leg-work research and number crunching. Don’t overpay on your mortgage, and be certain to do some serious shopping to find a mortgage with the lowest interest rate possible.
5. Finding and Keeping Good Tenants
When you become a landlord, keep in mind that finding and keeping a good tenant is perhaps the vital thing you can strive for in your quest to own rental property.
Simply put, tenants can either make or break your rental investment, at least for a season or two. A bad tenant wastes not only your time but may cost you thousands of dollars, destroy or seriously damage the property and damper your desire to further invest in real estate.
Making necessary repairs and up keeping the property are prime factors in attracting good tenants. Taking good pictures of the property and later posting them on rental listings is another good practice.
Asking family, friends and neighbors sometimes produce good tenants. Let the tenant know they will be screened as to credit references, employer comments and other related matter. While not 100 foolproof, it may help in weeding out undesirable tenants.
Once you find a tenant that pays on time, does some minor repair work himself such as changing his own light bulbs, keeps the drain unclogged, quietly keeps to himself and doesn’t keep a small army of “temporary guests,” you can safely say that you found a good tenant.
If you can keep them for a few years, you may even want to consider some concessions in order to keep that good investment. You may even try to persuade them to sign a two-year lease at a less amount of rent. Do whatever you wisely can do to hold on, and keep that good tenant.
6. Know the Law
Today, the court systems seem to be favoring tenant rights more than landlord rights. Be aware of this before taking a tenant to court for an eviction. Sometimes an eviction may take up to several months, depending on how savvy the tenant is and what your patience level is in dealing with a sometimes unscrupulous tenant. Sometimes, it may be better for you to actually pay the tenant to leave in lieu of an eviction process.
Likewise, today’s laws also tend towards discrimination of any kind–except having a bad credit or back rental payments due. In addition, each state or county jurisdiction has specific regulations concerning entering the property, when you are legally required to make repairs and when you can force an eviction.
Before renting out the property, take good pictures of the condition the apartment or house is in, and make a prospective tenant sign an affidavit attesting to the condition of the property on his assuming the place.
Doing so provides you evidence as to the preexisting condition of the property, and may help to keep some or all of their security deposit.
7. Charge a Security Deposit and First Month’s Rent
Typically, when you own a rental property, asking for a first month’s rent and a security deposit is the norm. Some landlords may ask even for more such as a first and second month’s rent–in addition to the deposit.
A security deposit equal to a month’s rent is wise. While this is not normally the case, keeping the monies in a separate liquid saving account earning interest is prudent. However, not too many landlords do this, and some prefer to have tenants live out their deposits.
This may, or may not work out if you have difficult tenants. Some will live out their deposits — and then try to live out several extra weeks knowing how slow the eviction process is in some jurisdictions.
8. DIY or Paid Property Management
In some cases, it is worth having a good property management company screen tenants for you. They can collect rents, hopefully, and potentially manage the property for a fee.
9. Draw Up a Legitimate Rental Agreement
If you don’t feel confident enough, then have an attorney draw one up or you can even find ample samples online to print. You can even buy blank rental agreements at stationery stores. Whatever you do, get everything in writing, and keep a copy of everything.
10. Keeping Good Records Is a Must
Good financial record keeping, creating separate bank accounts per property and keeping personal records apart from business records may save you money and embarrassment come tax time. Especially, keep records of any purchases and any improvements spent on the property in addition to all the receipts.
Before you decide to own rental property and become a landlord, you may be interested in knowing that this entails a great deal of work and sometimes tears.
Nevertheless, real estate ownership increases by 544 landlords per minute. A new renter is created every 22 seconds and there are now more than 23 million landlords throughout the U.S. Not surprisingly, about 55 percent of all renters become a landlord themselves within the next two to three years.
In other words, real estate ownership can be a growing and lucrative field to enter. Done properly, it will create wealth for you, but avoid fast property flipping. Take it slow and easy, and in the long run you will have created the financial independence you have dreamed about for yourself and for your family.