Becoming a landlord can be a highly effective strategy for generating a secure monthly income. Not only do rental properties typically appreciate over time, but they can also help finance existing properties and confer tax advantages.
Understanding the basics, such as projecting your return on investment and budgeting for affordable homeowners insurance, can prepare you for the responsibilities of overseeing a property before you open your checkbook.
Is Being a Landlord Right For You?
Being a landlord involves a variety of tasks. Duties include advertising vacancies, screening tenants, evaluating and purchasing rental properties and performing routine maintenance and repairs.
On the financial side, a landlord must also be adept at collecting rents, keeping the books, dealing with taxes, observing local laws, making and enforcing rules and occasionally evicting non-compliant tenants. Before you invest, be sure to understand the pros and cons.
PROS & CONS OF BEING A LANDLORD
- Income. Rentals can generate a steady stream of monthly income that tends to increase over time.
- Potential for wealth. Real estate is widely considered a reliable investment since property values tend to appreciate.
- Tax advantages. As a property owner you can write off depreciation and other costs. Active investors can also subtract expenses against their other income.
- Ability to leverage existing property. Few investments offer comparable opportunities to obtain financing of up to 80%.
- Legal issues. Running afoul of local landlord-tenant laws can get you dragged into court and put your net worth at risk.
- Vacancies. 41% of properties are vacant for some time each year.
- The Hassle. Nearly half of landlords have had to evict a tenant. Evictions can cost as much as $10,000.
- Time Commitments. Landlord duties, even for a single property, can be time-consuming. When it comes to repairs, for example, landlords get an average of six calls a year.
Tips on Becoming a First-Time Landlord
If you don’t have the interest or temperament for overseeing responsibilities yourself, a property manager can take on some tasks. Overseeing properties does become easier with time, and landlords can avoid the most common and costly errors by following these tips.
1 Buy rentals in good locations
Property location is the single biggest driver of a successful rental. Renter-value amenities like walkable neighborhoods near public transportation, parks, good schools, and lovely views are particularly important to renters.
For higher property appreciation, choose communities with solid growth in their employment rates, large employers nearby or projected development projects. These benefits can draw in first-time renters.
2 Leverage your properties
Finance and refinance your properties. Borrowing against your rentals frees up cash to purchase additional rentals and grow your real estate portfolio.
If you pay cash at an auction, you can refinance and pull 75% of your money back out. If you finance a rental purchase, you can usually borrow 80% and put 20% down.
3 Pick rentals that allow for cash flow
A surprising number of green landlords pick properties that cost them money month after month. Ensure that your property will generate positive cash flow, and be conservative with your income and expense projections.
Mortgage lenders require an income property appraisal to estimate future rents, and they discount that by 25% to account for vacancies.
4 Screen your tenants
The biggest mistake that landlords make is failing to screen their prospective tenants. A renter can dress well, speak politely and appear responsible and upstanding.
But nice-looking people still miss payments, flout rules and annoy their neighbors. Check credit scores and follow up on references without exception.
5 Be careful with estimates
Being financially unprepared is another common mistake. Don’t plan on collecting rent every month from Day One. You will have vacancies. And your property will require maintenance and repairs.
Seasoned investors set aside 1% to 3% of the property value for upkeep, depending on the condition and age of the building. Ideally, you’ll have two-to-three months of gross rent per unit in savings to cover unexpected costs.