The idea of buying an investment property to rent out and collect some passive income sounds good, does it not? After all, being a landlord is one of the greatest and most time-tested ways to build long-term wealth. Especially when rents just keep on rising, which means more money for rental owners. According to Apartment List’s National Rent Report, they “are up by 2.1% compared to their December 2016 level” and have risen each month of 2017. “In addition to the growth the national level, rents are increasing in most of the nation’s biggest markets,” they said, with “some individual markets seeing substantial increases.”
But, you have to do it right. And doing it right may not be as easy as it seems. The rental reality check includes:
Your tenants might be turn out to be lunatics. They may refuse to pay their rent or even leave your property.
Those are obviously worst-case scenarios, but that doesn’t mean you don’t have to prepare for them. Expecting the best and not preparing for the worst is a recipe for rental disaster. Doing a thorough background check and collecting a sufficient security deposit are key protections. Bigger Pockets has a few more suggestions to “protect newbie landlords against bad tenant situations.”
You’ll have to collect rent
Your tenant’s late rent check isn’t just an inconvenience. For some property owners, it can mean not paying the mortgage on time, which will mean incurring late fees and dinging your credit. Having several months of reserves in the bank to cover anything that might come up with your rental or renter is key, but, for those owners who are cutting it close, including an iron-clad late-fee policy for renters should help to ensure it’s paid on time.
They may be slobs or they may be destructive… but are they worth it?
Yes, you’ve collected that security deposit, but it might not cover the damage left behind when tenants move out. Many landlords don’t like to rent to college students for this reason (Hello, nightly parties!). Another downside is that there is often a higher turnover because students may not stay in the same place for more than one year and they may also be looking for a shorter lease if they’re planning to return home for the summer.
The potential upsides:
Increased rent potential. “Off-campus housing is often paid for by the student’s parents, or even by the college itself, so you may be able to get a higher rental price for the property,” said The Balance. Investors look for rental property in college towns often key in on homes that have multiple bedrooms, which can further increase the price.
A reliable tenant pool. “With some student populations ranging from 20,000-50,000 and accounting for as much as 25 percent of a town’s total population, there is high demand for rentals for co-eds who want to live off-campus and are not in the market for purchasing their own home.” You can protect your bottom line by requiring a co-signor, especially for students who have no previous rental history and may also have no credit history.
You may get calls in the middle of the night.
The toilet overflowed and flooded the bedroom, and now you’re double-fisting a plunger and toolbox at 3am. If that sounds as painful as it is, or if you have minimal (or zero) home maintenance skills, you’ll probably want to read the next entry.
If your investment property is out of your local area, you may not have a choice when it comes to hiring a property manager. But if you’re looking to do as little as possible – or if you simply aren’t qualified – and don’t mind paying out a little of your potential profits, property management might be for you. “A typical property manager will interact directly, on your behalf, with applicants and tenants. Managers will usually market and advertise your rentals, meet with prospects to host showings, collecting rent, deposit money to your bank account, and coordinate repair issues” “They are also the first line of defense when responding to tenant complaints and will even stand by your side when you have to pursue an eviction or get sued.”
Still interested? Heed these tips:
Make sure you have enough money to put down. You already know that the more you put down, the less you’ll have to finance. But financing for rental homes may also require a larger down payment than you were planning. “If you’re borrowing money for your first rental house, you’re going to need at least a 20% down payment,” said Interest.com. “And if it’s your first rental property, your current income is going to have to be enough to handle the mortgages for both your residence and your new property.”
Don’t buy more home than you can afford. Yes, a higher-priced home may increase the potential profit every month, but it can also increase your potential loss. What if you can’t rent the home right away? What if there’s a lapse between renters? Keep in mind how much your carrying costs are so you can determine how much house you can really afford without counting on max rent every single month.
Don’t take a chance on an unfamiliar neighborhood. Your best bet when you’re just getting started is staying local, where you know the home values, the rental trends, the crime rates, and maybe also have some local resources that can help with renovation, maintenance, and yard work.
Don’t be greedy. This may sound like an odd tip if the idea behind owning rental property is to make as much money as possible, but if your asking price isn’t getting applicants in the door, you need to rethink your strategy. Consider this: “Every month of vacancy costs you 8.3% of your potential yearly revenue, so you would be better off renting every property one month faster for 5% less rent, two months faster for 10% less rent, and so on,” said TIME. In the end, it may make better financial sense to lower the price of your rental if you’re having trouble finding tenants.