If you’ve been watching the programming on HGTV and wondering if now is the best time to invest in a rental property, you are far from alone.
Currently, the economy is experiencing a slow-growth, with low-interest rates and a population of millennials that tend to rent rather than own. If you are considering taking the plunge to become a landlord, here are a few things that you should consider first.
1.It Can Be Tricky
To make a property truly work for you, it takes a keen eye and attention to detail. You also need to have the skills of both a lawyer and an accountant. You should also have a personality that can be both firm and friendly at the same time. If this does not sound like you, you might want to reconsider owning an investment property.
2. Always Plan Ahead
Making a profit through a rental property can be a long-term investment. Many don’t see an actual profit for many years. However, if you can break even for a few years and pay down the principal on the property, you stand to turn a profit in the future. Being a landlord requires a lot of planning and forethought and not making rapid decisions based on market fluctuations.
3. Be Careful to Stay Within the Law
Being a landlord also comes with a lot of fine print and red tape. For example, collecting a tenant’s security deposit is not as simple as holding onto the money. There are many aspects of being a landlord for investors to consider, and landlords need to be aware of every law and regulation surrounding evictions, regulatory requirements, and fair housing.
4. Know Your Situation
If you own a rental property, does it make sense to pay 10% of your income from the property to a management service? These are the types of questions you need to ask because each situation is different. Are you comfortable with making executive decisions and potentially having to deal with less than courteous tenants? If not, you might want to invest your money elsewhere.
5. Choose Buying or Financing
While some experts suggest that no property is worth investing in unless paid for cash, others beg to differ. Many people find profit in investing using leverage, even though it comes with potential pitfalls. As long as a portion of the rent collected will pay down the principal of the investment, leveraging a property can turn a profit in the long run. It might take more work and patience, but it is entirely possible to profit by financing.
6. Budget for Unknowns
If you own a rental property, it is wise to save anywhere from 20 to 30% of the rental income in case of emergencies and upkeep and maintenance. You should always budget for the unpredictable and make sure that you aren’t just pocketing all of the profit. If something unexpected happens (and it will), you need to be ready to dip into savings to handle the repair cost.
7. Don’t Forget to Renew Leases
One of the biggest blindspots for a new landlord is neglecting to renew their tenant’s leases on time. Many landlords let tenants go on monthly leases without renewing any contracts. This is dangerous if the tenant needs to be evicted because they are not tied to any lease. This also means that landlords are not able to raise rent prices. Be sure to check state regulations and always abide by local ordinances when renewing leases.
8. Location is Key
When it comes to a rental property, location is critical. Finding a location that will compensate investors in times of slower appreciation is difficult, but it is possible. In most cases. Look for a site that is in a desirable location and has growth potential. It is better to err on the side of appreciation rather than higher cash flow upfront.
9. Keep Tenants Long Term
Unless a tenant breaks the law or a complete nuisance, it is cheaper to keep a tenant than look for a new one and potentially not find one promptly. If you want to play it safe, older tenants and those with disabilities often take care of their property well and are generally agreeable.
10. Don’t Neglect Property Tax
When it comes time to file your taxes, the Schedule E tax form allows landlords to write off everything from painting expenses to lightbulbs. This is a powerful tax incentive that keeps many investors interested in becoming landlords.
Bottom line
If you approach becoming a landlord the same way you would owning a business, there is no reason why you couldn’t be successful. It is hard work, but many investors find it worth the effort. If you are looking for an expert opinion on rental properties or becoming a landlord, the specialists and the Safetynet group can help address your concerns.