So You Want to be a Landlord?
The residual income from owning rental properties may bring more money into your life than the fast flip in the long term. If nothing else, the stress is reduced because a well-chosen investment will pay for itself until you the market is ready for you to sell. In order to make this idea work, you must plan carefully. Choose your property, choose your management approach, and choose your tenants carefully to make the most of your investment.
Choose your property.
Not every house is going to bring in the money you need each month. Some considerations:
Will you be financing? How much you finance is going to have to be factored in to how much you need to cover the monthly expenses. Up to four units is considered a residential loan by most banks; beyond that is commercial, which means that the lender may factor in the rent more easily as income, but other, more stringent requirements must be fulfilled to secure a loan. The more equity you have now, the more able you are to weather periods of vacancy.
How many units? Not only is the number of units a factor in lending, it's also very important for income. More units means less drain when you have a vacancy (a two-family house loses half the income when one tenant leaves!), it's also just plain easier to get enough rent to at least cover your expenses.
What rents can you charge? Find out how much the rents for the current tenants are, if any. If you don't know the rental market well enough, consult with your real estate broker or a professional property manager to determine what fair market rent for each apartment is. The monthly rent should be at least one percent of the value of the building for it to be a profitable investment.
Will major work be needed? If you're getting a place cheap, you probably are expecting to do some renovations. This has to be budgeted in, because you're spending money and not getting rent for that period of time. Contractors often break both deadlines and budgets, because hidden problems become apparent as you dig in to the project. Make sure you have a cushion to cover your mortgage, insurance, taxes and other expenses.
Choose your management approach.
Once you've found a winner of a property, it's possible to just sit back and let the money roll in . . . or you could make a part- or full-time job out of being a landlord.
If you're handy, enjoy paperwork, like working with people, and don't mind being available pretty much all the time, you should be a landlord. Many people have left their old jobs behind to manage their own rental properties full-time.
If you envisioned real estate as a more passive investment, consider professional management. Many real estate brokers manage properties as a side business, or you could contact a professional association such as the National Association of Residential Property Managers to find a dedicated property manager in your area.
Property managers handle all the tasks of being a landlord on your behalf for a portion of rents, usually around ten percent; this does not include costs of advertising and maintaining the building. They often also charge a placement fee of a month's rent when the sign a tenant, although whether this fee is the responsibility of the tenant or owner is negotiable. Their job is to keep the property occupied by reliable tenants and in good repair. Minor maintenance is done automatically, while bigger items (like a new roof) are addressed in consultation with the owner.
Choose your tenants.
If you are using a manager, once you pick a reputable one, you don't need to worry about this. If you're going it alone, here are some tips: Advertise. Put your place in papers, on bulletin boards, and online. The more visibility you get the more calls you'll get.
Background. Take an application from any prospective tenant which includes their current address, phone, social security number, landlord, employer, and personal references. You want to check references, and run credit and criminal checks; this will cost money so don't be shy charging an application fee.
Personal. Take a look at the condition of the prospective's car, inside and out. Make it a point to visit them where they live now, to see how they keep it. Meet every person (and animal, if you choose to allow pets) that will be living in your building.
Income. You cannot discriminate against someone because of the source of their income. With any applicant you turn down, it's a good idea to send a letter stating the reason for not renting, even if it's as simple as the background check came back faster on someone else.
Don't rush. The best way to pick a bad tenant is to rush into it because you're scared of a vacancy. If you choose poorly, you will likely have far worse than a vacancy on your hands.
If you don't have the iron constitution for buying properties and flipping them, but agree that real estate is the best investment around, rental properties are likely the way to go.
© 2005 Terence P Ward, all rights reserved. Terence P Ward is the President of Landlord for Hirehttp://www.landlordforhire.com, a residential property management service of Green and Clean Corporationhttp://www.Green-n-Clean.biz, based in the Mid-Hudson Valley of New York State. You may find contact information for him on either of his company's web pages.
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