We talk a lot about investing in real estate here on the Harvard Grace blog, but what do you do with that property once you’ve purchased it? Management is key to making the profit you planned on. If the property you purchased is intended for renting to tenants, this blog post is for you.
Even though renting out a property comes with its share of responsibilities, collecting rent every month and investing in real estate can improve your financial situation.
Whether you’re considering becoming a property owner or have already invested in a rental property, this guide will help you get the most out of your investment.
‣ RENTAL PROPERTIES AS INVESTMENTS
Purchasing a rental property is a great way to gain exposure to the real estate market, but it’s important to approach rental properties as long-term investments. Becoming a landlord will not make you rich overnight, and it’s a lot of responsibility to be charged with caring for someone’s literal home.
You can expect a 6% yield on this type of investment if you pick a good location, keep your property in good shape, and do your best to provide tenants with a comfortable place to live.
Follow these steps before investing in a rental property:
- Look for an ideal location. Finding tenants and collecting rent will be easier if your property is in a safe area where tenants will have access to jobs and be able to send their children to good schools.
- Have an expert inspect the property. Any signs of structural damage, mold, or pest infestation will result in additional expenses for you.
- Purchase a capitalization rate report. This report will give you a better idea of what the market and the risks are like in the area you’re interested in.
- Come up with enough cash to cover 20 to 25% of the asking price. You might also have to cover the remodeling costs if the property needs some work.
As the owner of a rental property, you’ll have to continue investing money over the years to keep your property in good shape. Inspect the property regularly and perform repairs as quickly as possible. Upgrading your property will make it easier to attract tenants and maintain its value.
‣ PROS AND CONS OF INVESTING IN A RENTAL PROPERTY
Becoming a landlord isn’t for everyone. Being aware of the pros and cons of this type of investment will help you determine if a rental property is a good choice for you.
These are the pros of investing in a rental property:
- You’ll generate a monthly income by collecting rent.
- Your property may gain value over the years if you pick a good location.
- You can use the property as leverage. This means you can borrow to finance your investment or use the property as collateral for another loan.
- There are tax advantages. If there is no cash leftover after covering expenses and paying your mortgage, you won’t have to pay taxes on the income from the property.
Consider these downsides as well:
- As a landlord, you’re liable for accidents on your property. Liability insurance is a must!
- Taking good care of tenants can be difficult and time consuming.
- You’ll lose money if your property remains vacant for too long.
- Unexpected expenses will come up, which means you might not generate a profit for a while.
- Your rental property might lose value. It’s important to pick a location where property values are rising.
‣ MANAGING YOUR RENTAL PROPERTY
You’ll get more out of your investment if you take the necessary steps to provide your tenants with a good experience and actively manage your rental property.
These tips will help you become a landlord people want to rent from while maximizing the return on your investment:
- Be aware of the law. As a landlord, you’re required to provide your tenants with a rental that meets certain criteria. You also need to know about the law in order to protect your investment. Take note of these key points:
- You’re liable if a tenant sustains an injury. Purchase liability insurance and do your best to create and maintain a safe environment.
- You can be held responsible if something illegal goes on in your rental property. Inspect your property regularly, communicate with tenants, and report anything suspicious to the police.
- You’re legally required to provide your tenants with a few necessities. Laws vary from one state to another, but at minimum property owners are usually required to provide their tenants with hot water, electricity, heat, and to notify them before entering the property.
- The lease agreement you sign with your tenant is a crucial document. The agreement needs to include information on your tenant, details about the security deposit and rent, and any rules you want to enforce regarding pets or smoking. Have a lawyer write a lease agreement for you.
- Select your tenants carefully. Finding the right tenants will make your job a lot easier. Legally, however, you absolutely cannot select your tenants based on their age, sex, or race. Instead, you may use credit history, proof of income, and employment history to qualify tenants.
- You can also ask prospective tenants for references, which may be a more equitable way of selecting your tenants, especially since credit scores and employment histories may not always be reflective of whether someone will be a loyal tenant.
- Be prepared. A number of things could happen to keep you from generating a profit. Managing your property includes preparing for situations such as natural disasters or legal issues with your tenants. These steps will help you prepare for unforeseen problems:
- Put some money aside to cover repairs and maintenance.
- Purchase sufficient insurance.
- Find a lawyer and a tax expert who can help you.
- Define your role as a landlord. Some property owners rely on turnkey services to manage their rental properties, but that will be an additional cost. If you plan to be a more hands-on manager, set aside some time to make a list of your goals and values as both a business owner and the keeper of your tenants’ quality of life.
This role includes inspecting the property, performing repairs, and collecting rent in person. To decide whether you want to do it or hire a service to do so, as yourself these questions:
- How much time can I afford to spend on managing this property?
- What are my investment goals?
Becoming a landlord can be stressful and requires time and hard work. However, a rental property is also a great way to invest in real estate due to both the appreciation of the property and the monthly rental income. You can be collecting rent while watching the value of the property rise. If you’re still mulling it over, look into joining a local Landlords’ Association to get in touch with other landlords in your area. They’ll provide you with some helpful tips and give you a good idea of what to expect.
If you need someone to chat with about how to be or become a landlord, grab some time with us today! In addition to our own property management experience, we’ve helped plenty of clients with their real estate portfolio.