10 TIPS FOR BUYING RENTAL PROPERTY
According to a recent study, real estate is Americans' favorite long-term investment. The popularity of real estate has been at its highest since Bankrate started the survey seven years ago. But should your clients?
1. It's Not as Easy As It Looks
To maximize income, the property requires an accountant's eye for detail, a grasp of landlord-tenant laws, and, should they choose to manage a rental property - a landlord's firm but friendly disposition.
While the rental property is considered a "passive investment," it's not! Toilets - termites and tenants are often the complaints of landlords!
2. Success Requires a Long-Term Outlook
Jeremy Kisner, a senior wealth adviser at Surevest Wealth Management in Phoenix, Az., owns two Las Vegas rentals. "The way people get in trouble with almost all investments is, they don't hold onto things long enough," he says. To make money in real estate, buyers want to think long-term.
3. It's Easy / Costly to Break the Law
State landlord-tenant laws can act like an open manhole cover for rental owners who ignore them. A case in point is tenant security deposits. It's more complex than collecting and holding money.
"There is bookkeeping involved. You need to have an account for each tenant, keep that money in that account, and save it," Hertzog says.
"Security deposit laws govern how much time landlords have to return a security deposit when the tenancy ends, less any expenses for cleaning and repair, all of which have to be itemized."
This is only one aspect of the laws surrounding rental property, & there are many others landlords must know to avoid running afoul of them.
4. Make Sure You're Landlord Material
Should landlords be their property managers or pay 6-10% of their rental income to a management service?
"They do the background check on your tenant, make sure they sign the lease and pay their rent on time," George says. "That frees landlords to manage money, not property and tenants."
There's a possible downside to being your own landlord."If you get too close to tenants and tenants have financial problems, landlords find themselves stuck because you don't want to evict them,"
On top of this issue, are you comfortable making the executive decisions to manage a property? Will you repair or end up replacing a failing AC or leaky dishwasher?
Note: A home warranty policy can solve this problem.
5. Analyze whether paying cash or financing is better.
While buying cash is good, "Leverage" (a mortgage) typically magnifies returns on both the upside and downside.
6. Budget for the Unexpected
Failure to plan for the myriad expenses of owning a rental can quickly lead to disaster. As a landlord, you want to save about 20% to 30% of your rental income for upkeep, maintenance, and emergencies.
7. Remember to Renew Leases
If mom-and-pop landlords have one glaring blind spot, it's the failure to renew tenant leases promptly. When tenants slide, it's challenging to get them back on track. Depending on the state, landlords can give notice of eviction for a specified period.
California mandates landlords to give 60-days' notice for tenants who have lived in the property for more than a year (or 30 days for less than a year), though the situation may be different in rent-controlled cities.
The landlord also might offer a new lease contract at the same time.
It's all about location, location, location – sort of.
That old Realtor mantra about the importance of location takes an exciting turn when applied to income property.
The best locations with the most appreciation are where you'll have the worst cash flow with a rental. Why? Investors can earn a return in two ways: cash flow and appreciation.
Investors want higher cash flow in some areas to compensate for slower appreciation. However, if investors expect a site to appreciate substantially, they may be willing to forgo cash flow for that appreciation.
The result: house appreciation outstrips the rent growth, and houses appreciate while yielding relatively low cash flow.
9. Want long-term tenants? Consider Section 8
A sudden tenant vacancy is the bane of every rental owner; each month a rental stands vacant, landlords are out $$$.
Section 8, the HUD's Housing Choice Voucher, typically caps the rent for low-income renters who qualify at 30% of their adjusted monthly income.
Many landlords are skeptical of the paperwork & potential upkeep problems presented by some Section 8 renters, But older populations and persons with disabilities are excellent tenants.
Most take excellent care of the property because this is their home. This is where they want to be. If they don't pay their rent, they ruin their vouchers.
10. Don't forget rental property at tax time
There's a singular ray of sunshine that beams down upon income property owners each spring as they hunker down with their accountants to prepare their federal income tax returns.
"When you have your own home, you can write off the interest, and that's about it. With an investment property, a Schedule E tax form, landlords write off nearly everything, from painting the home to changing the light bulbs.
That powerful combination of tax benefits and investment returns helps keep investors interested in rental properties.