Can You be a Landlord?
After the housing bubble, many people are very hesitant to become landlords and own rental property. However, this is actually the best time to purchase properties because of the huge hit the market has taken during the recession and the large number of foreclosures and short sales on the market. Many of these properties are just a few years old, have very few problems, and are owned by banks desperate to get them off their books. However, if you’re considering owning a rental, it’s important to know what you’re getting into and how to make it a profitable venture before you shell out your hard-earned money.
We learned during the housing crisis that putting zero down on a mortgage can be a very bad idea, and unless your income is extremely stable and you’re willing to pay a higher interest rate, you should avoid no-money-down mortgages. Most people don’t have the cash to buy a property outright, but if you can put 20% down into a mortgage on a rental property, you’ll get a good rate and have some equity in the property.
When purchasing a property, you’ll also need some money to fix it up to be move-in ready. A house that needs paint and carpet will sell for thousands less than one that’s already perfect, and you’ll end up saving a good chunk of money if you’re willing to put in the effort to get it fixed up after you buy and if you have some money you can put into it. If you’re looking for a great deal and have the time, cash, and inclination, you can get a cheap house that has a lot of damage or needs serious renovation and fix it up yourself, adding to the property’s worth as well as getting yourself a better cost-to-rent ratio.
Local Housing Prices
Before buying a place, make yourself aware of what rents look like in the area you want to purchase and compare it to the purchasing cost. Some areas like Las Vegas and Miami have housing prices that are much lower than rents being charged, meaning you could have a $400 mortgage on a nice three-bedroom house and receive $1000 in rent each month. The safe goal is to be able to charge twice as much as your mortgage to help you cover costs such as vacancy, property management, and repairs while still making a profit. With your first rental, it is wise to stick closely to this concept and save any extra money in case of anything unexpected that might occur while you’re learning the ups and downs of landlording.
If you’re considering owning a rental property, it’s important to decide if you will manage the property yourself or if you will outsource this job to a property management company. If you hand off the job, expect to pay 10%-15% of the monthly rental income to the company you hire, and for that you will be able to avoid tenant phone calls, finding repairmen, and any other situations that might come up. If you’re comfortable working with tenants and calling businesses to get leaky toilets fixed, and you have some extra time, taking this job on yourself is absolutely possible. Whichever way you decide to go about property management, make sure you are aware of what’s going on with your rental and keep yourself updated to avoid bigger problems down the road.
Owning a rental property can be a fun and very profitable venture, but you have to be aware of exactly what you’re getting into and what you need to do to make it successful. If you go in prepared and with a good understanding of the various costs and expectations of a landlord, you will be able to make a steady income stream by doing little to no work.