Do You Really Want To Be A Landlord?
You know that real estate investing is for you. Buy a distressed house or multi-family residence, fix it up, and rent it out. With the right tenants, the monthly income covers your mortgage and costs. You build equity and establish a reliable source of income.
Really?
Well, yes, but there are a few other steps along the way.
First of all, being a landlord is a responsibility. You have the responsibility to abide by laws governing tenant’s rights, including the right to a safe place to live. So, when the plumbing or electrical systems need repair, or the heating system stops working in January, you have the obligation to fix it. That means you need a ready supply of professionals to call on, and you need to have cash in reserve to pay them.
But let’s back up a minute. Finding a reliable tenant who will pay their rent on time, maintain the property in good order, and adhere to all conditions of the lease is not just a question of advertising on Craig’s List or in the local paper. It’s important to do credit checks on tenants, and be prepared to do property inspections with appropriate notice.
If you are a landlord who does not live on the premises, it’s usually advisable to hire a property management firm. They can take care of attracting and screening reputable tenants, collecting rent, and dealing with repairs.
If you are purchasing a multi family property with the idea of living in one unit and collecting rent from the others, bear in mind that you tenants are your neighbors. While there’s an advantage in living close by and observing the tenants and property on a friendly and informal basis, there’s also the problem of living with a tenant next door who may become disgruntled or disagreeable with you for many reasons.
When the pipe bursts at 2 am in the dishwasher, or the circuit breakers malfunction, there you are – right next door. And the fact that a plumber or electrician won’t be available for several more hours isn’t going to make the tenant feel any better!
The successful landlord determines in advance if they are going to be hands on or engage property management, and makes a few calculations in advance of buying the property:
- Determine the Cap Rate. The capitalization rate is the rate of return measured by dividing the annual income by the purchase price. A higher cap rate may mean increased profit, but it may also indicate increased risks.
- Determine the location. This is vital to any investor, as markets vary widely around the country. A market area may seem to have great prices on housing and opportunities, but also look into the rate of unemployment and vacancy in the community.
- Cheap is not always best. It’s true that there are many deals to be had with distressed properties, foreclosures, and short sales. The return on your investment will come from being able to attract stable tenants who will pay market rent, so consider spending more for a property in a desirable neighborhood.
- Successful landlords also use the services of contractors and experts in evaluating how much work will be necessary to ready a property for rental. In addition to repairs, upgrades may be necessary in kitchens and baths
- More properties are becoming pet friendly to attract tenants. Have clear policies in place about pets, and additional policies required for pet owners.