The Building Blocks of Building Your Rental Property Business
Have you ever imagined life as a game of Monopoly, where you could easily put up houses and collect rent, amassing your fortune? You probably already know that turning rental property into a lucrative source of income is a much more complicated and risky financial endeavor than those little green houses would lead you to believe.
With the foreclosure crisis creating at least 2 million more renters, as well as properties available for a fraction of the price, purchasing rental homes seems like a great idea to many people who have the start-up capital and the determination to make it happen. What do you need to know to prepare yourself to be a landlord? These are the things you need to think about to make sure you’re cut out for rental properties. They’re more than a sound investment, they’re a way of life.
1. Where are the finances coming from?
Almost all potential landlords will need to take out a loan to buy property, and you’ll need a good credit history and steady income to get approved. You might be interested in qualifying for Buy to Let Mortgages, which are specifically designed to help investors pay for rental properties. These mortgages have been popular in the UK since the late 1990s and are growing in popularity in the U.S. as well. Many of them have high fees and expect a down payment of up to 40 percent, but the upside is that they factor in how much rent you are estimated to earn as part of your income.
It’s still a gamble though, because delinquent tenants or depreciating property values can leave you underwater. That’s why investing in property is not so different from investing in the stock market.
2. Choosing the right property.
There are many factors that go into making a home rentable. You could be looking at the cheapest foreclosure houses in your area, but are they in a neighborhood where people want to rent? Are they too run down to be worth repairing? The facts are that no matter what the house, you will need to do some repairs. And home values in every neighborhood tend to go up and down. But you need to understand what the competitive rates for rent are in that area and whether that exceeds your mortgage payment enough to make it worth your while. But you don’t want to go too extravagant, either.
When you’re between tenants or you’re dealing with one who doesn’t pay rent on time, you could end up picking up the slack, and you need the cost to be manageable enough for you to do that.
3. Dealing with Difficult Tenants.
Most first-time landlords are unprepared for the number one headache that investors in rental property have – tenants that don’t pay rent. Even worse than that, some of them can damage the property or constantly call you up for minor repairs that cost you a small fortune. No matter how well you screen your tenants beforehand, it’s hard to predict who will turn out to be the deadbeat. And evicting someone is incredibly time-consuming. You’ll have to pay court fees as well as provide proof of the tenant’s wrongdoing. Sometimes it’s even cheaper just to pay a bad tenant money to leave.
In order to be a good landlord, you have to know that confrontation with your tenants is sometimes inevitable. You’re just trying to minimize costs in the long run.
4. Rental Property Taxes
Knowing what you should and shouldn’t count as income if you own one or more rental homes is part of being a landlord. You can include first and last rent as income, as well as any non-refundable deposits – not security deposits that you intend to give back. If a tenant agrees to do any work for you in exchange for part of the rent, you have to count this as a monetary value and include it. But the good news is that property owners have a long list of deductions they can make.
If you’re paying double the property tax for your own home and a rental home, it’s nice to know that depreciation and the cost of repairs are all deductible. The interest on your loan payment is also deductible, and that alone can make sure you end up turning a profit instead of losing money.
Investing in rental property is not for the faint of heart. It’s a high-stakes game where people can make a lot of money with a certain amount of personal freedom alongside it. Web searches for homes to rent have jumped over 50 percent in the last three years, so the tenants are out there. It’s simply a matter of putting the pieces together in order to pass Go.
About the Author: Amy Nielson is an avid blogger. You can follow her on Twitter @NielsonAmy.