BLOG VIEW: With the economy on the upswing and the real estate market rejuvenated, investing in property is once again on the rise. Acquiring a rental property seems to be on the minds of many real estate seekers, particularly those considering the option of attaining landlord status. Multifamily residences and apartment buildings are doing well not only on the traditional market, but also at the real estate auction block. Property investors are finding a host of propitious deals at real estate auctions in the quest to capitalize on generating some rental revenue.
Forecasters are optimistic as well. Daren Blomquist, vice president of RealtyTrac, says, ‘Investors holding on to rental property for the long term will also typically benefit from home price appreciation on top of the annual returns from rental income.’ While gaining the landlord title may seem like a lucrative plan, there are many factors to contemplate before taking this opportunistic leap.
As always, money is at the forefront. Anyone toying with the idea of becoming a landlord must meticulously take into account not only how much they have to invest to purchase a property but also to maintain it.
From the start, potential buyers need to have enough cash to cover any initial reconstruction and closing costs. They must also allocate a certain amount for repairs and upkeep.
Something to also bear in mind is the potential for delinquent renters who may need to be evicted, thus creating the risk of lost rental income, eviction charges and possible property damage.
‘You need to have a sizable reserve fund set aside to pay for expenses, whether it's to cover the mortgage for a stretch when the property is sitting vacant or to make repairs, which novice landlords tend to underestimate,’ explains Kenneth J. Eaton, a financial planner in Overland Park, Kan.
Location of the rental property is also a major consideration. A rule of thumb many rental investors go by when acquiring property is to purchase where unemployment is a good deal lower than the national average, which right now is 6.1%. Top markets include Anderson County, S.C. (where rental property owners earned 15% returns on their property investments); Sioux City, Iowa; Gainesville, Fla.; Washington, D.C.; Columbia, S.C.; Pittsburgh, Pa.; Columbus, Ohio; Charleston, S.C.; and Omaha, Neb., theStreet.com reports.
As theStreet.com says, ‘If you can't buy in those areas, at least follow the script and buy where jobs are more plentiful and income is rising. Those areas will yield the best rental customers, who are able to make their monthly payments easily.’
One of the biggest factors in making this decision is the change landlordship brings to your everyday life. Unless you hire a costly management company or individual property manager, expect to be on call 24/7, which includes holidays and weekends. You will need to educate yourself on finding reliable tenants with decent credit, and be prepared to do plenty of due diligence on prospective renters.
A recent New York Times article examined this issue, reporting, ‘You need to be prepared to screen tenants, run credit checks and get the water heater repaired at a moment's notice. That means you're going to need to establish relationships with a variety of service people, or, if you have the time and ability, do it yourself. So be honest about how big of a commitment owning a house will really be.’
Decide if you're OK with answering calls on a wide spectrum of tenant complaints and repairs, from the large to the petty. ‘Major problems aren't the only issues you'll have to account for,’ an article on MoneyCrashers.com states. ‘Some tenants will call you for everything. Be prepared to spend your free time changing light bulbs, replacing air filters, weeding yards and spraying squeaky hinges.’
‘I have never had pipes burst at a convenient time – they almost always go out in the middle of the night when you are out of town,’ says Alan Moore, a financial planner in Milwaukee who has owned rental properties and advises potential investors.
Then there's dealing with difficult tenants. Remember, you're trusting people you know very little about to respect and value your property as much as you do. If you're not careful and thorough in your choice of renter, you could end up with someone who is late on rent or doesn't pay at all, is destructive of your property, or unsatisfactory neighbors to the community.
Angela Colley of MoneyCrashers.com described one of her experiences as a property manager when she rented to three college students, who had made the unwise decision to install a fireman's pole in the home, along with not making their rent payments.
‘By the third month, I filed for an eviction,’ Colley recalls. ‘After the hearing, the tenants went back to the house and removed their stuff before the sheriff and I got there. When I went inside, I found graffiti on the wall, concrete in the toilets and sink, mold in the appliances, stains on the floors, and a bright, shiny fireman's poll.’
Needless to say, be sure to know your rights as a landlord, eviction laws for your state, and obtain as much information as possible before handing over the keys to a prospective tenant. Also educate yourself on your building and safety codes to avoid lawsuits, and have a solid homeowners insurance policy in place.
Owning rental property can indeed be a very advantageous and profitable endeavor when done wisely and with meticulous planning. Just be aware of all that comes with this enterprising venture before you don the title of ‘landlord.’
Ori Klein is founder and president of PropertyAuction.com, a niche marketing website dedicated exclusively to real estate auctions. Klein has more than 20 years experience in real estate marketing and technology, focusing on the auction sector of the real estate industry.
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