So You Want to be a Landlord?

 

The residual income from owning rental properties may bring more money into your life than the fast flip in the long term. If nothing else, the stress is reduced because a well-chosen investment will pay for itself until you the market is ready for you to sell. In order to make this idea work, you must plan carefully. Choose your property, choose your management approach, and choose your tenants carefully to make the most of your investment.

Choose your property.

Not every house is going to bring in the money you need each month. Some considerations:

Will you be financing? How much you finance is going to have to be factored in to how much you need to cover the monthly expenses. Up to four units is considered a residential loan by most banks; beyond that is commercial, which means that the lender may factor in the rent more easily as income, but other, more stringent requirements must be fulfilled to secure a loan. The more equity you have now, the more able you are to weather periods of vacancy.

How many units? Not only is the number of units a factor in lending, it's also very important for income. More units means less drain when you have a vacancy (a two-family house loses half the income when one tenant leaves!), it's also just plain easier to get enough rent to at least cover your expenses.

Will major work be needed? If you're getting a place cheap, you probably are expecting to do some renovations. This has to be budgeted in, because you're spending money and not getting rent for that period of time. Contractors often break both deadlines and budgets, because hidden problems become apparent as you dig in to the project. Make sure you have a cushion to cover your mortgage, insurance, taxes and other expenses.

Choose your management approach.

Once you've found a winner of a property, it's possible to just sit back and let the money roll in . . . or you could make a part - or full-time job out of being a landlord.

If you're handy, enjoy paperwork, like working with people, and don't mind being available pretty much all the time, you should be a landlord. Many people have left their old jobs behind to manage their own rental properties full-time.

Choose your tenants.

Personal. Take a look at the condition of the prospective's car, inside and out. Make it a point to visit them where they live now, to see how they keep it. Meet every person (and animal, if you choose to allow pets) that will be living in your building.

Income. You cannot discriminate against someone because of the source of their income. With any applicant you turn down, it's a good idea to send a letter stating the reason for not renting, even if it's as simple as the background check came back faster on someone else.

Don't rush. The best way to pick a bad tenant is to rush into it because you're scared of a vacancy. If you choose poorly, you will likely have far worse than a vacancy on your hands.

If you don't have the iron constitution for buying properties and flipping them, but agree that real estate is the best investment around, rental properties are likely the way to go.

 



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