Picture this: Cash rolls in like clockwork every month, and you don’t have to do a bit of work to get it.
That’s the promise of rental properties. In theory, they are passive cash-generating machines that deliver you money every month with little to no effort on your part. In reality, they can be a real pain or, worse, a drain on your wallet.
If you’re serious about owning a fleet of income properties, you may want to read one of the many books available on the subject to uncover all the finer details. And if you’re interested in renting your house to travelers, read this article on how to turn your home into a profitable vacation rental.
For everyone else who is playing with the idea of buying an income property, here is a rundown of the basics.
5 things to weigh when before buying
Not every property can be turned into a moneymaker. Some houses are destined to be duds.
Before closing on an income property, consider all of these factors:
- Prospective renters: Who is renting in your area? Is it college kids who might be happy with a couple of small rooms to call their own, or families who need more space to spread out? More importantly, will the property you’re looking at meet their needs?
- Neighborhood: It doesn’t matter how nice the house is if it’s in a bad area. A property in a bad neighborhood is probably not going to rent at top dollar. Plus, a high-crime area may boost your insurance costs and could make your property a nightmare to maintain if vandals frequently make the rounds.
- Price: For this, you need to consider not only the price you’ll pay for the property but also the price you can reasonably charge for rent. What’s more, will the latter cover the monthly mortgage payment if you end up financing the purchase?
- Taxes and insurance: The list price should be only part of your cost analysis. You also need to estimate the property taxes and insurance you’ll be paying annually. Depending on where the property is located, these costs can make a reasonably priced property unaffordable.
- Condition: Tenants don’t always make decisions based on price alone. They will also take into consideration the condition of your property. Be realistic about the amount of work a home will need to be marketable, and have it inspected just as you would with any other major purchase.
Once you find the right property at a price you can afford — bonus points if you pay cash — the next step is to figure out how you’re going to manage it.
Here, you have two choices. You can do it yourself, or you can hire a property manager. Property managers will cost you some money, but you may find their services are worth the price.
5 ways to get good tenants
If you’re using a property management company, it will likely be responsible for finding good tenants for your property.
If you’re doing it yourself, here are five tips to help find decent renters:
- Perform reference, background and credit checks: It’s not enough for a potential tenant to simply provide references. In addition, you need to call and speak with those people to confirm they do indeed have good things to say about your applicant. Also, while it may cost you a little money, you’ll want to run a criminal background check and perform a credit check to look for potential red flags.
- Have a face-to-face conversation: When taking rental applications, arrange to meet potential tenants and take them on a tour of the property. It offers the opportunity to have a conversation without the pressure of a formal interview. Another tactic could be to meet applicants at their current residence to see how clean and well-maintained they keep it. However, be careful not to run afoul of the law. Under the Fair Housing Act, landlords are prohibited from denying a rental application for reasons such as race, religion or the presence of children.
- Require a deposit: Requiring a deposit serves as a form of insurance for your property and can also weed out any applicants who may not be able to pay the monthly rent. State laws vary, but it’s not uncommon in some areas to require both the first and last month of rent in advance along with a security, or “damage,” deposit. If you’re renting to someone with pets, you might want to charge an additional amount to accommodate any pet-related damage. You can visit legal site Nolo.com to find the security deposit details for your state.
- Have a formal lease agreement: A handshake is not enough to protect your investment. You need to have a formal lease agreement drawn up. A good agreement goes beyond listing the rent and deposit. It should spell out who is responsible for what and what’s included in the rental price: utilities, yard work and so on. Before you pay big bucks for a lawyer to draw up this agreement, see if there is a rental housing association in your area. These groups may provide their members with standard forms for the lease agreement, lease application, pet addendum and more. They may even run background checks for you.
- Complete a prerental checklist: Finally, before your tenant moves in, take one last tour of the property with him or her. This time, bring along a prerental checklist. Use this checklist to note any existing issues to the property, such chipped drywall or scratches on appliances. Both you and your tenant should sign the checklist. That way, you can refer to it later if there is any question about whether damage was caused by the renter.
That’s a quick overview of buying and owning a rental property. Do any landlords out there have anything to add? Leave a comment below or on our Facebook page.