Whether investing in real estate or renting your house, consider these factors before becoming a landlord
Real estate market forces have many wanting to take advantage of property investment opportunities. However, investors who are acquiring and homeowners wanting to convert their primary residence should proceed prudently when considering the rental market.
Well-advised and diligent investors lean on veteran professionals with the acumen of real estate cycles. Those cycles, among other factors, weigh heavily on the decision to buy or sell. Investors and real estate professionals who recognize key indicators in a real estate cycle will sell at the first signs of a market that is tanking, poising them to take advantage of an impending downturn.
To invest in real estate prudently, you must consider many facets. As more rental homes become available, landlords need to lower their rates to be competitive. Too many investors get in at the wrong time for the wrong reasons.
How to Find Rental Properties
If real estate prices are declining or stagnant, rental investments become attractive. Recently, investors have been investing in real estate with deals that have huge upside potential, whether short-term or long-term. Well-capitalized investors acquire properties at foreclosure auctions. Because they are guaranteed a clear and marketable title, deep-pocket investors prefer buying “at the court house steps.”
Most foreclosure properties end up in a lender or servicer’s Real Estate Owned (REO) portfolio because the opening bid isn’t sensible. The property goes back to the mortgage company after an unsuccessful trustee sale or auction. These properties eventually end up on the local Multiple Listing Service (MLS) and are arguably screened by savvy investors as inopportune.
Buy Low, Rent High
As with any investment, rental properties prove more profitable if the initial investment stays as low as possible. Like owner-occupants, investment buyers should consider properties that yield a return.
Too many investors and real estate agents use cost per square foot as a deciding factor. You should use the price per square foot to drill down but certainly not as a deciding factor. Location, location, location and deferred maintenance are more important factors. If your debt service is low and the property is well maintained, you can offer the least expensive rent in the area, so you’ll always be able to rent the property.
There are no real secrets to finding a low purchase price. Foreclosure auctions are a great resource for finding low priced homes, but the competition is fierce, and you rarely have time to do extensive due diligence. You also have to pay cash within 24 hours of winning the auction. You can find properties going to auction through legal notices published in local newspapers or online by skimming trustee websites. Most importantly, a prudent investor makes unemotional decisions and walks away without regret.
Buried in Rental Property Maintenance
One of the hidden costs to rental properties is what many property managers call deferred maintenance. Manufacturers know that postponing equipment maintenance to reduce immediate costs often leads to much higher costs down the road. Investors should look at their properties the same way.
A professional home inspection report is a very useful arrow in your quiver. Property managers use tools and systems to document the condition of a property before move-in. These systems, reports and pictures are invaluable during a lease and when a tenant moves out.
The Lease and Renters
Choosing good tenants is a skill usually acquired via the school of hard knocks. But if you want to minimize heartache, ask around and get ideas from real estate professionals, including property managers and acquaintances who are landlords. The lease can be as specific or vague as you like, but remember, you and your tenants should sign the document fully intending to honor the agreement.
Hiring Property Management Companies
Many property owners who make lousy landlords but remain committed to investment properties will hire a property manager. Ask questions and look for a seasoned, well-organized property management company or agent. There is usually a new tenant fee, and they keep 10 percent of the monthly rent they collect. Make sure the manager or company is bonded and licensed. Never sign a long-term contract until you decide the “dating” phase is over.
Real Estate Investments Over the Long Run
Turning your home into a rental property may be a viable option for selling. However, if you become a landlord with the intention of making a large profit or preserving your retirement savings and income outlook, you need to commit many years to your new investment.
If you have a significant amount in a retirement account, rolling that into a self-directed IRA or 401k account is a worthy option. Buying real estate with a self-directed ROTH account guarantees tax-free gains and early distributions at age 59.
A version of this article appeared on the Destiny Real Estate blog.