Build Wealth by Investing in Rental Property
Tuesday, September 8, 2015 - Author: Candace F.
Building Your Future One House at a Time
I love those TV shows where a novice buys an investment property, has it totally remodeled so it looks like it just popped out of Good Housekeeping Magazine, puts it on the rental market for top dollar, attracts the perfect tenant, and everyone lives happily ever after. Except, remember, that is a TV show. You never really see what happens when the cameras are turned off. I am listing here a few things you should be aware of prior to making this kind of investment.
How Do I get Started?
Ask anyone who has been a landlord for a number of years and they will tell you that there are a number of things they wish they had known before they invested in rentals.
This is a business and you need to treat it as such. You are buying a house and not a home. It is up to your tenants to make it a home. You cannot become emotionally invested in the property or you will take offense every time a tenant does something that is not up to your standards.
Start small to see if it is for you. Do you really want those 3:00 AM calls about a water leak? Try it out with one house or a duplex. Give it a few months before you buying more properties.
Buy in a neighborhood that you know and that is close to you. How do you fix that leak at 3:00 AM when it is 6 states away? Even if you have a contractor take care of repairs, it is more difficult when it is not in a close proximity to you.
Know what to charge. Check local real estate ads or Craig's list to determine the correct rent amount.
Are you going to handle it yourself? Can you do the repairs? Can you do the bookkeeping? Do you WANT to do the repairs? Do you WANT to do the bookkeeping?
Do you need to hire a property management company?
Keep your tenants happy. It costs less to charge a reasonable rent than to have a vacancy.
I Don't Have That Much Money!
So, you have found the investment property that you want to buy. How much is it going to cost you? If you are going to need a loan to purchase the property, you need to know that lenders don't loan 80% on investment properties like they do on a person's home. Probably 75% is tops. This means that the additional 25% has to come from you - along with the closing costs. Closing costs alone can be a pretty good sum.
Then if it needs any repairs, you will need funds for that. Most houses will need a minimum of flooring and paint. Perhaps more.
Don't forget the insurance. Insurance on a rental is higher than on a home that you live in. Then there are newspaper ads, background checks....
Bringing Everything up to Standard.
You will get out of your investment accordingly to what you put in it. If you wouldn't want to live in the house, why do you think someone else would? If you are trying to rent out trash, that is what you will get to live in it.
Screening Your Tenants.
Background checks, credit reports, they are worth 100 times what they cost. Along with this, don't be afraid to say "No". This is a long term contract. Do not enter into it without knowing all of the facts. And speaking of contracts, be sure you have one. Spend the money to have a real estate attorney prepare it for you so all of the bases are covered. Even if the proposed tenant is your favorite Uncle Bill, get the contract. It is for your protection as well as the tenant's. If you are a person who is going to crumble every time someone tells you a sob story, then you definitely need a management company. Don't try be a landlord you would do much better in charity work. Don't misunderstand me, the softhearted people are wonderful people, and the world is a better place because of them, but they will not make any money as a landlord.
Be in it for the Long Haul.
Now, you have purchased your rental property, tricked it out so the most discerning person would beg you to be able to live there, accessed the tenant's background check and credit report, got the contract signed, there's nothing left to do but sit back and start making money! Not quite so fast. If everything is in order, and your rent is set appropriately, you might clear a little money, but that is not where your profit comes from. The real money in rentals comes when you either pay off the mortgage and can claim the rent receipts as your own, or when sell the property that has appreciated while someone else made all of the payments on for you.
I don't mean for this to be discouraging. That is not my goal at all. I think investment in rentals is an extremely smart thing to do; I just want you to have your eyes wide open when you jump in.