Secrets Before Becoming a Landlord
Due to record-high home affordability and rising rents, housing looks good to investors. The National Association of Realtors estimates that, in 2011, investors made up 27% of home sales, up from 17% in 2010. If you’re thinking of joining in an investment market that averages a 6% yield nationwide, consider the following “secrets” first.
Treat It Like a Part-Time Job
Many properties are going to require some restoration and rehabilitation. And this is going to require time. In the majority of cases, it will also require capital, especially if you DIY (do it yourself). If so, count on contributing much sweat and long hours.
Be A ‘Silent’ Landlord
Not interested in DIY? Consider the easier alternative of turnkey property investing. There are several companies, such as HomeVestors and Professionals Invest USA, that buy homes cheap, rehab them, find tenants, and then sell the homes to investors looking to diversify portfolios. Though you’re the ‘silent’ landlord, these companies will, for a monthly fee, continue to manage and maintain the property, collect rents, vet new tenants, and more. — for a monthly fee.
Before buying, determine whether or not money can be made. First, calculate the capitalization rate, which measures of the rate of return on a property by basing it on the anticipated yearly rental income divided by the purchase price. The higher the the cap rate, the higher the potential returns – and sometimes, the higher the risk, too.
Location, Location, Location
The ubiquitous phrase that influences all real estate investing. If you plan to be hands-on, choose an easily commutable area. Research all local economic data. Avoid markets with high unemployment; a lack of jobs means a smaller pool of renters. Consider areas with positive job growth projections. College towns often offer great returns on rentals. On the other hand, places with low unemployment rates but high traditional homeownership rates could mean less rental demand.
Picking A Property
Check out short sales, REOs, estate and probate sales, auctions, and other such places where you can get a good deal. Use a real estate agent who works directly with the banks; they will have experience handing distressed deals and might have access to as-yet publicly listed properties. And one more thing: of cours, price is important, but don’t buy based simply on price. Make sure it’s attractive to stable tenants in a decent area.
If you have the cash to pay in full, consider doing so – less hassle and less fees. If you need a mortgage, use a community bank with more favorable lending rates. Expect to plunk down at least 20% when taking out a mortgage – and don’t forget that investor properties are ineligible for mortgage insurance. It’s 25% down and a higher credit score for two- to four-family homes. If buying a rental, you need six months’ worth of cash reserves of six months’ worth of payments on the property in question. There can also be additional fees, so make sure you do your due diligence.
Managing the Site
If you’re not going to live onsite, hire a property manager, who usually charge 8-10% of monthly rent. In return, you’ll have someone who conducts property inspections, vets tenants, collects rent, evicts tenants (when necessary), and is on-call for emergencies.
If managing the property yourself, learn how to get good tenants. Do your own credit and criminal background screenings; don’t accept them from tenants who themselves provide the documents. Require two landlord references. Keep the number of a good real estate attorney, who can help close on a property and make sense of tenant laws.