Long-term real estate investments are an excellent way to create wealth, however being a landlord and creating rental income is no easy task.
You have to treat your rental properties like a business. A business plan that covers everything from marketing the properties to potential tenants to how you will handle maintenance issues, move-in/move-out procedures, etc. is vital before you sign your first contract.
Once your business plan is ready, your first step should be to ensure you only invest in properties that will provide positive cash flow. You need to know what the market rents are, and make sure they exceed your monthly expenses to maintain the property.
You also need to be able to stay afloat if your tenant stops paying, pays late, or damages the property. It’s a good idea to have a six-month reserve to cover emergencies, such as fire, flooding, etc.
Rental Income: The Best Way to Start
The best way to ease into being a landlord is to start with a single-family home. They are easier to purchase than condominiums and multi-family properties. Buy only in an area that you know well. The area should be desirable to renters and have an established history of good overall maintenance by other homeowners. You’ll have a tough time attracting tenants to an undesirable neighborhood.
Familiarize yourself with federal and local housing laws. Do not discriminate against potential tenants based on race, ethnicity, sex, religion, disability, sexual orientation, age, or political viewpoints. You may require a pre-determined credit score, background check clearance, and monthly income, as well as references from previous landlords.
The Importance of Rent Price
Price the rent correctly. Don’t just cover your mortgage payment, make sure your taxes and insurance are covered, as well. Add an additional ten percent for vacancies and repairs.
A licensed real estate agent can help you determine a rental price based on the property’s features that the market will support. Just like an overpriced home, if a rental property’s monthly rent is priced too high above the market, it will sit vacant.
You can use the first year as a landlord to learn how best to approach your bookkeeping, maintenance procedures, and communications. Expect to get a few late-night and/or weekend maintenance calls. You’ll need to be prepared to respond promptly.
Finding a keeping good tenants is vital for rental income stability. You want to keep your tenants happy. If you take a week to fix their air conditioner, don’t respond in a timely manner to requests, or stick them with a repair you are responsible for, they are going to move out at the end of the lease if not before. The less tenant turnover you have, the fewer vacancy periods you’ll have to cover. Treat good tenants like customers you want to keep. Kindness and courtesy go a long way in maintaining positive tenant-landlord relationships, but don’t get too friendly. Be firm about timely rent payments and other tenant responsibilities.
Managing the Property
For your first property, you definitely have the advantage if you’re handy. Making repairs yourself rather than calling a plumber, electrician, or other contractor every time something breaks can save you a lot of money, if you know how to do it correctly.
If you don’t want to manage the property yourself, a professional real estate management company can handle the landlord duties for you. They will change a percentage of the monthly rent, so this option will only work if you will still maintain positive cash flow. And remember, even if the property is professionally managed, the ultimate responsibility for maintaining the property and ensuring all landlord-tenant laws are followed still falls on you as the owner.
These are some of the issues to keep in mind when deciding to make money from rental income. While it can appear daunting at first, becoming a landlord can be relatively easy – and lucrative – if you follow the steps to determine the method that is best for you.