By Christopher Hoeffel, President CoreVest Finance This article originally appeared in Scotsman Guide. The commercial…
The results are in: Americans love renting. If recent data are any indication, Americans’ living preferences are slowly switching from homeownership to renting. That’s bad news for homeowners looking to sell — but great news for those in the market to buy rental properties.
A steadily increasing demand for affordable rentals means that becoming a landlord can be a lucrative move. But being a landlord involves more than just sitting back and waiting for the rent checks to roll in. If you’re in the market for a rental property, keep these five things in mind:
You’ll Need Quite a Bit of Money Up Front
First, there’s the down payment, which will depend on the building you’re looking to buy. A loan for a duplex or a triplex might only require a 5% down payment, but it’s still a good idea to have up to 20% on hand. Interested in buying a larger property? A building with more than four units requires commercial financing. (Remember: If you have no history as a landlord, most banks won’t allow you to count income from tenants when you’re applying for a mortgage.)
And unless you’re planning on making absolutely no changes to the building, you’ll also need a budget for repairs, remodeling, and general upkeep of the building. It’s hard to attract quality new tenants if your building sorely needs new floors, a new paint job, or a deep cleaning.
Research Is a Must
Don’t wait to do your research. Before you enter the market in earnest, meet with your financial advisor. Call up a few rental property owners and ask them for advice. Spend some time researching property values and tax figures, to finding out where assets are appreciating in value. Sometimes buildings are for sale for a good reason. If property values in an area are in freefall, don’t assume that you’ll be able to reverse the trend as a first-time landlord.
Once you’ve narrowed your focus to a single property, get as much information as possible. The city assessor is your friend here. All the vital facts for a structure — age, property value, new property taxes, new major repairs — are available through the city assessor’s office. Also, ask the current owner for a copy of his or her Schedule E, which will give you an idea of profits and losses.
Insurance is Mandatory
Insurance policies for landlords cover your property against damage from hail, fire, wind, lightning, snow, ice, and other hazards. They also cover losses or injuries your tenants might incur while on the property. As a result, landlord insurance policies are typically more expensive than homeowner policies — sometimes by as much as 25%.
Turns Out “Passive Income” is a Misnomer
People often refer to income from collecting rent as “passive.” Nothing is further from the truth. When you own a rental property, you’re responsible for nearly everything that could (and probably will) go wrong. Has the washing machine flooded the basement? Has the furnace given out in the dead of winter? Have weeds overgrown the yard? Are tenants filing noise complaints against each other? Guess who takes those calls.
You Might Need a Property Management Company
Managing a rental property is a challenge, and if you don’t want to go it alone, you have two options: Hire a resident property manager (aka a “super”) to live on site and take care of day-to-day operations or hire a property management company. Hiring a resident manager means adding more tasks because you’ll be an employer in charge of his or her payroll. Property management companies, on the other hand, are typically independent contractors. They’ll charge you anywhere from 5% to 15% of your rental earnings. But the peace of mind could be worth it to you. Schedule meetings and ask for quotes.
Sam Radbil is a contributing member of the marketing and communications team at ABODO, an online apartment marketplace. ABODO was founded in 2013 in Madison, Wisconsin. And in just three years, the company has grown to more than 30 employees, raised over $8M in outside funding and helps more than half a million renters find a new home each month.