Rental units are making up a significant percentage of the housing market these days, so it would be no surprise if you were to express an interest in becoming a landlord. In theory, it sounds like a fantastic move – you buy a home and have someone else pay your mortgage, with a little extra for yourself. And once you become successful, you can buy another house, and another, and so on.
However, you also need to bear in mind that being a landlord isn’t always the right route to take. The reality is that it is hard work, and even though there is an excellent opportunity for investors who get it right, it’s all too easy to get it wrong. In this guide, we’re going to go through a few of the issues you might come up against. Let’s get started with the basics.
The legal aspect
Being a landlord is like being in business. And just like any other business, you will need to ensure you are keeping excellent records of your transactions. That includes taxes, income and expenses, compliance with local, state and federal law, as well as keeping up to date with your insurance policies and legal obligations.
Bear in mind that you will probably need professional help, especially when it comes to going through the legalities. And given that the tax laws are reasonably complicated around property and rental income, it’s also advisable that you use a tax specialist.
Before you start looking for a property to buy and rent out, have a long, hard think about who you want to find with regards to tenants. Some inexperienced landlords buy first and then look for tenants, but if you do this yourself you run the risk of purchasing a property with a specific demographic in mind, but it’s the wrong area of town to attract those people.
For example, maybe you have a vision for renting out your home to a family. It’s one of the safest tenancies you can offer as a landlord because families with young children tend to stick around and keep their homes in good order. But if you buy a house in a popular student area, or somewhere there is a high crime rate or even has a lack of facilities for children nearby, it’s unlikely you will get the kind of tenants you were looking for.
As we discussed above, location is critical when it comes to buying rental property. Young professionals like living in areas with a healthy nightlife – city centers, for example. Families prefer quieter areas where there is plenty of access to stores and children’s facilities. And students prefer living near their college campus, and consider rental costs as the primary factor in their decision making more than anything else.
There will always be exceptions to the rules, of course, but by and large, you will find these descriptions of tenants and their preferred locations ring true. And going against the grain can often cause you problems. As every successful investor will tell you, minimizing your risk as much as possible is almost always the best way to go.
Before you take the plunge, make sure you are aware of your responsibilities of being a landlord. Don’t forget that you alone will be responsible for your mortgage payments every month – regardless of whether or not your tenant pays their rent. You also need an understanding of local, state and federal laws regarding rental housing.
You will also have to be prepared to answer your tenant’s calls 24/7. For example, if there is a flood at 2 am, you will have to be available to deal with the emergency. Finally, there is a legal requirement to maintain the habitability of the property. If a tenant or visitor injures themselves because of unsafe conditions, you will be held responsible.
As you can see, when you put all these little details together, there is already a significant cost involved. It’s vital that your rental charges take these expenses into account. It’s also crucial to find out more details on services that provide ‘live-in’ renovations and repairs so that you don’t lose rental income when a problem arises. The cost of having to move your tenants out while you do repairs can result in wiping out your entire profits for the next 6-12 months in some cases.
However, it’s not all bad, as there are plenty of financial benefits of being a landlord. For example, you can claim tax deductions on all kinds of things like depreciation, office expenses, mortgage interest deduction and, if you choose to use them, professional real estate services.
Using management companies
Of course, it’s also possible to make your life a lot easier by engaging with a management company. It can handle all kinds of things on your behalf, from rent collection through to repair work. Doing this is advised if you decide to buy a rental property some distance from your own home – a vacation property, for example. It will also help those of you who just don’t have the time to commit to looking after a second home, due to work, family commitments, or a combination of both.
There is a cost involved, here, of course. The management company will take a monthly fee – sometimes a flat charge; sometimes as a percentage of your rental income. You will need to weave these costs into your financial plans. While some new landlords prefer to take the DIY route to save money, it won’t always be the case. For example, if you earn a good wage from work, it might make financial sense to pay someone to look after the home on your behalf, so you don’t lose any of your own income.
As you can see, there is a lot to consider when you are a landlord. From local, state and federal laws all the way through to the day-to-day running of your new business, it can all take up a significant amount of your time. That said, if you commit, plan well, and vet and treat your tenants well, it could well be a brilliant starting point to a new investment opportunity – and perhaps a new career. Good luck!