Landlord Basics
It's
not exactly life on easy street. Difficult tenants, costly repairs and
falling rents can eat into your profit. Here's how to know if you're
up to the job.
Lenders typically expect down payments of 20% to 25% for rental property, and some lenders want as much as 40% down. Your loan will be more expensive than a typical residential mortgage, as well, because lenders believe investors are more likely to walk away from a rental than they are from their own home. Lenders charge interest rates that are anywhere from one to two [percentage] points more on a rental-property loan than they would on an owner-occupied home You do have some alternatives:
Remember, too, that you’ll be getting special tax breaks. What you spend on upkeep and repairs for a rental is typically tax-deductible. You also get a break for depreciation, which is an allowance for the wear and tear over time on your property. You may even be able write off up to $25,000 in losses each year if your modified adjusted gross income is under $100,000. But you shouldn’t count on tax breaks to help you make a profit, experienced landlords caution. They typically look for properties that will rent for more than the monthly mortgage, insurance and tax payments, to ensure they have enough cash to cover needed maintenance and repairs. You may also need to adjust your expectations about profit. A good return from rental real estate is anything more than 10% annually, and many small landlords will find they earn less, even after the property’s rising value is taken into account. Maintenance, repairs and the occasional empty unit eat into profit, landlords say. A major repair, falling rents or a costly eviction can be a disaster for your bottom line. The key is screen, screen, screen. Verify references, ask questions. Run credit checks, and call previous landlords to ask whether the tenants paid their rents on time and kept their apartments clean. Diligence is one way to keep down the eviction rate. Some credit checks can be done for less than $10. A more complete report, which includes a public records search for lawsuits, previous evictions and criminal convictions, can be had from tenant-screening companies for about $20. Take the extra step of making sure the phone numbers applicants list for their employers and previous landlords actually match the publicly listed numbers. That can help ensure the applicant isn’t simply directing you to a friend who’s been instructed to provide a phony reference. There are only two times a landlord gets into trouble: When he gets in a hurry, or when he feels sorry for someone.” You can, of course, hire a property manager to do all this for you. The manager can also handle the repairs, tenant disputes, midnight move-outs and neighbor complaints, all for a flat fee or a portion of each month’s rent. Some landlords have had good experiences with property managers, while others feel that no one cares as much about their investment as they do. Such an arrangement also can eat up 10% of your rental income, which could consume much of your profit, depending on the property. Indeed, the more tasks you hire other people to do for you, landlords say, the less you’ll earn from your investment. If you’re still interested in being a landlord, you have one more task ahead: learning the landlord-tenant laws in your area. Potential landlords should educate themselves thoroughly on their rights and responsibilities, exercising particular caution when it comes to rental agreements. A poorly worded or outdated form, for example, can make getting rid of a problem tenant expensive, if not impossible. Professional bad tenants know the law. Local landlord associations can provide up-to-date forms, education and legal help. The American Association of Small Property Owners can provide links to associations in your area. For Additional information try these links:
Landlord.com
Loopnet.com
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