Are You Thinking of Becoming a Landlord?

Are You Thinking of Becoming a Landlord?

If you’re considering investment property to put your extra cash to work, you’re not alone. How do you decide whether this is the right choice for you? Start by identifying the costs of purchasing, owning, and managing a rental and researching rents in your area to determine how much income to expect. You’ll also need to consider the risks involved with rentals and decide whether you want to put the time and effort into managing a rental property.

Look at the Numbers

Unless you’ll be paying cash, a good first step is to talk to a lender. Find out what loan amount and interest rate you qualify for, and ask the lender for a list of all costs associated with the loan. Rates for investment properties are typically higher than those for primary residences, and down payment requirements may be higher as well. It pays to shop around: not all lenders offer the same types of loans.

Other expenses to include in your cost estimate are property taxes, insurance, association fees (if any), and ongoing maintenance. Be realistic about how much it will cost to keep the property in good condition so that you can continue to attract renters.

Don’t forget to factor in the transaction costs (closing costs) incurred when buying and eventually selling the property. Finally, talk to a tax accountant about how rental property ownership, including rental income and depreciation, will affect your taxes.

Once you’ve evaluated the costs and tax implications, you’ll be in a good position to determine whether monthly rents in your area will make the investment worthwhile.

Consider the Risks

Owning investment property can be profitable but is not risk free. Some of the risks include late rent payments and damage to property caused by careless or unhappy tenants.If tenants lose their jobs, they may miss rent payments altogether. If this happens, how will it affect your finances?Will you be able to keep up with your loan payment and other expenses associated with the property?

Unlike a money-market fund you can draw on when you need cash, real estate is not liquid, and its value varies depending on market conditions. If you have an unexpected need to sell, it may happen when the market is going against you. Even in a good market, it usually takes at least six to eight weeks from listing to closing. In a buyer’s market with a surplus of houses for sale, selling can take much longer and sale prices can be disappointing.

Is it the Right Fit for You?

Rental property management includes finding tenants, handling tenants’ calls about problems, arranging for repairs, and sprucing up the property for the next tenants. Some people decide against investing in a rental because they don’t want the hassle and don’t think the income generated would justify hiring a property manager. Others don’t see managing a rental as an obstacle, especially if they have extra time and are handy enough to do some of the maintenance and repairs themselves.

Deciding What to Buy

Once you make the decision to move forward, you’ll need to find a property. Many rental owners prefer townhouses or condos where the homeowner’s association handles some of the maintenance. Others focus on single-family homes in good school districts. With the trend toward working at home, some tenants may want a home office or at least some kind of workspace.

When you find a property to buy, make sure your offer includes all the relevant inspections so you can identify problems before taking ownership. Try to negotiate repairs with the seller to minimize your costs later on.

If you’re willing to take on the responsibility and assume the risks, rental property may be a profitable addition to a diversified financial portfolio. And if the current shortage of homes for sale continues, the pool of potential renters could increase, making it easier to find reliable tenants.

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See more of Annette’s articles on related real estate topics. If you’re planning to buy or sell a home, contact Annette at (610) 247-7892 or annette@preferredhomes.com

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