Wednesday, June 6, 2007

How to Become a Landlord

Despite the downturn in the real estate market in most of the U.S., people are still interested in investing in real estate. And they should be. Every balanced portfolio needs to include real estate investments (REITs, home builder stocks, mortgage backed securities, rental properties, etc.). The hard part is deciding which real estate investment suits your risk and reward tolerance.

One of the more challenging, but rewarding real estate investments is owning a rental property. As a landlord myself, there are certain rules to live by. One of the best articles on this topic is available from the Fool.com (one of my favorite websites-I will blog on this another time).

If you have ever wanted to become a landlord, this is the time to do it. Here's why:

  • Historically low interest rates allow for lower monthly payments. The lower your monthly payments, the lower rent you can charged and still make money.
  • The booming real estate market over the past few years has made home buying impossible for many.
  • The influx of immigrants has created a large demand for rental homes since most mortgage companies only give loans to U.S. citizens.
  • Over the past few years, many apartment complexes have been converted into condos leaving a shortage of rental properties.
  • The recent sub-prime lending crisis have forced lenders to make it harder for everybody to get a mortgage.
  • Many recent home buyers have adjustable interest rate mortgages that have risen quickly, making their mortgage payments too much for them to afford. In response, these home owners are unloading their homes for bargain basement prices to avoid foreclosures.

In addition to the great tips in the Fool.com article from above, here are some of my insider tips to becoming a landlord:

  • Buy a rental house that you, yourself would live in. This not only helps you market the home, but may help you avoid some taxes if you actually move into it for a couple of years before selling it (check with your accountant for more info on this).
  • Simply your life by buying a home warranty through a company like American Home Shield or Old Republic. The cost is less than $400 a year and will save you (and your tenant) time and heartache. If there is ever a maintenance issue, the tenant calls the home warranty company (not you) and pays the $40 service fee. This way you aren't fixing toilets at midnight.
  • Give your good tenants a reason to stay. It is a lot easier to keep a good tenant than to find a new one. When it is time to renew, tell your good tenant you will get a new refrigerator, blinds, carpet, landscape or something for the house in exchange for them signing on for another year. The cost of this little gesture will not only improve YOUR rental property, but it will save you money you would lose through advertising and vacancy costs while you find a new tenant.
  • The easiest way to determine if a house for sale will make a profitable rental is to make sure the monthly rental amount is equal to or greater than 1% of the purchase price. For example, if the house for sale costs $180,000 than you should get $1,800 a month in rent to make some money. This isn't an exact science, but it is a good rule of thumb.

Make sure to do your homework before you become a landlord. If you have any questions or stories, post a comment below. I will be happy to help any way I can.

11 comments:

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and I'll be glad to let you know my secrets at my blog.

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