Being a landlord is not for everybody, but in today’s rental market, it can be a smart way to grow your wealth. That’s because demand for rental units continues to be strong — driven by the failure of wages to keep up with the rising cost of housing.
However, you can still buy rental property and actually make income on it. It should not, therefore, be mistaken for a way to get rich quick. This is a long-term investment that needs to be approached carefully. But if you’re still itching to tap your inner real estate baron, here are 7 smart moves to help you get started.
Smart Move 1: Recognize that being a landlord is a business.
Being a landlord is different than being a private homeowner. It’s a business, and you need to treat it like one. “Where I see a lot of people make mistakes is, they don’t have a good business plan,” Roberts a real estate investor says. “This type of investment is not hands-off. It’s not just a passive revenue stream. It requires involvement. It requires your time. It requires certain skills.”
Any property you buy has to make sense from a business perspective, not because it is a house you would like to live in. That means it should be a reasonably priced home likely to appeal to the kind of tenants you’re looking for.
Smart Move 2: Start small.
Roberts suggests starting with a single house or smaller multiple-dwelling unit, perhaps with a partner, to see if the business really suits you.
“Single-family residences are the easiest properties to buy when you’re looking for investment property,” Merrill says. Condominiums usually require a larger down payment and monthly association fees.
Starting with a single home will allow you to get a feel for the maintenance, bookkeeping and other work required. Roberts and Merrill both recommend choosing an initial property without high-maintenance features such as elaborate landscaping.
Smart Move 3: Don’t invest somewhere you don’t know.
An old joke is that the three keys to a successful business are “location, location, location.”
That’s especially true for rental property. A home that seems to be a steal might be priced lower because it’s in a neighborhood most people wouldn’t want to live in — with higher crime or poor schools, for example. For that reason, investing in out-of-state property is a gamble. Buying in neighborhoods you know well or have carefully researched is the smart move.
Smart Move 4: Figure out the right rent.
Rents differ widely around Lagos State. We at 99 Property Nigeria Limited can give you an idea of what they are where you are buying. Then you need to determine if that rent will be enough to cover your costs. Too often, people take a look at their loan and think if they cover that, they are doing fine.
We advise our clients to put aside, 5% of gross rental income to regular maintenance and another 5% to pay for the downtime and repairs that come with vacancies. Not budgeting enough for maintenance is a common mistake. Things break. You’re going to need money in a bank account to deal with those expenses.
You will also want to know the rate of return you are getting on your investment. There are formulas, such as the “capitalization rate,” to help with this, but you might want to turn to a professional. A good accountant can make sure the purchase makes sense.
Smart Move 5: Be ready to get your hands dirty.
If starting with a single home, you will find it to your financial advantage if you can manage the property yourself. That requires those “certain skills” Roberts mentioned.
The better you are with tools, the easier it is to maintain rental property without having to call in costly plumbers or electricians every time something breaks.
If you are the kind of person who has put off fixing your own leaky faucet for a month, this probably is not the business for you.
Likewise, if you’re uncomfortable at the thought of calling tenants to ask where their rent cheque is, you need to look elsewhere or hire a property management company, which will add to your expenses.
Smart Move 6: Get professional help when you need it.
If you decide to manage your property, you will probably want to consult a real estate lawyer to get a solid lease and learn the rights of tenants. You may want an accountant, and you’ll need to know some good plumbers, electricians and other tradespeople.
Turning to a property management company is another approach, we advise. They bear the burden of sleepless nights of thinking on how to write letter of renewal of rents, rents review and generally, managing the property in a good way for you.
“Once I had more than two or three addresses, it made sense for me to hire a property manager, just because my wife and I also have careers,” Roberts says. “It’s worth it for us to pay 7% to 10% of our rental income to a manager.”
Buzz Farlow, owner of Pioneer Properties, a property management company in Tucson, says vetting and dealing with tenants is one of the most valuable services a good management company provides.
“It’s a very different dynamic when a tenant is dealing directly with the owner,” some argues, but, “There’s a tendency for the tenant to think they are your friend, and that can complicate things. With a manager, it is clear, it’s a business.”
Smart Move 7: Keep your tenants happy.
“Of all the costs associated with being a landlord, the biggest one is vacancy,” Roberts says. “Every time a tenant moves out, you are going to spend money, probably quite a bit of it.” That means finding and keeping good tenants is the heart of successfully investing long-term in real estate.
“Happy tenants are critically important. They’re your customers,” Robert says. “And the way you keep them happy is by keeping the property in good shape and treating them with respect.”
Do that and you will be building wealth with an investment you can feel good about.
Culled from: Reed Karim, Interest.com
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