Being a landlord can be a great way to create passive income. Many investors are seeking to get into the rental market to create passive income to fuel their lifestyles, and the market in the United States is still rising.
Since 2005, the number of households that rent has hiked to 37%, a jump of 9 million and the largest increase by decade since 1965, according to a December study by Joint Center for Housing Studies of Harvard University. This is on track to be the “strongest decade of renter growth ever recorded,” according to the study, and hikes in rent are beating inflation.
Traditionally, investors have looked for quick returns by flipping houses after a swift remodeling. Flipping your home doesn’t mean it’s going to sell out quick, it can also tie up your money if the home doesn’t sell immediately.
According to Corey Brinkman, market vice president of Renters Warehouse, a property management company in St. Louis, “Plus, Flipping the house is a one-time benefit once the house sells. Renting out a property can provide income month after month and free up your cash flow to invest in other places.
But investors should enter the market with caution because it is easy to underestimate the costs of repairs and upkeep on your rental unit. “A good rule of thumb is to calculate anywhere from 7 to 15 percent for these unforeseen repairs, depending on the age of the rental property,” Brinkman says.
Here is some advice from experts to keep your rental money flowing in the right direction.
Keep your goals in mind.
These investors need to know why they are in the rental market and what they want to accomplish financially, says Wendell De Guzman, chief executive of the real estate investment firm, PCI in Chicago.
If the goal is to live passively off the rental income, then investors should know how much income they’ll need. The tax rate changes as income becomes passive, says De Guzman, and “your tax rate can be zero percent” because you can deduct the depreciation from your taxable income.
Know your income and expenses.
Put your financial house in order. This will help you get loans and, subsequently, buy more property, De Guzman says. But don’t forget to include taxes, insurance, maintenance, management, utilities and the reserves for major repairs, like a new roof.
It is also a good idea to learn about financing and talk with mortgage brokers to find programs to buy the property with as little money down as possible. First-time homeowners might buy a four-unit apartment building, get a FHA loan with a 3.5% down payment, collect the security deposit, and if you close early enough in the month, use the first month’s prorated rent toward the down payment, De Guzman says.
Better to learn your market’s vacancy rates and property ratings.
There are areas rated A through F, and they all sell and rent for different rates. Keep your vacancy rate to 5% or less, De Guzman says, so you won’t be stuck with an unrented property for months at a time.
You might want to avoid the areas with the lesser ratings unless you want to be a property babysitter. Areas with F ratings often have the most violent crimes in the neighborhood. Also take note, A-rated areas often mean higher sales prices but lead to higher rents and more regular tenants.
Look for real estate with great potential.
Properties that tend to do well are near schools, expanding retail or trendy points of interest, local transportation, or surrounding malls, says Daniel Sanchez, commercial associate partner of Partners Trust Commercial in Beverly Hills, California. And he says that, “Once it’s yours, maintain the exterior and keep your costs down with desert landscaping, low-flow toilets and tank less water heaters.” Keep your options open. Consider smaller markets within secondary markets, how well the house was built and how much people are paying rent in the neighborhood. Before buying, check out how well the house was framed, who the tenants would be and what he can add to property to reasonable increase the rent.
Don’t be lured by low interest rates.
If a property is already 30 years old and would cost the same to build it, then don’t buy it. Make sure your home has enough value to get the returns you want when you eventually sell the property.
Renovate the kitchen and bathrooms to get higher rent.
Put some quality granite in the kitchen, this could save you resurfacing costs, and bring-in an extra $50 to $90 per month. Be sure to know how much renovations cost so that you know if you’re getting a fair bid.
Screen the tenants.
Have an application process and use a service such as National Tenant Network to look for civil and criminal lawsuits, recent collection activity and credit scores above 600, says De Guzman. “Look for people who were down financially, but now are on their way up with a good job and some savings, who have been paying their bills for the past four years,” he says.
Source: usnews.com, technobuffalo.com, sellroom.net, panbudan.com, moneycrashers.com
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