Tips on Buying, Renting a Home for Extra Income
Low mortgage rates have made buying a home more affordable and turned rentals into an attractive option for investors.
Throughout the downturn in the housing market, average investors, sometimes pooling their money, have bought foreclosures at a sharp discount and turned them into rentals. Many homeowners also have purchased a second home and rented out their first property.
Although the housing market is showing signs of recovery, demand for rental housing is expected to remain strong.
The national unemployment rate remains high at 7.9 percent, banks are still working through a backlog of foreclosures and tight lending requirements prevent many renters from becoming homeowners.
And the Fed has said it will keep its short-term interest rate, the federal funds rate, at a record low until U.S. unemployment falls below 6.5 percent, something many economists don’t expect to happen until late 2015 at the earliest.
“In this market, at this point, it’s a sweet spot,” says Chris Princis, a senior executive at financial advisory firm Brook-Hollow Financial and owner of two rental properties in Chicago. “You’re getting the market where it’s just starting to rebound, but still at the bottom, with what’s looking to be a great recovery.”
Here are some tips on becoming a landlord or investor in rental property:
Understand What it Means to Be a Landlord: Residential real estate generally provides three possible ways to get a return on your investment: when it’s sold, assuming it has grown in value, by collecting rent and through tax savings, such as the mortgage interest deduction.
Choose an Area With a History of Strong Demand: Neighborhoods near universities are a good option. For homes in residential areas, proximity to schools can be a good draw for families.
Consider Using a Management Firm: If you take on the responsibility of selecting the tenant and handling property issues, you are obliged to fix any problems (leaky faucets, broken furnace, etc.) or find professionals to do it.
Do the Math: Although prevailing rental prices will go a long way toward determining what you can charge, getting the best return on your investment starts with making sure you’re going to get enough rent to, ideally, cover expenses and costs.
One formula would be charging 15 percent above monthly mortgage and maintenance costs. So if those costs add up to $1,000, he’ll look to charge $1,150.
The good news: Rents for single-family homes rose 2.3 percent last year from 2011, according to Trulia.
Screen Tenants Thoroughly: Once your rental starts drawing inquiries, it pays off to screen prospective tenants by asking for previous landlord references and running a credit and a criminal records check.
Experts also recommend asking for a deposit equal to one month’s rent, plus extra if the tenant has pets.
That will help cover any damage to the property and protect you if a tenant moves without paying rent.
Also, have a walkthrough of the unit with the tenant and ask that they sign off on the condition of the property before they move in. That will help avoid conflicts over the security deposit if there are damages once they’re ready to move out.
Get Familiar With Landlord Laws: As a neophyte landlord, it’s important to know your exact responsibilities under the law.
Two good resources for rental rules are the U.S. Department of Housing and Urban Development’s Web site (www.hud.gov), and The Landlord Protection Agency (www.thelpa.com), which includes state-specific rental guidelines and standardized forms for rental agreements.
An attorney or the Landlord Protection Agency also can help you craft a well-written lease, which is crucial to protect your property. It will help you evict a tenant or hold them accountable for damage if necessary.