Owning a rental property can be a wise investment, as it’s a long-term source of passive income. Often times, though, there are a lot more moving parts than people realize. If you’re vacating your home and have decided to turn it into a rental property (or if you wish to buy a home and immediately rent it out), here are seven things you need to know first.
7 Things to Know About Owning a Rental Property
1. Decide Whether or Not You Want to Work Directly With Renters
Property management companies act as a middleman and work directly with tenants (or applicants) so that you don’t have to. When it comes to marketing the rental, getting rent payments, and maintenance issues, they handle it.
Some property owners want to avoid this added expense, so they do all of this themselves. Will you ultimately save money? Possibly. You will also lose time. And do you want to be answering the tenant’s call at 2:00 a.m. when the heater goes out? Probably not.
It’s a personal choice that you need to make. However, do sit down and list all of the pros and cons of each approach. You might find that paying for a property manager is a wise addition to your investment.
2. Know Your Margins
It might feel great to be collecting $1,500 a month from your renters, but you don’t get to keep $1,500. What are the costs to you? Think of things like:
- Property management fees.
Consider what these expenses will add up to for you, and use them to calculate what you want to charge for rent. Of course, the rent should make sense for the property it covers and should be comparable to other properties in the immediate area. However, you also want to be sure that at the end of the day, you’re making a profit each month.
And this brings us to our next point…
3. Set Aside an Emergency Fund for Owning a Rental Property
You’ve (hopefully) always put aside a portion of your own paycheck into your savings as a safety net and especially for a “rainy day.” Owning a rental property is no different. You need the same safety net in case you experience a rainy day — or in some cases, a torrential downpour.
Minor wear and tear is normal for any property. But you also want to be prepared for more major damage, like a leak in the roof or burst pipes that lead to flooding. Don’t let these expenses catch you off-guard. As you collect your passive rental income, you should be setting aside a portion of it — say roughly 20% — for these bigger expenses.
4. Location, Location, Location
Think like an investor — because you are! If you’re starting from scratch with a new property that you plan to buy, location is everything.
Do you want to buy a property in an area that’s declining, unstable, or otherwise undesirable? Of course not. Most people won’t be rushing to move there. Put yourself in the shoes of someone searching for a place to rent. What are they looking for? What do they want? Where do they want to go?
These are the questions you need to consider when choosing a location for your real estate investment.
You should prioritize owning a rental property in an area that’s flourishing and brimming with potential. Keep an eye out for great public schools, low crime rates, reasonable property taxes, and a solid job market. Consult with a qualified real estate agent in the area to help you navigate.
5. Get Landlord Insurance
As a homeowner, you get homeowners insurance. When you turn your home into a rental property, you’re also going to need landlord insurance. Expect to pay more for the latter than the former. Both mortgages (more on that in a minute) and insurance rates for rentals are more expensive since they typically experience more wear and tear.
And yes, you need landlord insurance. This protects you by covering things like damage to the property and maintenance. It should also cover minor accidents that occur on your property. Legal fees might also be included, and landlord insurance helps protect you if you lose rent due to damage to your property that makes it uninhabitable.
You can also typically pay extra for things like flood and storm coverage. This is something you can consider on a case-by-case basis depending on where the property is and what the weather is commonly like there.
6. Check What Your Mortgage Allows
When you agreed to your mortgage, you most likely signed something saying that you would occupy it and it would be your primary residence. This gave you a number of advantages with your mortgage, including a lower down-payment and lower interest rates.
You can’t simply apply this same mortgage when you vacate and renters take over. This can actually get you in serious trouble.
Is all hope lost? Not quite. Check with your lender to see what your options are in terms of your mortgage. And it likely goes without saying that for any future properties you buy with the intention of renting out, be sure to get the appropriate type of mortgage.
7. Make Your Rules and Requirements Clear From the Beginning
Will you allow pets? What kinds? How many? Is there a weight limit for each?
Who is responsible for maintaining the yard — you or the tenant? If them, what exactly will you require them to do?
How many occupants are allowed to live in the rental property?
When is rent due? How are they allowed to pay? What happens if they pay late?
It’s in your best interest to really get into the nitty-gritty when it comes to laying down the law with your tenants. When you give renters too much freedom and flexibility, they tend to run wild with it. In this case, it’s better to be strict.
We know that you might be feeling overwhelmed. We’re here to help. Whether you want to rent out your current home and move or purchase a new one as a real estate investment, you need an experienced real estate agent to guide you along the way. Contact The Brendan King Group today.