1. 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.
So, if you elect to
buy a property for the long-term investment potential, the goal should be to
ensure that the rental income covers the cost of your mortgage and monthly
maintenance costs.
If you buy a
foreclosed home, you’ll have to factor in the cost of repairs to ready the home
for rent. And if you have a mortgage on the property, you’ll need to be
prepared to cover the costs for however long it takes to find a tenant.
“Real estate is a
great investment if people are paying their rent,” says Princis. “If they’re
not paying their rent, it’s a horrible investment.”
2. BUY IN AN AREA WITH
A HISTORY OF STRONG RENTAL DEMAND: Neighborhoods near universities are a good
option. For homes in residential areas, proximity to schools can be a good draw
for families.
Condominiums and
similar properties in communities with a homeowners’ association can be a great
option because the association arranges for upkeep on the property.
But check the fine
print on your mortgage and homeowners’ association rules to make sure turning
your property into a rental isn’t forbidden.
If you’re going to buy
a foreclosure, be prepared to compete with other investors, many of them paying
in cash. And because many require upgrades and repairs, expect that it will
take longer until you’ll be generating rental income.
3. CONSIDER USING A
MANAGEMENT FIRM: Determine whether you want to select the tenant and handle
property issues or hire a company to do it. If you take on the responsibility,
you are obliged to fix any problems (leaky faucets, broken furnace, etc.) or find
professionals to do it.
“Are you prepared to
do all of this on your weekends or evenings or get calls while you’re at work
because a pipe burst and it’s flooding?” asks Jim Warren, chief marketing
officer for property management company FirstService Residential Realty.
“What’s that threshold worth to you?”
Property management
firms can charge a percentage of the rent, sometimes 10 percent or more.
Hiring out the
hands-on landlord job also makes sense if your rental property is not in the
same city where you live.
4. 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.
Princis’ formula is
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.
Of course, flexibility
might be called for if you’re unable to get a tenant in for months and months.
Experts recommend
starting with popular rental listings in newspapers or on Web sites such as
Craigslist.com, Trulia and Zillow, to see what comparable apartments or rooms
are going for.
The good news: Rents
for single-family homes rose 2.3 percent last year from 2011, according to
Trulia.
5. 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. Also, have a walk through 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.
6. GET FAMILIAR WITH
LANDLORD LAWS: As a neophyte landlord, it’s important to know your exact
responsibilities under the law.
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