If you're cut out for life as owner can be very profitable. But success is not assured. Here's what you should know before diving in.
The idea of owning rental properties is gaining popularity as investors tire of the darkness and swoons of the stock market. Not everyone has what it takes to be an owner. But those who do may find rentals to be a good way to build wealth. Once you've decided to buy a rental property, your real work begins. Finding a profitable rental property usually takes time, connections and extensive research.
Here's what you need to know to get started:
Know your time horizon
As with any investment, you should have a good idea of how long you intend to own a rental property before buying it. The longer you plan to own property, the more you'll probably need to invest in maintenance, repairs and improvements. If you keep it for 20 years, at some point you will put a new roof on this property. You will put in new equipment and doing some major repairs. If you plan only to have a property for five years, however, you probably want to avoid making major improvements unless you're sure you can recover the cost of a sale price higher.
You also may face more investment risk with a time horizon shorter. Although your rental will almost certainly appreciate over 20 years, he could easily lose its value over the next five years, especially if you buy in a market overheated. You will need a bigger potential annual return to compensate for this risk.
For many small investors long-term ownership makes the most sense. You have plenty of time to get to market fluctuations and rental income can supplement nicely to your day job. Find enough rental properties, and being a landlord may become your day job.
Develop a network
Experienced owners to locate their properties in a variety of ways. Some hunts before making friends with city hall clerks or bank employees who know which properties are about to be sold. Some ads appear in local newspapers. Others work with real estate agents who keep their eyes peeled for possible buys.
Several landlords recommended joining a local landlord or owner and the Association to establish contacts. "When you start your own rent, all other investors are starting to emerge from the woods. You can also try approaching the owners directly to see if they are willing to sell, by calling the numbers listed on rental ads in the classifieds, across neighborhoods in search of "Rent" signs or by talking to all owners that you know personally.
Get your finances in shape
The better your credit card and less credit and other consumer debt you have, the better your chances of getting a decent loan. Lenders usually require bigger payments, higher interest rates and generally stronger finances when you buy rental property. Because they know that people are more likely to default on investment property than they are their own houses.
Landlords say it also pays to have a substantial pool of money left after buying a property. This can help pay for unexpected repairs and vacancies. Although there are few rules of thumb, setting aside at least one month's rent for each unit is a good start. CPA Paul Berning suggests having a line of credit secured by a property or your own home, to cover higher costs.
You should also make sure that you could be enough to save for retirement and other goals before investing in rental housing. Although the rental income can supplement your retirement, most people should not count on it to replace other investments or allow themselves to be fully exposed to the local property market. Rents and property values can fall as well as rise, and those who are sufficiently diversified, with investments in stocks, bonds and cash will be better able to withstand both good and bad.
Avoid overpaying
You make your profit when you buy a property, not when you sell it. Paying too much, and you'll never recover as much as you might have.
The property rental market is generally tougher on investors who overpay than on homeowners who do the same thing, several owners have said. Even if a house is often an emotional purchase, which may lead to a "must! Offers and bidding wars, most landlords look strictly at the numbers to see if their investment will be profitable. If you pay too much for rent, you can not count on a mad "superior" to come later to flee.
Not overpaying will be difficult in a very promising market, however. Apartments in New York, for example, currently sell at a premium of 60% compared to their "inherent" value. In other words, they sell much more than the revenue stream of the apartments generate, according to Reis, a national real estate research firm. In San Francisco and Los Angeles, the premium is 10%.
Some landlords use formulas such as not paying more than six to eight times the rents they expect to make the first year. Others try to estimate what the property could be worth after needed repairs and upgrades are made, and they do not pay more than 70% of that price, less the cost of these repairs.
Each housing market is different, however, and these formulas may not work in your area. It is important to ensure that your rental income covers your out-of-pocket costs.This includes paying the mortgage on the property, as well as taxes, insurance, maintenance, repairs and a vacancy rate of around 5%. (If you have five units, for example, you must wait at least one unit to be empty three months each year. Here's the math: 5 time units of 12 months is equal to 60 and 60 times .05 is 3.)
If you can at least break even, you'll be able to benefit from any increase in prices and tax incentives offered to property rentals. You should know that there is a big difference in how repairs and improvements are treated for tax purposes. You can usually deduct the cost of repair, such as patching a roof or fixing a leaking pipe, on your tax return for the year in which the repair is made.
Replace the roof or tiles, it is generally considered an improvement, which means that the cost can be deducted. Instead, it is added to the amount you paid for the property to determine your tax basis when you sell. More basic, plus your taxable income. But if you must wait 20 years after a major upgrade to recover the full cost for tax purposes, you may think twice about buying a property that needs a lot of initial work, Berning said.
To better estimate your costs, get a thorough inspection before purchasing a property. Some owners have electricians, plumbers and contractors they send to prospective property, promising them they can do any repair work they find. Others use professional inspectors they trust.
The idea of owning rental properties is gaining popularity as investors tire of the darkness and swoons of the stock market. Not everyone has what it takes to be an owner. But those who do may find rentals to be a good way to build wealth. Once you've decided to buy a rental property, your real work begins. Finding a profitable rental property usually takes time, connections and extensive research.
Here's what you need to know to get started:
Know your time horizon
As with any investment, you should have a good idea of how long you intend to own a rental property before buying it. The longer you plan to own property, the more you'll probably need to invest in maintenance, repairs and improvements. If you keep it for 20 years, at some point you will put a new roof on this property. You will put in new equipment and doing some major repairs. If you plan only to have a property for five years, however, you probably want to avoid making major improvements unless you're sure you can recover the cost of a sale price higher.
You also may face more investment risk with a time horizon shorter. Although your rental will almost certainly appreciate over 20 years, he could easily lose its value over the next five years, especially if you buy in a market overheated. You will need a bigger potential annual return to compensate for this risk.
For many small investors long-term ownership makes the most sense. You have plenty of time to get to market fluctuations and rental income can supplement nicely to your day job. Find enough rental properties, and being a landlord may become your day job.
Develop a network
Experienced owners to locate their properties in a variety of ways. Some hunts before making friends with city hall clerks or bank employees who know which properties are about to be sold. Some ads appear in local newspapers. Others work with real estate agents who keep their eyes peeled for possible buys.
Several landlords recommended joining a local landlord or owner and the Association to establish contacts. "When you start your own rent, all other investors are starting to emerge from the woods. You can also try approaching the owners directly to see if they are willing to sell, by calling the numbers listed on rental ads in the classifieds, across neighborhoods in search of "Rent" signs or by talking to all owners that you know personally.
Get your finances in shape
The better your credit card and less credit and other consumer debt you have, the better your chances of getting a decent loan. Lenders usually require bigger payments, higher interest rates and generally stronger finances when you buy rental property. Because they know that people are more likely to default on investment property than they are their own houses.
Landlords say it also pays to have a substantial pool of money left after buying a property. This can help pay for unexpected repairs and vacancies. Although there are few rules of thumb, setting aside at least one month's rent for each unit is a good start. CPA Paul Berning suggests having a line of credit secured by a property or your own home, to cover higher costs.
You should also make sure that you could be enough to save for retirement and other goals before investing in rental housing. Although the rental income can supplement your retirement, most people should not count on it to replace other investments or allow themselves to be fully exposed to the local property market. Rents and property values can fall as well as rise, and those who are sufficiently diversified, with investments in stocks, bonds and cash will be better able to withstand both good and bad.
Avoid overpaying
You make your profit when you buy a property, not when you sell it. Paying too much, and you'll never recover as much as you might have.
The property rental market is generally tougher on investors who overpay than on homeowners who do the same thing, several owners have said. Even if a house is often an emotional purchase, which may lead to a "must! Offers and bidding wars, most landlords look strictly at the numbers to see if their investment will be profitable. If you pay too much for rent, you can not count on a mad "superior" to come later to flee.
Not overpaying will be difficult in a very promising market, however. Apartments in New York, for example, currently sell at a premium of 60% compared to their "inherent" value. In other words, they sell much more than the revenue stream of the apartments generate, according to Reis, a national real estate research firm. In San Francisco and Los Angeles, the premium is 10%.
Some landlords use formulas such as not paying more than six to eight times the rents they expect to make the first year. Others try to estimate what the property could be worth after needed repairs and upgrades are made, and they do not pay more than 70% of that price, less the cost of these repairs.
Each housing market is different, however, and these formulas may not work in your area. It is important to ensure that your rental income covers your out-of-pocket costs.This includes paying the mortgage on the property, as well as taxes, insurance, maintenance, repairs and a vacancy rate of around 5%. (If you have five units, for example, you must wait at least one unit to be empty three months each year. Here's the math: 5 time units of 12 months is equal to 60 and 60 times .05 is 3.)
If you can at least break even, you'll be able to benefit from any increase in prices and tax incentives offered to property rentals. You should know that there is a big difference in how repairs and improvements are treated for tax purposes. You can usually deduct the cost of repair, such as patching a roof or fixing a leaking pipe, on your tax return for the year in which the repair is made.
Replace the roof or tiles, it is generally considered an improvement, which means that the cost can be deducted. Instead, it is added to the amount you paid for the property to determine your tax basis when you sell. More basic, plus your taxable income. But if you must wait 20 years after a major upgrade to recover the full cost for tax purposes, you may think twice about buying a property that needs a lot of initial work, Berning said.
To better estimate your costs, get a thorough inspection before purchasing a property. Some owners have electricians, plumbers and contractors they send to prospective property, promising them they can do any repair work they find. Others use professional inspectors they trust.
