So you think you want to be a landlord? You got this home ownership thing nailed down. The next step is to start buying up property and ….not so fast, before taking the plunge, here are 8 things you need to consider:
1) Commercial Loans Require Larger Down Payments - Loan-buying for an investment property is treated differently from a lending standpoint. Loans have slightly less competitive interest rates since the loan is for investment purposes. Down payments required are usually 35%-50%.
2) Should You Hire a Property Management Company? Do you have the personality and patience to deal with tenants? The vast majority of tenants are easy to deal with and have reasonable requests but you should be prepared for the rare problem tenant. And, very rarely, you may need to evict. If you are NOT someone who wants to interact with tenants and likes to maintain a safe and anonymous distance, hire a property management company. They usually take between 5-6% of the rent to manage the property.
3) The Honey-Do List Can Get Long - Like anything with surface area, your new investment will have a constant list of small and large repairs and maintenance issues. Are you handy? Can you tackle these issues yourself or will you turn to experts. Time to start cultivating a list of “go-to” plumbers, electricians, painters, flooring contractors to help you keep your investment tip top. Also, make sure to set aside funds to do the necessary work.
4) Managing the Peaks and Valleys - Don’t count on your property always being full. There will be times when the income will vary. When one tenant moves out, you rarely have a tenant moving in the same day. Allow time to refurbish and clean up the unit. Believe it or not, we do experience softer rental markets. You may have even up to a few months before renting the unit out. Do you have reserves to weather these spotty times? Most pro-forma for an investment property allow a 3-5% vacancy rate throughout the year.
5) Ease Into It - Beware of the fixer upper. If you’re new to investing, don’t take on a large scale remodel or upgrade. These can be fraught with cost overruns and other minefields. Start with something modest that does not need a big overhaul.
6) Spread Your Risk - If you’re going to do this, you might as well leverage your labor. If you can afford it, financially, physically and psychically, buy a duplex, triplex or a fourplex. Consider partnering, but if you’re going to co-invest, make sure you are very comfortable with your business partner and have a very clear written agreement to purchase, manage and divest your investment.
7) Consider a REIT - If all of the above sound too daunting, then consider buying a REIT. Real Estate Investment Trusts are private or public companies that use investor money to buy real estate. Your share of the REIT can offer more reliable and less time consuming returns then owning and managing real estate on your own.
If none of the above has deterred you, go ahead…do it.