If you’ve ever played the “what would you do if you won the lottery” game, people always tend to have great answers. Some would quit their job and travel around the world. Others would buy a big house and lots of fun toys.
But then, there is always the serious, practical person. They will invest their money, buy some property and maybe indulge in a nice steak dinner for them and their family.
Despite being a bit boring, their reasoning is sound: Investing is always smart and buying property is an investment in itself. (No word on the steak dinner yet.)
Unfortunately for many people, buying the lottery is far from reality. But you may be thinking about investing or buying property and land. With your new property, you might have a myriad of plans. It could be building your dream home, waiting and selling it again later or renting it out.
Purchasing rental property is a fantastic option for many, as they’ll be able to make money immediately on their purchase. Without that sweet lottery money though, you’re not going to be able to walk up and slam a briefcase full of 100-dollar bills down. You’re going to have to go through a long process of steps before you can sign the final dotted line.
Think About Everything
Sure, the idea of buying rental property sounds great but there’s much more to it than just buying the property.
Are you ready to manage it? Are you ready to deal with people? Are you going to hire groundskeepers? Are you willing to be the typical movie landlord who is always hounding people for their rent checks?
Look for property that fits your current needs and goals. You’ve first got to make sure this is something that you’re going to be willing to handle. If you’ve already decided on that, then proceeding ahead shouldn’t be a problem.
Location, Location, Location
The above mantra almost seems like a broken record when it comes to anything involved in real estate. When it comes to your real estate property, you still need to be thinking about the location.
If the property you’re buying was vacant before, what has you convinced people are going to be moving in right away? Do you have an effective marketing strategy planned to moving tenants in as soon as possible? Make sure you’re doing your homework not on just the house itself, but the surrounding location as well.
Looking for a Loan
When it comes to rental loans, there are plenty of options out there. You’ll want to look for one with lower interest rates and ones that can fit your payment schedule.
Although rental loans are typically 30 years, the down payment needed usually starts at 20%, compared to your home’s mortgage which can hover start as low as 3%.
You’ll want to make the necessary calculations to ensure you’re not going to default on your loan. A good rule of thumb is that the rental price should be 1% of what you purchase price for the property.
No Debt Here
If you’re looking to work your way out of debt, buying a rental property isn’t one of these. Not only will lenders shy away from your application, but it will just add on the amount of debt you have, especially upfront costs.
You could go about getting a loan, but that’s rarely the entire case for purchasing a property. There are bound to be plenty of things around the house that need renovating and it could be some time before you have applicants, let alone people that are moving in.
Start Small
If this is your first time buying rental property, it may be best to start small and make sure you’re cut out to be a landlord. Look for single-family homes that are closer to move-in ready and not “let’s get Chip and Joana Gaines on the line now.”
That way, you’ll only have to deal with one tenant, be in charge of a small property and get your feet wet on being a landlord and rental property owner. You’ve got to walk before you run, even in real estate.
Photo Credit: turkeychik
Before you BUY a rental property, find out if you are suited to be a landlord. Own a home with a garage? Put up a tiny shed for lawn mower, bikes and garden tools. Then SELL at a yard sale everything else in the garage. Rent the garage for dead storage and see how you like dealing with a tenant. Have a first floor master suite with private bath? Add French doors and a little deck to the outside for access directly from the outdoors, close off the entrance from bedroom to the rest of the house and rent the master bedroom and bath to a single person and see how being a landlord is before you spend a lot of money and go down in flames financially. Many people are NOT suited to being landlords. Have a professionally drawn lease done by a CONTRACT lawyer, not something from the internet. Enforce the lease. Give 5 days grace period for late rent with late fee and have clause that you will AUTOMATICALLY file in landlord tenant court if rent is not paid on time and in full. Take NO pets. Allow NO visitors. You will quickly find out if you are suited to be a landlord or if you are not suited. I have been to landlord tenant court and small claims court suing tenants 193 times and got judgments 192 times. At one time I had 54 units and full occupancy. Can’t tell you the huge number of hapless landlords I have met in court suing for the first time for two, three, four, six months back rent because they were too soft hearted to sue for rent and possession as soon as their tenants refused to pay the rent on time. These people are losing their shirts, often their property and they expect sympathy because they did not enforce their lease and timely payments by the tenants.
Excellent advice! I might add:
(1) have a reliable plumber, electrician and painter on speed dial . You will need them in emergencies. Maybe a lawyer, too.
(2) You can depreciate the property on your taxes over 27 years, but if it is in a foreign country, it’s 40 years. Those golden days when the IRS let you depreciate over 19 years are over.
(3) avoid the temptation to have someone else be the “administrator” for 10% of rent collected. This puts someone between you and your tenant and my sad experience is that the administrator often deducts “repair expenses” (complete with invoices) for things that were not repaired in your property.
(4) If possible, rent without appliances. This totally avoids the problem of who pays for repairs and what is “normal wear and tear vs. negligence “. You may have to charge less rent, but the tenant brings it, repairs it and takes it with him when he goes. The only possible exception is airrconditioners.
(5) The greatest tenant is one who pays on time and stays a long time, (even if you think “I could charge more now”) because you avoid having to paint, repair, have a month empty and perhaps pay an agent’s commission for each new tenant.
Call me a softie, but I give a big Christmas basket valued at 10% of a month’s rent to these tenants each Christmas, contents depending on the family, but always with liquor, delicacies, gourmet items, etc. If there are kids, maybe soda, cookies and small toys, too. But only to those who have paid on time all year.
If you buy a single family home to rent, do NOT include the garage with the house. Set a separate rent for the garage and if the tenants want to rent it, fine, they pay a separate check for the garage. Otherwise rent garage to another party and get second income stream from one property. NEVER GIVE AWAY THE GARAGE. Never take pets, especially dogs as with one dog bite if you allow the dog you can lose the rental, and your own home.
AniVee and Karen: You’re both awesome! Thank you for the fantastic tips!