Some people dream of becoming landlords. They picture rent checks coming in the mail regularly from friendly tenants. Other people picture a nightmare scenario with a constant flow of shady characters who damage property and skip paying rent. While the reality is somewhere between those two scenes, renting properties can be financially rewarding for those who do their research and are prepared for the commitment.
Here are some basics to consider when deciding whether to invest in rental properties.
Rental Property Basics
Learn the Laws
The legalities of renting properties go way beyond an air-tight lease agreement. It’s important to know the state and local laws on rental properties. Rules vary on how much notice a landlord needs to provide before entering an apartment, how quickly problems need to be fixed and how the landlord should evict a tenant who isn’t paying rent. Local housing rights organizations and real estate attorneys are good sources for learning more.
It’s also vital to know whether an existing insurance policy would cover a rental property if someone was injured on site. Setting up limited liability companies for rental properties can protect property owners’ other assets if they get sued.
Know the Region
When shopping for a rental property or debating whether to rent out an existing home, understanding the community, housing market and current events is critical. Research rental rates and how often they increase. Find out whether the market is glutted with rentals or highly competitive. Brush up on news such as whether a local college or factory is about to shut down or double in size. A house in a town or city with excellent schools and other amenities is much easier to rent out than a home in a depressed area.
Someone preparing to buy a rental property should look for a well-built, well-maintained house that won’t require major improvements and can be leased for competitive rent.
Investing in rental properties can pay off in the long term, but requires a lot of money up front. Buying a second (or third) house can demand a higher down payment and fewer tax breaks. Use an online calculator to determine the true costs of buying a second house. Owning more than one house also requires larger cash reserves over the long run because now landlords might experience broken washing machines, furnaces and pipes at their own homes in addition to the rental properties.
Know the Tenants
Most long-term landlords have at least one horror story of the clean-cut looking tenant who paid with fraudulent checks or infuriated the neighbors. Taking time to screen tenants helps landlords avoid many pitfalls. Landlords should charge potential tenants application fees to cover the costs of running credit and background checks. They should run histories on every adult who plans to live at the property. Landlords should also call tenants’ references and previous property managers.
Landlords can help themselves by setting very clear rules in writing so tenants understand everything from where they can park, to how many pets they can have, to how long guests can stay. Knowing the local laws comes in handy when drafting binding rules documents.
Plan for Repairs
Every house has problems now and then: a leaky roof or broken air conditioner. Sometimes those crises happen in the middle of the night. Anyone investing in rental properties either needs to be available to fix the problems or hire someone who can. Someone handy and ambitious can tackle a minor home repair. Other choices include a home warranty, a property manager or a general contractor. All those options involve extra time and money.
Landlords who repair properties themselves need backup when they go on vacation or get sick. Tenants expect prompt repairs regardless of whether it’s convenient for property managers. Keeping a property clean and in good repair retains and attracts good tenants.
Renting properties can be a satisfying and lucrative business. Before investing, future landlords can protect themselves by properly researching the local laws and market, cushioning their investments with deep pockets, screening tenants thoroughly and dutifully maintaining their investment properties.
Author Bio: Diana Fishlock has researched and written articles on a wide variety of subjects for newspapers in New York, Pennsylvania and Maryland. She lives near Harrisburg, PA and writes for Zillow.