With interest rates where they are today and home prices that appear to be stabilizing in many parts of the country, many are considering investing in real estate yet again. Historically, owning real estate is a great way to create wealth. As property values increase over time, equity is built all while someone else is paying the mortgage for you. The numbers seem to work, but there’s another consideration. When you buy property and rent it to someone else, you’re officially a landlord. What do you need to know?
1: Getting Approved for the Loan
The first consideration determines not “if” you want to be a landlord but “can” you? Mortgage lenders require at least 20 percent down for rental properties and conventional mortgages will be your only choice. Government-backed loans such as VA and FHA mortgages are only available to finance a primary residence.
Second, and just as important, if this is your first investment property, you may not be able to use the rental income from the subject property to offset your new mortgage payment. If you do have a recent history of owning rental property, a lender may allow the cash flow from the subject property to be used as income, helping you qualify.
2: Screening your Potential Tenants
An advantage of owning rental properties is that someone else pays you rent which then goes toward paying your mortgage. Yet the important part of that sequence is first getting the rent paid on time. As a landlord, it’s your responsibility to both market the property and screen prospective tenants. If your mortgage payment is due on the 1st you want to get your rent on the 1st as well.
A rental application must contain information about the tenant’s employer, current landlord and address as well as a release to review a copy of the applicant’s credit report. You can look at a recent paycheck stub to see how much income is there each month to pay the rent. A good rule of thumb is that the monthly rent not exceed one-third of the applicant’s gross monthly income.
Contact the current and previous landlord for a reference. Did they pay on time? Why did they leave? Contact the employer and find out how long they’ve worked there and what is their position? Good, stable tenants have good credit and have a history of paying their rent on time.
3: Make the House Habitable
Renters have rights too and one of them is requiring you, the landlord, to keep the property in a habitable condition. If you’re buying a fixer-upper, you need to do the fixing before you start the renting.
Depending upon the area, these minimal conditions provide a safe, livable environment for your tenants. Pest infestation, lack of smoke alarms, no hot water and no locks on the doors will need to be addressed and repaired. Just remember that tenants have a right to live in a property that is considered decent, safe and sanitary.
If the rental property is in bad shape, you may have a hard time getting financing. Talk to a reputable lender before making an offer.
4: You Will be the Fixer
Not only are you the landlord but you’re also the “fixer.” You recall when you rented your first apartment and the garbage disposal quit working or the toilet backed up, what did you do? That’s right, you called the landlord.
You can be out on a leisurely Sunday afternoon playing a round of golf with your friends when your phone rings and your tenant frantically yells, “The toilets’ backing up and the garage is flooded with sewage!”
Not exactly a pleasant thought, but when emergency repairs are needed, you’re the one your tenants call. One other consideration when being a fixer is having the ability to pay for needed repairs as they arise. Hot water heaters, refrigerators and any appliance will ultimately need repair or replacement. Make sure your finances are in order to accommodate emergency repairs.
5: Is a Property Manager the Way to Go?
One of the best things about being a landlord is that you don’t have to be if you don’t want to. You can hire a property manager. Property managers take care of as much or as little as you require. For a monthly fee, the property manager can collect the rent, answer phone calls from tenants and work with local contractors to make needed repairs as they arise.
Property managers are often real estate agents and can help market your property when your tenants ultimately decide to move. They can show the property, complete the rental agreement on your behalf and take on as much or as little of your landlord duties as needed.
Property managers will affect your cash flow and if the rent is barely covering your mortgage payment, then a property manager may not be your best choice. But if you do have some room for a manager, it does take some of the stress away from being a landlord.
Are You Ready to be a Landlord?
If you think you’re ready, willing, and able to be a landlord, contact us to see if you qualify for an investment property loan.