Owning and Operating Properties: Tips for Prospective Landlords
Investing in rental properties seems like an amazing idea on paper. It looks so simple – you just buy a home in a nice area, find good tenants, and wait for the cash to roll in. But it isn’t that simple. There are some things that you need to consider before you decide on buying a property, and propping a “for rent” sign on the lawn.
Here are some of the pros and cons of owning rental property, as well as some tips on how you can turn a profit as a landlord.
Advantages of Rental Properties
You’ll find that there are a lot of people who feel squeamish about investing in financial instruments but have no objections to investing in real estate because it is a tangible asset. Besides this fact, here are some of the advantages of investing in rental properties:
Current Income – This is the rent money left after the mortgage and other expenses have been paid. In a nutshell, it’s the money your property produces for you.
Leverage – You can buy rental properties with borrowed funds. That means you can control the property and the equity it holds by putting down just a fraction of its total cost. The property you purchase also secures the debt, instead of your other assets.
Appreciation – This is the increase in value that most properties experience over time.
Tax Advantages – If you do not receive net cash flow after expenses are deducted, your rental income may be tax-free. You can also pull out tax-free money when you refinance your loan if the property increases in value on the interest rates have fallen. Also, you may be able to avoid paying taxes if you sell it and immediately reinvest the money in another property. This is also called switching.
Disadvantages of Rental Properties
Liability – This can be a scary thing- what with the possible lawsuits and distress accidents like a stair breaking under a tenant’s feet. You have to make sure that your rental property meets all building codes and regulations.
Bad Tenants – Almost every landlord you’ll ever know will have a story about a tenant that police officer had to escort out of the property or one that has required them to use a collection agency to collect overdue rent.
Unexpected Expenses – It’s impossible to be ready for every single expense that is related to owning a rental property. There will be issues and some of them can be expensive to fix.
Vacancy – When you don’t have money coming in, you will have to make all the monthly payments from your own pocket.
Tips for Aspiring Landlords:
Here are some guidelines that can help you minimize the disadvantages of owning rental real estate:
- Be realistic with your expectations. While your goal should always be positive cash flow, you shouldn’t expect to be traveling around the world after a year. Keeping expectations in check will also keep you from being tempted to chase out good tenants and unreasonably jacking up the rent.
- Consider hiring a property management firm if you are busy with other things like a full-time Job.
- Learn all the rules to know your responsibilities, your rights, and your liabilities. It might require some reading, but that’s a whole lot better than spending time in court.
- Have the property inspected before you purchase it and before you rent it out.
- Run credit checks. It may be exciting to get tenants, but make sure you find time to see if your prospective tenant will be able to handle his obligations.
- Have a good banker, tax professional, and layer. As a rental property owner, you are going to need the services of these three.
- Have the right kind of insurance to cover your liability.
- Build an emergency fund to pay for all unexpected expenses that are not covered by insurance.
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