There are currently more than 22 million landlords in the United States, and this number is growing rapidly. In fact, according to the Rental Protection Agency, more than 500 people become new landlords every day in this country. Perhaps you are considering joining them. Investing in rental property can be a lucrative venture, but it can also have its risks and drawbacks. Be sure to take the following five factors into consideration before buying a house to rent. That way, you can increase your odds of success.
There are a number of different types of homes that you can buy to rent out. Before you even start looking at properties to potentially invest in, determine what type of property you wish to lease out.
Decide where you plan to buy a house to rent. The location of this property is very important so consider all of the following:
Jessica Rao of CNBC cautions that “it is critical to make cash-flow analyses and projections before you buy.” To do this, you should first determine how much you can reasonably expect to collect on rent for the property and then calculate your expected monthly costs by adding the following:
Once you have added those costs up, compare them to the amount of rent you expect to collect. If you cannot collect enough in rent to see a worthwhile profit, this may not be the right house for you to invest in. If the profit is slight, keep in mind that you will also be building equity in the home, so this investment may be a good one.
Either way, Dana Anspach of MoneyOver55.com recommends that you “talk to a Certified Public Accountant who has experience working with clients that own rental real estate. Ask for their advice on what to do, and what not to do. An accountant will have many clients that have had both good and bad experiences with rental property, and they'll be able to provide an objective point of view on the pros and cons.”
Angela Colley of Money Crashers warns that you should not even consider owning a rental property “unless you’re sure that you can pay for repairs. Landlord and tenant laws require that you make serious repairs quickly. If you don’t, you could be held liable for additional damages.”
If there is a problem at your rental house, can you handle maintenance work yourself or will you need to hire help? More importantly, is there someone you can put in charge during times that you are away, such as on vacation? Problems like wind damage and plumbing issues will not wait for times that are convenient for you.
Some landlords keep a repair person on retainer to handle minor problems at the house. You may want to be certain that you have a fund set up to enable you to easily pay for necessary repair work. Also, be sure that you are aware of what your landlord insurance policy will and will not cover so that you are fully compensated for work that should be covered.
Problematic renters are one of the biggest risks faced by landlords. In addition to being unable to collect rent from some tenants, you may also be held liable if your tenant is engaging in illegal activity such as stealing cable or using your rental home to manufacture illegal drugs. Furthermore, you can be fined for garbage or abandoned cars on the property, or for having a tenant who is a nuisance.
Different states have different laws pertaining to the landlord/tenant relationship, but in many cases, the courts tend to side with the tenant. In many northern states, it is illegal to shut off utilities or evict a nonpaying tenant in the wintertime. In other cases, it can take months, and a lot of money in court costs, to remove a deadbeat tenant.
If your tenant damages the property before moving out, you may also find yourself needing to do a lot of repair work before you can lease the property to another tenant, further reducing your income potential.
To avoid this problem, Brandon Turner of The BiggerPockets® Blog strongly recommends that you screen your applicants carefully before agreeing to rent to them. He advises that you first require that they show proof of income that is at least three times the asking rental amount and then run background and credit checks on them. This may seem like overkill, but it can prevent the costs and headaches associated with evicting a bad renter.