Are you considering purchasing a property as an investment? Renting real estate requires a thorough understanding of the leasing practices, mortgages, landlord-tenant relationships, and property maintenance.
Renting out real estate can be lucrative, but like any other investment, it should only be done after thorough research.
Takeaways from the Key Notes
- A landlord who is hands-on needs to be well versed in a wide range of topics, including basic tenant laws and how to fix a leaking faucet.
- Consider hiring a property manager to do the work for you or investing in REITs.
- Renting out their rental properties full-time requires a lot of work. They have to choose houses, fix them up and manage the property.
- Vacation homes, multifamily homes and single-family houses are all good investment properties.
So, You Want To Be A Landlord?
It is possible to earn money by renting out investment properties, but this requires time and effort. selecting the right property and preparing the unit are the first steps.
Upkeep and maintenance costs may reduce your rental income. You should be prepared for any emergency, such as roof damage. Investors are advised to plan on putting aside 1% of the value of their property for repairs.
Renters can either manage their rental property themselves or hire a Property Manager who charges between 8 and 12 percent of the collected rent. A property manager is expensive, but they can offer a variety of services, including organizing maintenance and repairs, screening tenants, and dealing with late rent payments.
laws governing landlord-tenant relationships are specific to each state. Tenants and landlords both have obligations and rights in regards to security deposits, leases, eviction rules and fair housing laws.
Protecting your real estate investment is essential. landlords insurance is available to rental property owners in addition to homeowners’ insurance. This insurance covers property damage and lost rental income as well as liability protection for tenants or visitors who are injured due property maintenance problems.
How to Buy a Rental Property
To get started, identify the property you want to purchase and get ready to finance it.
Location
Look for low property taxes in a neighborhood with good schools and amenities like restaurants, coffee shops and parks that are easily accessible.
Renters are more likely to rent in a neighborhood with a low rate of crime, easy access public transportation and a growing employment market.
A growing population in an area or a revitalization program is a investment opportunity.
Sites like Zillow.com offer investors information on home rental rates, current investment property values and other real estate-related topics. Airbnb.com can show the current rates of short-term vacation rentals or condos. Trulia, Realtor.com and other sites list long-term rental properties.
Financing Your Rental Property
The process of obtaining a mortgage for rental property is similar to the one for a primary home mortgage. However, there are some key differences. Lenders charge higher rates of interest on rental properties because they have a higher default rate.
Investors can choose to borrow money in the same way as a homebuyer. They may also qualify for a FHA mortgage, or a Veterans Affairs mortgage.
Renters may face stricter underwriting standards. Mortgage lenders are primarily concerned with credit score, the down payment and debt-to income ratio. The same factors apply to mortgages for rental properties, except that the investor might be required to have a stricter credit history or a larger down payment.
The typical requirements for a mortgage on a rental property are:
- Credit Score: A Minimum score 620. Better rates and terms are available for scores above 740.
- Down Payment: For government-backed mortgages borrowers can put down 0% to 3 % on a mortgage to purchase a primary home, but for real estate investment borrowers must generally pay 15% to 25 %.
- The debt-to-income (DTI), is the percentage of a borrower’s income that goes towards their monthly debt. You can count up to 75% your rental income towards your DTI.
- Savings Borrowers need to have enough cash to cover 3 to 6 months’ mortgage payments including principal, tax, insurance, and interest.
What is the best way to finance an investment property – cash or financing? It depends on what the investor wants to achieve and how much they have saved. Cash-flowing an investment property immediately can be a positive cash flow, but many investors don’t have the option.
Discrimination in mortgage lending is illegal. You can take steps if you believe you have been discriminated against because of your race, religion or sex. If you are a victim of discrimination based on national origin, disability or age. You can file a complaint with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development.
Renting out your home for profit
Operating costs on a new property can range from 35% to 80% of the gross operating revenue.
Operating expenses can be calculated as 40% of the rent.
Investors often use the 50% rule. Rent is $2,000 a month. Expect to pay $1,000 for total expenses.
Investigate whether you can bundle your landlord insurance with homeowners insurance to reduce costs.
Wall Street firms who buy distressed properties are aiming for a return of between 5% and 7%. The goal for individuals should be a return of 10%.
Estimate annual maintenance costs as 1% of property value.
The costs of homeowner insurance, homeowners associations fees, property taxes and other monthly expenses, such as pest control and landscaping, are also included.
Renting out an investment property can yield a healthy 6% in the first year. This number will increase over time.
The following are some of the ways to improve your ROI.
Investors in rental property calculate their return by using the formula ROI = (Annual Rent Income – Operating Costs Annual) / Mortgage value
Flipping houses is a popular choice for some real estate investors. They buy a home at a price below market value, make repairs and then sell it again. Investors must also consider factors such as affordable materials and labor. There may be or may not tenants when a house is “flipped”.
Renting a property: Benefits and Risks
- Enjoy the Benefits Investors can earn passive income while they work a regular job.
- When real estate prices increase, so does the value of your investment.
- Rent is exempt from Social Security Tax.
- Interest on a loan for investment property may be tax deductible.
- Real estate is an asset that can be touched and felt.
- Risks Rental income can be affected by maintenance costs and expenses related to property management.
- The monthly mortgage payment may not be covered by the rental income.
- Real estate takes time to be sold and is not a liquid investment.
- Entry and exit fees can be expensive.
- Even if a tenant leaves, the landlord must still pay for monthly expenses.
Should I find a real estate investing partner?
In exchange for a portion of the profit, a real estate partner will help finance the transaction.
You can also turn to your family and friends for help, find a local real-estate investment club or use real-estate crowdfunding.
How Much Down Payment Is Required to Purchase Investment Property?
Lenders have more stringent guidelines for properties purchased to be rented. While you can purchase a primary residence with just 3%, the majority of borrowers will need to pay 15% to 20% for a rental.
Should I invest in a condo?
Condos are a great option for those looking to rent out a property. They’re often in desirable areas.
Condos tend to be less expensive and require less maintenance than single-family houses.
The association dues, and the possibility of expensive special assessments, are risks. It is crucial to check the financial standing of the homeowners’ association, as well as the condition of both the building and each individual unit.
Bottom Line
Renting out a property can be an excellent investment. It provides with a steady, passive income.
Do your research before you buy. To invest in rental properties, you need to be familiar with tenant and landlord laws and practices, as well as mortgage policies and property management.